10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

___________________

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

T ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the fiscal year ended December 31, 2008

OR

£ 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 Registrant as Specified in its Charter)

Georgia	58-2256460
(State of Incorporation)	(I.R.S. Employer Identification No.)
600 North Glynn Street, Suite B, Fayetteville, Georgia	30214
(Address of Principal Executive Offices)	(Zip Code)

(770) 461-2781

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, no par value stated

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 Yes £   No T

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

 Yes £   No T

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

x

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 definition 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

The aggregate market value of the registrant’s outstanding common stock held by nonaffiliates of the registrant as of June 30, 2008, was approximately $37,552,700, based on the registrant’s closing sales price as reported on the NASDAQ Over-the-Counter Bulletin Board.  There were 3,921,528 shares of the registrant’s common stock outstanding as of March 31, 2009.

DOCUMENTS INCORPORATED BY REFERENCE

Document	Parts Into Which Incorporated
Annual Report to Shareholders for the Year Ended December 31, 2008	Part II
Proxy Statement for the Annual Meeting of Shareholders to be held May 14, 2009	Part III

TABLE OF CONTENTS

		Page
PART I		1
ITEM 1.	BUSINESS	1
ITEM 1A.	RISK FACTORS	14
ITEM 1B.	UNRESOLVED STAFF COMMENTS	21
ITEM 2.	PROPERTIES	22
ITEM 3.	LEGAL PROCEEDINGS	22
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	23
PART II		23
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERS PURCHASES OF EQUITY SECURITIES	23
ITEM 6.	SELECTED FINANCIAL DATA	24
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS	24
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	24
ITEM 8.	FINANCIAL STATEMENTS	24
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	24
ITEM 9A(T).	CONTROLS AND PROCEDURES	24
ITEM 9B.	OTHER INFORMATION	26
PART III		26
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE	26
ITEM 11.	EXECUTIVE COMPENSATION	26
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	26
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE	27
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	27
PART IV		28
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	28
SIGNATURES
EXHIBIT INDEX

PART I

ITEM 1. BUSINESS

Cautionary Notice Regarding 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.

Information About SouthCrest Financial Group, Inc.

Description of Business

SouthCrest Financial Group, Inc. (the “Company” or “SouthCrest”) is a bank holding company headquartered in Fayetteville, Georgia.  SouthCrest was incorporated under the laws of the State of Georgia on August 15, 1996 as Upson Bankshares, Inc. and is registered under the Bank Holding Company Act of 1956, as amended, and under the bank holding company laws of the State of Georgia.  SouthCrest conducts its operations through its wholly owned subsidiaries (collectively the “Banks”), Bank of Upson (“Upson”), The First National Bank of Polk County (“FNB Polk”), Peachtree Bank (“Peachtree”) and Bank of Chickamauga (“Chickamauga”).  The Company was created on September 30, 2004 when Upson Bankshares, Inc. and First Polk Bankshares, Inc. merged and adopted the name SouthCrest Financial Group, Inc.

1

Bank of Upson / Meriwether Bank and Trust / SouthCrest Bank

Bank of Upson was chartered in 1951 under the laws of the State of Georgia.  Upson is headquartered in Thomaston, Upson County, Georgia and operates a total of seven full-service banking locations and seventeen 24-hour ATM sites in Meriwether, Spalding, Fayette and Upson Counties in western Georgia.  In Upson County, Georgia, Upson operates its main office and a full-service branch.  In Meriwether County, Georgia, Upson operates three full-service branches under the trade name "Meriwether Bank & Trust:" the Manchester and Warm Springs branches were purchased in 1999, and the Luthersville branch was purchased in 2002.  In Fayette County, Georgia, Upson has two full-service de-novo branches which it operates under the trade name “SouthCrest Bank” – the Fayetteville branch was opened in 2004 and the Tyrone branch was opened in 2007.  Effective April 30, 2009 the Fayette County operations will be consolidated at the Tyrone branch office.

Bank of Upson is a full service commercial bank focusing on meeting the banking needs of individuals and small- to medium-sized businesses.  Upson offers a broad line of banking and financial products and services customary for full service banks of similar size and character.  These services include consumer loans, real estate loans, and commercial loans as well as maintaining deposit accounts such as checking accounts, money market accounts, and a variety of certificates of deposit.  Bank of Upson attracts most of its deposits and conducts most of its lending transactions from and within its primary service area encompassing Upson, Fayette, and Meriwether Counties Georgia.

The First National Bank of Polk County

The First National Bank of Polk County was chartered in 1920 under the laws of the United States.  FNB Polk is headquartered in Cedartown, Polk County, Georgia and operates a total of three full-service banking locations and three ATM sites in Polk County in northwest Georgia.  FNB Polk operates out of its main office in Cedartown, Polk County, Georgia.  In addition to its main office, FNB Polk operates a branch office in Cedartown and another in the Rockmart, also in Polk County.  FNB Polk also operates three ATM machines; one at each of the branches.

FNB Polk is a full service commercial bank that provides community-banking services to the individuals and business in Polk County in northwest Georgia.  FNB Polk performs banking services customary for full service banks of similar size and character.  Such services include making real estate, commercial and consumer loans, providing other banking services such as traveler's checks, and maintaining deposit accounts such as checking, money market, consumer certificates of deposit and IRA accounts.

Peachtree Bank

Peachtree Bank was chartered in 1919 under the laws of the State of Alabama.  Peachtree is headquartered in Maplesville, Chilton County, Alabama and operates a total of two full-service banking locations in central Alabama.  On October 31, 2006, Peachtree became a wholly-owned subsidiary of the Company as a result of the merger of Maplesville Bancorp, Peachtree’s holding company, with SouthCrest.  Peachtree maintains its main office in Maplesville, Alabama and operates a branch office in Clanton, Alabama. Peachtree is a full-service community bank providing banking services in its primary trade area of Chilton County, Alabama. Such services include making real estate, commercial and consumer loans, as well as providing deposit accounts such as checking, money market, consumer certificates of deposit and IRA accounts.

2

Bank of Chickamauga

Bank of Chickamauga was chartered in 1910 under the laws of the State of Georgia.  Chickamauga is headquartered in Chickamauga, Walker County, Georgia and operates a total of two full-service banking locations in north Georgia.  On July 1, 2007, Chickamauga became a wholly-owned subsidiary of the Company as a result of a share exchange between Chickamauga and SouthCrest.  Chickamauga maintains its main office and an additional branch office in Chickamauga, Georgia.  Chickamauga is a full-service community bank providing banking services in its primary trade area of Walker County, Georgia, which falls within the Chattanooga, Tennessee, MSA.  Such services include making real estate, commercial and consumer loans, as well as providing deposit accounts such as checking, money market, consumer certificates of deposit and IRA accounts.

Business Activities of the Company

Deposit Services.  Deposits are a key component of the Banks’ business, serving as a source of funding for lending as well as for increasing customer account relationships.  The Banks offer a variety of deposit services, including non-interest bearing checking accounts, interest bearing checking accounts, money market accounts, savings accounts, and time deposits of maturities ranging from three months to five years.  The primary sources of deposits for the Banks are businesses and individuals in their primary market areas.

Lending Services.  The Banks’ lending business consists primarily of making consumer loans to individuals, commercial loans to small and medium-sized businesses and professional organizations, and secured real estate loans, including residential and commercial construction loans, and first and second mortgage loans for the acquisition and improvement of personal residences.

Investment Services.  The Company provides investment services through its partnership with a full-service brokerage firm, and offering its customers brokerage services for stocks, bonds, mutual funds, IRA's, 529 plans, retirement plans, certificates of deposit, and insurance products.  The customer base for this service consists of individual investors, small businesses, and non-profit organizations.  This service is offered at the Bank of Upson through its division operating under the trade name “SouthCrest Investments” which was created in 1999 and has been in full service since 2001.  In 2005 FNB Polk began offering this service to its customers under the trade name “SouthCrest Investment Services.”

Trust Services.  SouthCrest also operates a full-service personal trust department through Bank of Upson.  The trust department provides estate analysis, consultation, estate and agency accounts, as well as non-profit agency services.  All trust-related record-keeping, back-office, and securities servicing is provided through a third-party.

Asset and Liability Management.  The Banks manage their assets and liabilities in an effort to provide adequate liquidity, and at the same time, to achieve the maximum net interest rate margin.  These management functions are conducted within the framework of written loan and investment policies.  The banks attempt to maintain a balanced position between rate sensitive assets and rate sensitive liabilities.

Market Area and Competition.  The Company operates in a highly competitive environment.  The Banks compete for deposits and loans with commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies and other financial entities operating locally and elsewhere.  In addition, because the Gramm-Leach-Bliley Act now permits banks, securities firms, and insurance companies to affiliate, a number of larger financial institutions and other corporations offering a wider variety of financial services than the Banks currently offer could enter our area and aggressively compete in the markets that the Banks serve.  Many of these competitors have substantially greater resources and lending limits than the Banks and may offer certain services that they do not or cannot provide.

3

We currently conduct business principally through the Banks’ fourteen branches in their market areas of Fayette, Meriwether, Polk, Upson and Walker Counties, Georgia and Chilton County, Alabama.  Based upon data available on the FDIC website as of June 30, 2008, SouthCrest’s total deposits ranked 1st among financial institutions in our market area, representing approximately 14.0% of the total deposits in our market area.  The table below shows our deposit market share collectively and by each Bank in the counties we serve according to data from the FDIC website as of June 30, 2008.

Market	Number of Branches		Our Market Deposits		Total Market Deposits		Ranking		Market Share Percentage (%)
	(Dollar amounts in millions)
Upson
Fayette County		2	$	8	$	1,854		16		0.8	%
Meriwether County		3		88		233		1		37.9	%
Upson County		2		167		373		1		44.6	%
Upson Total		7		270		2,460		2		11.0	%
FNB Polk
Polk County		3		143		421		1		34.0	%
FNB Polk Total		3		143		421		1		34.0	%
Chickamauga
Walker County		2		61		502		4		12.2	%
Chickamauga Total		2		61		502		4		12.2	%
Georgia Total		12		474		3,384		1		14.0	%
Peachtree
Chilton County		2		56		412		4		13.5	%
Peachtree Total		2		56		412		4		13.5	%
Alabama Total		2		56		412		4		13.5	%
SouthCrest		14	$	530	$	3,796		1		14.0	%

Employees.  As of December 31, 2008, the Company and the Banks had a total of 226  full-time equivalent employees.  Certain executive officers of the Banks also serve as officers of SouthCrest Financial Group, Inc.  We consider our employee relations to be good, and we have no collective bargaining agreements with any employees.

4

SUPERVISION AND REGULATION

Both the Company and the Banks are subject to extensive state and federal banking laws and regulations that impose restrictions on and provide for general regulatory oversight of their operations.  These laws and regulations are generally intended to protect depositors and not shareholders.  Legislation and regulations authorized by legislation influence, among other things:

· how, when and where we may expand geographically;

· into what product or service market we may enter;

· how we must manage our assets; and

· under what circumstances money may or must flow between the parent bank holding company and a subsidiary bank.

Set forth below is an explanation of the major pieces of legislation affecting our industry and how that legislation affects our actions.  The following summary is qualified by reference to the statutory and regulatory provisions discussed.  Changes in applicable laws or regulations may have a material effect on our business and prospects, and legislative changes and the policies of various regulatory authorities may significantly affect our operations.  We cannot predict the effect that fiscal or monetary policies, or new federal or state legislation may have on our business and earnings in the future.

SouthCrest Financial Group, Inc.

Since the Company owns all of the capital stock of Upson, FNB Polk, Peachtree and Chickamauga, it is a bank holding company under the federal Bank Holding Company Act of 1956.  As a result, we are primarily subject to the supervision, examination and reporting requirements of the Bank Holding Company Act and the regulations of the Federal Reserve.  As a bank holding company located in Georgia, the Georgia Department of Banking and Finance also regulates and monitors all significant aspects of our operations.

Acquisitions of Banks. The Bank Holding Company Act requires every bank holding company to obtain the Federal Reserve’s prior approval before:

— acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;

— acquiring all or substantially all of the assets of any bank; or

— merging or consolidating with any other bank holding company.

Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to create a monopoly, substantially lessen competition or otherwise function as a restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served.  The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served.  The Federal Reserve’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.

5

Under the Bank Holding Company Act, if we are adequately capitalized and adequately managed, we or any other bank holding company located in Georgia may purchase a bank located outside of Georgia.  Conversely, an adequately capitalized and adequately managed bank holding company located outside of Georgia may purchase a bank located inside of Georgia.  In each case, however, restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits.  Currently, Georgia law prohibits acquisitions of banks that have been chartered for less than three years.  Because Upson, FNB Polk and Chickamauga have been chartered more than three years, this limitation under Georgia law would not affect SouthCrest’s ability to sell Upson, FNB Polk or Chickamauga.  Similarly, Alabama law prohibits the acquisition of Alabama state banks that have been chartered for less than five years.  However, since Peachtree has been chartered for more than five years, this law does not apply to sales of Peachtree.

Change in Bank Control. Subject to various exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company.  Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company.  Control is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:

— the bank holding company has registered securities under Section 12 of the Securities Act of 1934; or

— no other person owns a greater percentage of that class of voting securities immediately after the transaction.

Our common stock is currently registered under Section 12 of the Securities Exchange Act of 1934.  The regulations also provide a procedure for challenging the rebuttable presumption of control.

Permitted Activities. The Bank Holding Company Act has generally prohibited a bank holding company from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those determined by the Federal Reserve to be closely related to banking or managing or controlling banks as to be a proper incident thereto.Provisions of the Gramm-Leach-Bliley Act have expanded the permissible activities of a bank holding company that qualifies as a financial holding company.  Under the regulations implementing the Gramm-Leach-Bliley Act, a financial holding company may engage in additional activities that are financial in nature or incidental or complementary to financial activity.  Those activities include, among other activities, certain insurance and securities activities.

To qualify to become a financial holding company, the Banks and any other depository institution subsidiary of the Company must be well capitalized and well managed and must have a Community Reinvestment Act rating of at least “satisfactory.”  Additionally, the Company must file an election with the Federal Reserve to become a financial holding company and must provide the Federal Reserve with 30 days’ written notice prior to engaging in a permitted financial activity. While the Company meets the qualification standards applicable to financial holding companies, we have not elected to become a financial holding company at this time.

Support of Subsidiary Institutions.  Under Federal Reserve policy, we are expected to act as a source of financial strength for the Banks and to commit resources to support the Banks.  This support may be required at times when, without this Federal Reserve policy, we might not be inclined to provide it.  In addition, any capital loans made by us to the Bank will be repaid only after its deposits and various other obligations are repaid in full.  In the unlikely event of our bankruptcy, any commitment by it to a federal banking regulator to maintain the capital of the Banks will be assumed by the bankruptcy trustee and entitled to a priority of payment.

6

The Banks

General. The Banks are subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of our operations.  These laws are generally intended to protect depositors and not shareholders.  The following discussion describes the material elements of the regulatory framework that applies to us.

Since Upson and Chickamauga are commercial banks chartered under the laws of the State of Georgia, they are primarily subject to the supervision, examination and reporting requirements of the FDIC and the Georgia Department of Banking and Finance.  The FDIC and Georgia Department of Banking and Finance regularly examine each of Upson’s and Chickamauga’s operations and have the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions.  Both regulatory agencies have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.

Since FNB Polk is chartered as a national bank, it is primarily subject to the supervision, examination and reporting requirements of the National Bank Act and the regulations of the Office of the Comptroller of the Currency.  The Office of the Comptroller of the Currency regularly examines FNB Polk’s operations and has the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions.  The Office of the Comptroller of the Currency also has the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.

Since Peachtree is a commercial bank chartered under the laws of the State of Alabama, it is primarily subject to the supervision, examination and reporting requirements of the FDIC and the Superintendent of Banking of the Alabama State Banking Department (the “Alabama State Banking Department”).  The FDIC and the Superintendent regularly examine Peachtree’s operations and have the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions.  Both regulatory agencies also have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.

Because the Banks’ deposits are insured by the FDIC to the maximum extent provided by law, they are also subject to certain FDIC regulations.  The Banks are also subject to numerous state and federal statutes and regulations that affect their business, activities and operations.

Branching.  Under current Georgia law, each of Upson and Chickamauga may open branch offices throughout Georgia with the prior approval of the Georgia Department of Banking and Finance.  In addition, with prior regulatory approval, each of Upson and Chickamauga may acquire branches of existing banks located in Georgia.  National Banks are required by the National Bank Act to adhere to branching laws applicable to state banks in the states in which they are located.  Therefore, FNB Polk may open branch offices or acquire branches of existing banks located in Georgia with the approval of the Office of the Comptroller of the Currency.  Similarly, under current Alabama law, Peachtree may open branch offices throughout Alabama, or acquire branches of existing banks located in Alabama, with the prior approval of the Alabama State Banking Department.  The Banks and any other national or state-chartered bank generally may branch across state lines by merging with banks in other states if allowed by the applicable states’ laws.  Both Georgia and Alabama law, with limited exceptions, currently permit branching across state lines through interstate mergers.

7

Under the Federal Deposit Insurance Act, states may “opt-in” and allow out-of-state banks to branch into their state by establishing a new start-up branch in the state.  Currently, Alabama has opted in to this provision, while Georgia has not.  Therefore, interstate merger is the only method through which a bank located outside of Georgia may branch into Georgia.  This provides a limited barrier of entry into the Georgia banking markets, which protects us from an important segment of potential competition.  However, because Georgia has elected not to opt-in, Upson, FNB Polk and Chickamauga’s ability to establish a new start-up branch in another state may be limited.  Many states that have elected to opt-in have done so on a reciprocal basis, meaning that an out-of-state bank may establish a new start-up branch only if their home state has also elected to opt-in.  Consequently, until Georgia changes its election, the only way Upson, FNB Polk or Chickamauga will be able to branch into states that have elected to opt-in on a reciprocal basis will be through interstate merger.

Because Alabama has elected to opt-in on a reciprocal basis, any out-of-state bank may establish a new start-up branch in Alabama so long as that state’s banking law would also allow Alabama banks to establish start-up branches in that state.  Similarly, Peachtree may establish a new start-up branch in any state that has elected to opt-in on a reciprocal basis.

Prompt Corrective Action.  The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions.  Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) in which all institutions are placed.  The federal banking agencies have also specified by regulation the relevant capital levels for each of the other categories.  At December 31, 2008, the Banks qualified for the well-capitalized category.

Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories.  The severity of the action depends upon the capital category in which the institution is placed.  Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.

FDIC Insurance Assessments.The FDIC is an independent agency of the United States government that uses the Deposit Insurance Fund to protect against the loss of insured deposits if an FDIC-insured bank or savings association fails. The FDIC must maintain the Deposit Insurance Fund within a range between 1.15 percent and 1.50 percent of all insured deposits. The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities.  The system assesses higher rates on those institutions that pose greater risks to the Deposit Insurance Fund (the “DIF”).  The FDIC places each institution in one of four risk categories using a two-step process based first on capital ratios (the capital group assignment) and then on other relevant information (the supervisory group assignment).  Within the lowest risk category, Risk Category I, rates vary based on each institution’s CAMELS component ratings, certain financial ratios, and long-term debt issuer ratings, if any.

Capital group assignments are made quarterly and an institution is assigned to one of three capital categories: (1) well capitalized,; (2) adequately capitalized; and (3) undercapitalized.  These three categories are substantially similar to the prompt corrective action categories described above, with the “undercapitalized” category including institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes.  The FDIC also assigns an institution to one of three supervisory subgroups based on a supervisory evaluation that the institution’s primary federal banking regulator provides to the FDIC and information that the FDIC determines to be relevant to the institution’s financial condition and the risk posed to the deposit insurance funds.  For 2008, assessments ranged from 5 to 43 cents per $100 of deposits, depending on the institution’s risk category. capital group and supervisory subgroup. Institutions in the lowest risk category, Risk Category I, were charged a rate between 5 and 7 cents per $100 of deposits.  Risk Categories II, III, and IV were charged 10 basis points, 28 basis points and 43 basis points, respectively.

8

Because the Deposit Insurance Fund reserve fell below 1.15 percent as of June 30, 2008, and was expected to remain below 1.15 percent, the Federal Deposit Insurance Reform Act of 2005 required the FDIC to establish and implement a restoration plan to restore the reserve ratio to no less than 1.15 percent within five years, absent extraordinary circumstances.

On December 16, 2008, the FDIC adopted, as part of its restoration plan, a uniform increase to the assessment rates by 7 basis points (annualized) for the first quarter 2009 assessments.  As a result, institutions in Risk Category I will be charged a rate between 12 and 14 cents per $100 of deposits.  Risk Categories II, III, and IV will be charged 17 basis points, 35 basis points, and 50 basis points, respectively.

On February 27, 2009, the FDIC amended its restoration plan to extend the period for restoration to seven years and further revised the risk-based assessment system.  Starting with the second quarter of 2009, institutions in Risk Category I will have a base assessment rate between 12 and 16 cents per $100 of deposits.  Risk Categories II, III, and IV will be have base assessment rates of 22 basis points, 32 basis points, and 45 basis points, respectively.  These base assessments will be subject to adjustments based on each institution’s unsecured debt, secured liabilities, and use of brokered deposits.  As a result of these adjustments, institutions in Risk Category I will be charged rate between 7 and 24 cents per $100 of deposits.  Risk Categories II, III, and IV will be charged between 17 and 43 basis points, 27 and 58 basis points, and 40 and 77.5 basis points, respectively.

Under an interim rule adopted on February 27, 2009, the FDIC will impose an emergency special assessment of 20 basis points as of June 30, 2009, and may impose additional emergency special assessments of up to 10 basis points thereafter if the reserve ratio is estimated to fall to a level that the FDIC believes would adequately affect public confidence or to a level that shall be close to zero or negative at the end of a calendar quarter.

The FDIC may, without further notice-and-comment rulemaking, adopt rates that are higher or lower than the stated base assessment rates, provided that the FDIC cannot (i) increase or decrease the total rates from one quarter to the next by more than three basis points, or (ii) deviate by more than three basis points from the stated assessment rates.

The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.

FDIC Temporary Liquidity Guarantee Program.  On October 14, 2008, the FDIC announced that its Board of Directors, under the authority to prevent “systemic risk” in the U.S. banking system, approved the Temporary Liquidity Guarantee Program (“TLGP”). The purpose of the TLGP is to strengthen confidence and encourage liquidity in the banking system.  The TLGP is composed of two components, the Debt Guarantee Program and the Transaction Account Guarantee Program, and institutions had the opportunity, prior to December 5, 2008, to opt-out of either or both components of the TLGP.

The Debt Guarantee Program. Under the TLGP, the FDIC is permitted to guarantee certain newly issued senior unsecured debt issued by participating financial institutions.  The annualized fee that the FDIC will assess to guarantee the senior unsecured debt varies by the length of maturity of the debt.  For debt with a maturity of 180 days or less (excluding overnight debt), the fee is 50 basis points; for debt with a maturity between 181 days and 364 days, the fee is 75 basis points, and for debt with a maturity of 365 days or longer, the fee is 100 basis points.  The Bank did not opt-out of the Debt Guarantee component of the TLGP.

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The Transaction Account Guarantee Program. Under the TLGP, the FDIC is permitted to fully insure non-interest bearing deposit accounts held at participating FDIC-insured institutions, regardless of dollar amount. The temporary guarantee will expire at the end of 2009.  For the eligible non-interest-bearing transaction deposit accounts (including accounts swept from a non-interest bearing transaction account into an non-interest bearing savings deposit account), a 10 basis point annual rate surcharge will be applied to non-bearing transaction deposit amounts over $250,000. Institutions will not be assessed on amounts that are otherwise insured.  The Bank did not opt-out of the Transaction Account Guarantee component of the TLGP.

Community Reinvestment Act.  The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the federal bank regulators shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate-income neighborhoods.  These facts are also considered in evaluating mergers, acquisitions and applications to open a branch or facility.  Failure to adequately meet these criteria could impose additional requirements and limitations on the Banks.  Additionally, the Banks must publicly disclose the terms of various Community Reinvestment Act-related agreements.

Allowance for Loan and Lease Losses.  The Allowance for Loan and Lease Losses (the “ALLL”) represents one of the most significant estimates in the Bank’s financial statements and regulatory reports.  Because of its significance, the Banks have developed systems by which they develop, maintain and document comprehensive, systematic and consistently applied processes for determining the amounts of the ALLL and the provision for loan and lease losses.  The Interagency Policy Statement on the Allowance for Loan and Lease Losses, issued on December 13, 2006, encourages all banks to ensure controls are in place to consistently determine the ALLL in accordance with GAAP, the bank’s stated policies and procedures, management’s best judgment and relevant supervisory guidance.  Consistent with supervisory guidance, the Banks maintain a prudent and conservative, but not excessive, ALLL, that is at a level appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the remainder of the loan and lease portfolio.  The Banks’ estimates of credit losses reflect consideration of all significant factors that affect the collectibility of the portfolio as of the evaluation date.  See “Management’s Discussion and Analysis – Critical Accounting Policies.”

Commercial Real Estate Lending.  The Banks’ lending operations may be subject to enhanced scrutiny by federal banking regulators based on their concentrations of commercial real estate loans.  On December 6, 2006, the federal banking regulators issued final guidance to remind financial institutions of the risk posed by commercial real estate (“CRE”) lending concentrations.  CRE loans generally include land development, construction loans and loans secured by multifamily property, and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property.

The guidance prescribes the following guidelines for its examiners to help identify institutions that are potentially exposed to significant CRE risk and may warrant greater supervisory scrutiny:

— total reported loans for construction, land development and other land represent 100% or more of the institutions total capital, or

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— total commercial real estate loans represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more.

Other Regulations. Interest and other charges collected or contracted for by the Banks are subject to state usury laws and federal laws concerning interest rates.  The Banks’ loan operations are also subject to federal laws applicable to credit transactions, such as the:

— Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

· Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

· Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

· Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act, governing the use and provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures;

· Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

· Soldiers’ and Sailors’ Civil Relief Act of 1940, as amended by the Servicemembers’ Civil Relief Act, governing the repayment terms of, and property rights underlying, secured obligations of persons currently on active duty with the United States military;

· Talent Amendment in the 2007 Defense Authorization Act, establishing a 36% annual percentage rate ceiling, which includes a variety of charges including late fees, for consumer loans to military service members and their dependents; and

· rules and regulations of the various federal banking regulators charged with the responsibility of implementing these federal laws.

The Banks’ deposit operations are subject to federal laws applicable to depository accounts, such as the:

· Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts;

· Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

· Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and

· rules and regulations of the various federal banking regulators charged with the responsibility of implementing these federal laws.

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Capital Adequacy

The Company and the Banks are required to comply with the capital adequacy standards established by the Federal Reserve, in the case of the Company, the FDIC, in the case of Upson, Peachtree and Chickamauga, and the Office of the Comptroller of the Currency, in the case of FNB Polk.  The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies.  The Banks are also subject to risk-based and leverage capital requirements adopted by their respective federal agency, both of which are substantially similar to those adopted by the Federal Reserve for bank holding companies.

The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets.  Assets and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights.  The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.

The minimum guideline for the ratio of total capital to risk-weighted assets is 8%.  Total capital consists of two components; Tier 1 Capital and Tier 2 Capital.  Tier 1 Capital generally consists of common stockholders’ equity, minority interests in the equity accounts of consolidated subsidiaries, qualifying noncumulative perpetual preferred stock, and a limited amount of qualifying cumulative perpetual preferred stock, less goodwill and other specified intangible assets.  Tier 1 Capital must equal at least 4% of risk-weighted assets.  Tier 2 Capital generally consists of subordinated debt, other preferred stock and hybrid capital, and a limited amount of loan loss reserves.  The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies.  These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the Federal Reserve’s risk-based capital measure for market risk.  All other bank holding companies generally are required to maintain a leverage ratio of at least 4%.The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance on intangible assets.  The Federal Reserve considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities.

Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits and certain other restrictions on its business.  As described above, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements.  See “The Banks – Prompt Corrective Action” above.

See Note 14 in the “Notes to Consolidated Financial Statements” for the capital ratios of SouthCrest, Upson, FNB Polk, Peachtree and Chickamauga.

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Payment of Dividends

The Company is a legal entity separate and distinct from the Banks.  The principal sources of the Company’s cash flow, including cash flow to pay dividends to its shareholders, are dividends that the Banks pay to their sole shareholder, the Company.  Statutory and regulatory limitations apply to the Banks’ payment of dividends.  If, in the opinion of the federal banking regulator, any of our Banks were engaged in or about to engage in an unsafe or unsound practice, the federal banking regulator could require, after notice and a hearing, that it stop or refrain from engaging in the questioned practice.  The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice.  Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized.  Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.  See “The Banks—Prompt Corrective Action.”

The Georgia Department of Banking and Finance also regulates each of Upson’s and Chickamauga’s dividend payments and must approve dividend payments by either bank that would exceed 50% of their respective net incomes for the prior year.  Our payment of dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines.

The Alabama State Banking Department also regulates Peachtree’s dividend payments and must approve dividend payments that would exceed 50% of Peachtree’s net income for the prior year.  Our payment of dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines.  Under Alabama law, a bank may not pay a dividend in excess of 90% of its net earnings until the bank’s surplus is equal to at least 20% of its capital.  Peachtree is also required by Alabama law to obtain the prior approval of the Alabama State Banking Department for its payment of dividends if the total of all dividends declared by Peachtree in any calendar year will exceed the total of (1) Peachtree’s net earnings (as defined by statute) for that year, plus (2) its retained net earnings for the proceeding two years, less any required transfers to surplus.  In addition, no dividends may be paid from Peachtree’s surplus without prior written approval of the Superintendent, and Peachtree may not pay any dividend that would cause its Tier 1 Capital ratio to fall below 8%.

FNB Polk is required by federal law to obtain prior approval of the OCC for payments of dividends if the total of all dividends declared by the Bank in any year will exceed (1) the total of the FNB Polk’s net profits for that year, plus (2) the FNB Polk’s retained net profits of the preceding two years, less any required transfers to surplus.

The payment of dividends by the Company and the Banks may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines.  At December 31, 2008, the Banks could pay $868,000 in aggregate cash dividends without prior regulatory approval, subject to the limitations described herein.

Restrictions on Transactions with Affiliates

The Company and the Banks are subject to the provisions of Section 23A of the Federal Reserve Act.  Section 23A places limits on the amount of:

· a bank’s loans or extensions of credit to affiliates;

· a bank’s investment in affiliates;

· assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;

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· loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations of affiliates; and

· a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.

The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus.  In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements.  The Banks must also comply with other provisions designed to avoid the taking of low-quality assets.

The Company and the Banks are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibit an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

The Banks are also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests.  These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.

Proposed Legislation and Regulatory Action

New regulations and statutes are regularly proposed that contain wide-ranging changes to the structures, regulations and competitive relationships of financial institutions operating or doing business in the United States.  We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Effect of Governmental Monetary Policies

Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies.  The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession.  The monetary policies of the Federal Reserve affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject.  We cannot predict the nature or impact of future changes in monetary and fiscal policies.

ITEM 1A. RISK FACTORS

An investment in our common stock involves risks.  If any of the following risks or other risks, which have not been identified or which we may believe are immaterial or unlikely, actually occur, our business, financial condition and results of operations could be harmed.  In such a case, the trading price of our common stock could decline, and you may lose all or part of your investment.  The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

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Risks Related to Our Business.

We could suffer loan losses from a decline in credit quality.

We could sustain losses if borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. We have adopted underwriting and credit monitoring procedures and policies, including the establishment and review of the allowance for credit losses that we believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our credit portfolio.  These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect our results of operations.

Our net interest income could continue to be negatively affected by the Federal Reserve’s recent interest rate adjustments, as well as by competition in our market area.

As a financial institution, our earnings are significantly dependent upon our net interest income, which is the difference between the interest income that we earn on interest-earning assets, such as investment securities and loans, and the interest expense that we pay on interest-bearing liabilities, such as deposits and borrowings. Therefore, any change in general market interest rates, including changes resulting from changes in the Federal Reserve’s fiscal and monetary policies, affects us more than non-financial institutions and can have a significant effect on our net interest income and total income. Our assets and liabilities may react differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity characteristics of the assets and liabilities. As a result, an increase or decrease in market interest rates could have material adverse effects on our net interest margin and results of operations.

In response to the dramatic deterioration of the subprime, mortgage, credit and liquidity markets, the Federal Reserve recently has taken action on six occasions to reduce interest rates by a total of 400 - 425 basis points since September 2007, which likely will continue to stress  our net interest income during the first half of 2009 and the foreseeable future. Any reduction in our net interest income will negatively affect our business, financial condition, liquidity, operating results, cash flows and/or the price of our securities. Additionally, in 2009, we expect to have continued margin pressure given these interest rate reductions, along with elevated levels of non-performing assets.

A prolonged economic downturn, especially one affecting our market areas, could adversely affect our financial condition, results of operations or cash flows.

Our success depends upon the growth in population, income levels, deposits and housing starts in our primary market areas.  If the communities in which we operate do not grow, or if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed. Unpredictable economic conditions may have an adverse effect on the quality of our loan portfolio and our financial performance. Economic recession over a prolonged period or other economic problems in our market areas could have a material adverse impact on the quality of the loan portfolio and the demand for our products and services.  Future adverse changes in the economies in our market areas may have a material adverse effect on our financial condition, results of operations or cash flows.  Further, the banking industry in Georgia is affected by general economic conditions such as inflation, recession, unemployment and other factors beyond our control.  As a community bank, we are less able to spread the risk of unfavorable local economic conditions than larger or more regional banks. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas even if they do occur.

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In addition to considering the financial strength and cash flow characteristics of borrowers, we often secure loans with real estate collateral.  The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended.  The market value of the real estate securing our loans as collateral has been adversely affected by the slowing economy and unfavorable changes in economic conditions in our market areas and could be further adversely affected in the future.

As of December 31, 2008, approximately 85% of our loans receivable were secured by real estate. Any sustained period of increased payment delinquencies, foreclosures or losses caused by the adverse market and economic conditions, including the downturn in the real estate market, in our markets will adversely affect the value of our assets, revenues, results of operations and financial condition.  Currently, we are experiencing such an economic downturn, and if it continues, our operations could be further adversely affected.

Most of our loans are concentrated in our primary market area.  Consequently, a decline in local economic conditions may have a proportionally greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse.

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 December 31, 2008, the Company had $6,412,000 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 required debt service coverage ratio of 1.25, defined as net income of subsidiary banks multiplied by 50%, divided by the annual debt service of the Company. 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.

Future impairment losses could be required on various investment securities, which may materially reduce the Company’s and the Bank’s regulatory capital levels.

The Company establishes fair value estimates of securities available-for-sale in accordance with generally accepted accounting principles. The Company’s estimates can change from reporting period to reporting period, and we cannot provide any assurance that the fair value estimates of our investment securities would be the realizable value in the event of a sale of the securities.

A number of factors could cause the Company to conclude in one or more future reporting periods that any difference between the fair value and the amortized cost of one or more of the securities that we own constitutes an other-than-temporary impairment. These factors include, but are not limited to, an increase in the severity of the unrealized loss on a particular security, an increase in the length of time unrealized losses continue without an improvement in value, a change in our intent or ability to hold the security for a period of time sufficient to allow for the forecasted recovery, or changes in market conditions or industry or issuer specific factors that would render us unable to forecast a full recovery in value, including adverse developments concerning the financial condition of the companies in which we have invested.

The Company may be required to take other-than-temporary impairment charges on various securities in its investment portfolio.  In particular, the Company may be required recognize other-than-temporary impairment charges with respect to preferred stock having an original cost of $900,000 and subordinated debt securities having original cost of $2,000,000 issued by companies operating in the banking and financial services industry.  In addition, depending on various factors, including the fair values of other securities that we hold, we may be required to take additional other-than-temporary impairment charges on other investment securities.  Any other-than-temporary impairment charges would negatively affect our regulatory capital levels, and may result in a change to our capitalization category, which could limit certain corporate practices and could compel us to take specific actions.

A reduction in the fair value attributable to  acquired units of our business may result in the Company having to recognize a non-cash core deposit intangible or goodwill impairment charges, which would negatively impact our earnings and, consequently, our ability to pay dividends.

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The Company completed its acquisition of FNB Polk in 2004, Peachtree Bank in 2006, and Bank of Chickamauga in 2007.  In connection with these acquisitions, we recorded a total of $14,255,000 in goodwill as an intangible asset on the balance sheets of the banks acquired.  Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” requires us to make a periodic assessment of any goodwill we carry on our balance sheet by comparing the current fair value of each unit for which goodwill has been recognized to that unit's book value.  In the event that the assessment shows that the book value of any unit exceeds its fair value, we must take a non-cash goodwill impairment charge equal to the difference between relevant book and fair values.  While such a goodwill impairment charge would have no impact on our regulatory capital ratios or liquidity position, it would result in a reduction of our earnings.  As the Company’s ability to pay dividends is dependent upon its level of retained earnings, any future goodwill impairment charge would generally reduce the funds from which such dividends may be drawn.  See “Supervision and Regulation,” on page 5.

The goodwill impairment assessment must occur on at least an annual basis, or more frequently as changing circumstances would dictate.  The Company normally performs its annual assessment on August 31 of each year. After its most recent regular annual assessment, we determined that no core deposit intangible or goodwill impairment charges were necessary.  However, the weakening of real estate markets, both nationally and locally in our primary market area, the tightening of credit, and other events of the past months have generally resulted in the lowered market valuation of financial institutions operating in the southeastern United States, including the Company.  As a result, we undertook a supplemental assessment of our core deposit intangible and goodwill assets as of December 31, 2008, and determined that a core deposit intangible impairment of $1.3 million and a goodwill impairment charge of $7.9 million was necessary.  After these impairment charges, the Company has $2,051,000 of core deposit intangible and $6,397,000 in goodwill remaining.  However, there can be no guarantee that the results of future impairment assessments may require that we realize additional impairment charges.

Opening new offices may not result in increased assets or revenues for us.

The investment necessary for branch expansion may negatively impact our efficiency ratio.  There is a risk that we will be unable to manage our growth, as the process of opening new branches may divert our time and resources.  There is also risk that we may fail to open any additional branches, and a risk that, if we do open these branches, they may not be profitable which would negatively impact our results of operations.

Our business strategy includes the continuation of growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

We intend to continue pursuing a growth strategy for our business. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in growth stages of development. We cannot assure you we will be able to expand our market presence in our existing markets or successfully enter new markets or that any such expansion will not adversely affect our results of operations.  Failure to manage our growth effectively could have a material adverse effect on our business, financial condition, results of operations, or future prospects, and could adversely affect our ability to successfully implement our business strategy.  Also, if our growth occurs more slowly than anticipated or declines, our results of operations could be materially adversely affected.

Our ability to grow successfully will depend on a variety of factors including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and our ability to manage our growth. While we believe we have the management resources and internal systems in place to manage our future growth, there can be no assurance that growth opportunities will be available or growth will be managed successfully.

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Our plans for future expansion depend, in some instances, on factors beyond our control, and an unsuccessful attempt to achieve growth could have a material adverse effect on our business, financial condition, results of operations and future prospects.

We expect to continue to engage in new branch expansion in the future.  We may also seek to acquire other financial institutions, or parts of those institutions.  Expansion involves a number of risks, including:

● the time and costs of evaluating new markets, hiring experienced local management and opening new offices;

● the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;

● we may not be able to finance an acquisition without diluting the interests of our existing shareholders;

● in the event of an acquisition, costs or difficulties related to the integration of our businesses may be greater than expected, and we may experience deposit attrition, customer loss or revenue loss that is greater than expected

● the diversion of our management’s attention to the negotiation of a transaction may detract from their business productivity;

● we may enter into new markets where we lack experience; and

● we may introduce new products and services with which we have no prior experience into our business.

If we fail to retain our key employees, our growth and profitability could be adversely affected.

Our success is, and is expected to remain, highly dependent on our Chairman, Daniel Brinks, and President and CEO, Larry Kuglar.   This is particularly true because, as a community bank, we depend on our management team’s ties to the community to generate business for us. Our recent growth and the current challenging economic environment will continue to place significant demands on our management, and the loss of any such person’s services may have an adverse effect upon our growth and profitability.  In addition, loss of key loan officers can also adversely affect our loan growth, which may adversely impact future profitability.

Our recent results may not be indicative of our future results, and may not provide guidance to assess the risk of an investment in our common stock.

We may not be able to sustain our historical rate of growth or may not even be able to grow our business at all.  In addition, our recent and rapid growth may distort some of our historical financial ratios and statistics.  In the future, we may not have the benefit of several recently favorable factors, such as a generally increasing interest rate environment, a strong residential and commercial mortgage market or the ability to find suitable expansion opportunities. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit our ability to expand our market presence.  If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected due to a high percentage of our operating costs being fixed expenses.

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Competition from other financial institutions may adversely affect our profitability.

The banking business is highly competitive, and we experience strong competition from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other financial institutions, which operate in our primary market areas and elsewhere.  Presently 35 banks serve our market area with a total of 99 branches.

We compete with these institutions both in attracting deposits and in making loans.  In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established and much larger financial institutions. While we believe we can and do successfully compete with these other financial institutions in our markets, we may face a competitive disadvantage as a result of our smaller size and lack of geographic diversification.

Although we compete by concentrating our marketing efforts in our primary market area with local advertisements, personal contacts and greater flexibility in working with local customers, we can give no assurance that this strategy will be successful.

As a community bank, we have different lending risks than larger banks.

We provide services to our local communities.  Our ability to diversify our economic risks is limited by our own local markets and economies.  We lend primarily to small to medium-sized businesses, and, to a lesser extent, individuals which may expose us to greater lending risks than those of banks lending to larger, better-capitalized businesses with longer operating histories.

We manage our credit exposure through careful monitoring of loan applicants and loan concentrations in particular industries, and through loan approval and review procedures. We have established an evaluation process designed to determine the adequacy of our allowance for loan losses. While this evaluation process uses historical and other objective information, the classification of loans and the establishment of loan losses is an estimate based on experience, judgment and expectations regarding our borrowers, the economies in which we and our borrowers operate, as well as the judgment of our regulators. We cannot assure you that our loan loss reserves will be sufficient to absorb future loan losses or prevent a material adverse effect on our business, financial condition, or results of operations.

Our directors and executive officers own a significant portion of our common stock and can influence stockholder decisions.

Our directors and executive officers, as a group, beneficially owned approximately 19.8% of our fully diluted outstanding common stock as of December 31, 2008.  As a result of their ownership, the directors and executive officers have the ability, if they voted their shares in concert, to influence the outcome of all matters submitted to our stockholders for approval, including the election of directors.

Risks Related to our Industry

Ongoing deterioration in the housing market and the homebuilding industry may lead to increased losses and further worsening of delinquencies and nonperforming assets in our loan portfolios. Consequently, our results of operations may be adversely impacted.

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There has been substantial industry concern and publicity over asset quality among financial institutions due in large part to issues related to subprime mortgage lending, declining real estate values and general economic concerns. Furthermore, the housing and the residential mortgage markets recently have experienced a variety of difficulties and changed economic conditions. If market conditions continue to deteriorate, they may lead to additional valuation adjustments on our loan portfolios and real estate owned as we continue to reassess the market value of our loan portfolio, the losses associated with the loans in default, and the net realizable value of real estate owned.

The homebuilding industry has experienced a significant and sustained decline in demand for new homes and an oversupply of new and existing homes available for sale in various markets, including some of the markets in which we lend. Our customers who are builders and developers face greater difficulty in selling their homes in markets where these trends are more pronounced. Consequently, we are facing increased delinquencies and non-performing assets as these builders and developers are forced to default on their loans with us. We do not know when the housing market will improve, and accordingly, additional downgrades, provisions for loan losses, and charge-offs related to our loan portfolio may occur.

Changes in monetary policies may have an adverse effect on our business, financial condition and results of operations.

Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve.  Actions by monetary and fiscal authorities, including the Federal Reserve, could have an adverse effect on our deposit levels, loan demand or business and earnings.

Our ability to pay dividends is limited and we may be unable to pay future dividends.  As a result, capital appreciation, if any, of our common stock may be your sole opportunity for gains on your investment for the foreseeable future.

We cannot make assurances that we will have the ability to continuously pay dividends in the future.  Any future determination relating to dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, regulatory restrictions and other factors that our Board of Directors may deem relevant.  The holders of our common stock are entitled to receive dividends when, and if declared by our Board of Directors out of funds legally available for that purpose.  As part of our consideration to pay cash dividends, we intend to retain adequate funds from future earnings to support the development and growth of our business.  In addition, our ability to pay dividends is restricted by federal policies and regulations.  It is the policy of the Federal Reserve that bank holding companies should pay cash dividends on common stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition.  Further, our principal source of funds to pay dividends is cash dividends that we receive from our subsidiary banks.

Environmental liability associated with lending activities could result in losses.

In the course of our business, we may foreclose on and take title to properties securing our loans.  If hazardous substances are discovered on any of these properties, we may be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage.  Many environmental laws can impose liability regardless of whether we knew of, or were responsible for, the contamination.  In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site, even if we neither own nor operate the disposal site.  Environmental laws may require us to incur substantial expenses and may materially limit the use of properties that we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default on the loans they secure.  In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.

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We are subject to extensive regulation that could limit or restrict our activities and impose financial requirements or limitations on the conduct of our business, which limitations or restrictions could adversely affect our profitability.

As a bank holding company, we are primarily regulated by the Federal Reserve.  Our subsidiary banks are regulated by the FDIC, the Georgia Department of Banking and Finance, the Alabama State Banking Department and the OCC. Our compliance with these regulations is costly and may limit our growth and restrict certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to capital requirements of our regulators.

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability.  Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.

The Sarbanes-Oxley Act of 2002, the related rules and regulations promulgated by the SEC that currently apply to us and the related exchange rules and regulations, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices.  As a result, we may experience greater compliance costs.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not Applicable.

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ITEM 2. PROPERTIES

SouthCrest maintains its executive offices in leased office space at 600 North Glynn Street, Suite B, Fayetteville, Georgia.

Upson's main banking office is located at 108 South Church Street, Thomaston, Georgia  30286.  In 2005, Upson began rebuilding this facility, enlarging it from approximately 16,000 square feet to 26,000 square feet.  This project was completed in 2007.  Upson's operations center occupies 12,500 square feet in a facility located at 732 Technology Parkway, Thomaston, Georgia  30286.  Construction of this facility began in 2007 and was completed in 2008.  Upson also owns banking offices at the following locations:  (i) 943 North Church Street, Thomaston, Georgia  30286, (ii) 406 West Main Street, Manchester, Georgia  31816, (iii) 121 Broad Street, Warm Springs, Georgia 31830, and (iv) 14 North Main Street, Luthersville, Georgia  30251.  Upson leases two branches in Fayette County, Georgia, at 600 North Glynn Street, Fayetteville, Georgia  30214, and 105 St. Stephens Court, Suite A,  Tyrone, Georgia 30290.  The office in Fayetteville will be closed effective April 30, 2009 as the Fayette County operations will be consolidated at the Tyrone Branch.  Upson’s offices in Manchester, Warm Springs, and Luthersville, Georgia are located within Meriwether County, Georgia and do business as Meriwether Bank & Trust.  The offices in Fayetteville and Tyrone, Georgia are located in Fayette County and do business as SouthCrest Bank.  Bank of Upson owns 17 ATMs, which are located within Upson, Fayette, and Meriwether Counties.

FNB Polk’s main office is at 967 North Main Street, Cedartown, Georgia.  The main office was built in 1991 and occupies 26,500 square feet.  FNB Polk also owns and operates a full-service downtown branch at 117 West Avenue, Cedartown, Georgia.  The branch occupies 10,000 square feet.  In 1973, FNB Polk opened a full-service Rockmart branch at 131 West Elm Street, Rockmart, Georgia.  The branch was enlarged from 4,200 square feet to approximately 9,200 square feet in project completed in 2005 at a cost of $895,000.

Peachtree’s main office is at 9411 Highway 22, Maplesville, Alabama.  The main office was built in 1961 and occupies 4,200 square feet.  Peachtree also owns and operates a full service branch located at 1501 North 17th Street in Clanton, Alabama.  This branch was built in 1994 and occupies 3,500 square feet.

Chickamauga’s main office is at 201 Gordon Street, Chickamauga, Georgia.  The main office was built in 1910 and occupies 12,000 square feet.  Chickamauga also owns and operates a full service branch located at 112 Lafayette Road, Chickamauga, Georgia.  This branch was established in 1974 and occupies 2,300 square feet.  A new branch facility occupying 3,700 square feet is under construction on the same site.  The new facility is expected to be completed in April 2009 after which time the old building will be demolished.

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company is a party or of which any of its properties are subject, nor are there material proceedings known to the Company to be contemplated by any governmental authority.   Additionally, the Company is unaware of any material proceedings, pending or contemplated, in which any existing or proposed director, officer or affiliate, or any principal security holder of the Company or any associate of any of the foregoing, is a party or has an interest adverse to the Company.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted during the fourth quarter of the fiscal year ended December 31, 2008 to a vote of shareholders of SouthCrest Financial Group, Inc., through the solicitation of proxies or otherwise.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

In December, 2004 our common stock began trading in the over-the-counter market under the symbol “SCSG.”  The development of an active secondary market requires the existence of an adequate number of willing buyers and sellers.  Historically, the reported trading volume would indicate a lack of activity in the secondary market for the Company’s common stock.  The lack of activity in the secondary market for the Company’s common stock may materially impact a shareholder’s ability to promptly sell Company common stock at a price acceptable to the selling shareholder.

The following table sets forth the high and low bid information for transactions in our common stock for the previous two years on the Nasdaq Over-the-Counter Bulletin Board.  These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

	2007				2008
	High		Low		High		Low
First Quarter	$	24.80	$	23.02	$	20.25	$	14.51
Second Quarter	$	25.50	$	23.00	$	17.00	$	12.50
Third Quarter	$	23.50	$	21.40	$	15.00	$	12.25
Fourth Quarter	$	22.00	$	19.50	$	13.25	$	7.60

On March 27, 2009, the Company had approximately 880 shareholders of record of our common stock.

The Company has generally declared a dividend on the first business day of each quarter, to be paid on the last business day of that month, with the record date normally being two weeks prior to the payment date.  The table below shows the quarterly dividends paid during 2007 and 2008.

	2007		2008
First Quarter	$	0.130	$	0.130
Second Quarter		0.130		0.130
Third Quarter		0.130		0.130
Fourth Quarter		0.130		0.130

The principal source of the Company’s cash flow, including cash flow to pay dividends to its shareholders, is dividends that the Bank pays to the Company as its sole shareholder.  Statutory and regulatory limitations apply to the Banks’ payment of dividends to the Company, as well as to the Company’s payment of dividends to its shareholders.  For a complete discussion of restrictions on dividends, see “Part I—Item 1.  Description of Business—Supervision and Regulation—Payment of Dividends.”

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The table below sets forth information regarding purchases of the Company’s common stock by the Company and the Company’s Employee Stock Ownership Plan whose trustees are executive officers of the Company.  All shares were purchased in open market transactions.

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 2008		-	$	-		-		-
November 2008			$			-		-
December 2008		2,722	$	9.54		-		-
Total		2,722	$	9.54		-		-

ITEM 6. SELECTED FINANCIAL DATA

Pursuant to the revised disclosure requirements for smaller reporting companies effective February 4, 2008, no disclosure under this Item is required.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS

The response to this item is included in the section of the same title contained in the Company's 2008 Annual Report to Shareholders and is incorporated herein by reference.  See Exhibit 13.1.

ITEM 7A. 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 8. FINANCIAL STATEMENTS

The response to this item is included in the section of the same title contained in the Company's 2008 Annual Report to Shareholders and is incorporated herein by reference.  See Exhibit 13.2.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not Applicable.

ITEM 9A(T). CONTROLS AND PROCEDURES

Disclosure Controls

As of the end of the period covered by this Annual Report on Form 10-K, 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 Annual 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.

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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.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.  Our internal control over financial reporting is a process designed to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, transactions are executed in accordance with appropriate management authorization and accounting records are reliable for the preparation of financial statements in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008.  Management based this assessment on criteria for effective internal control over financial reporting described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting.  Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.

Based on this assessment, management believes that SouthCrest Financial Group, Inc. maintained effective internal control over financial reporting as of December 31, 2008.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

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Changes to Internal Control Over Financial Reporting

There have been no significant changes in our internal control over financial reporting during the fourth fiscal quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION

Not Applicable.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The response to this Item is partially included in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 14, 2009 under the headings “Proposal One: Election of Directors,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference.

The Company has adopted a code of ethics that applies to its principal executive, financial and accounting officers.  A copy of the code of ethics may be obtained, without charge, upon written request addressed to SouthCrest Financial Group, Inc., 600 North Glynn Street, Suite B, Fayetteville, Georgia  30214, Attention:  Chief Financial Officer.  The request may be delivered by letter to the address set forth above or by fax to the attention of the Company’s Chief Financial Officer at (770) 461-2701.

ITEM 11. EXECUTIVE COMPENSATION

The response to this Item is included in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 14, 2009 under the headings “Proposal One: Election of Directors – Director Compensation” and “Executive Compensation” and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The response to this Item is partially included in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 14, 2009 under the heading “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by reference.

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The table below sets forth information regarding shares of the Company’s common stock authorized for issuance under the 2005 Stock Incentive Plan as of December 31, 2008.  The 2005 Stock Incentive Plan was approved by the Shareholders on May 12, 2005.

	Number of securities to be issued upon exercise of outstanding options		Weighted-average exercise price of outstanding options		Number of shares remaining available for future issuance under the Plan (excludes outstanding options)
Equity compensation plans approved by security holders		185,400	$	23.44		363,600
Equity compensation plans not approved by security holders		--		--		--
Total		185,400	$	23.44		363,600

ITEM13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The response to this Item is included in the Company’ s Proxy Statement for the Annual Meeting of Shareholders to be held May 14, 2009 under the headings “Proposal One: Election of Directors – Director Independence” and “Related Party Transactions” and is incorporated herein by reference.

ITEM14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The response to this Item is included in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 14, 2009 under the heading “Audit Committee Matters” and is incorporated herein by reference.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Number	Exhibit
3.1	Articles of Incorporation1
3.2	Amended and Restated Bylaws 1
3.3	Amendment to Bylaws 2
4.1	See Exhibits 3.1, and 3.2 for provisions of the Articles of Incorporation and Bylaws defining rights of holders of the Common Stock
10.1	Lease Contract, dated September 14, 1993, between Truitt A. Mallory and Bank of Upson 1
10.2	Agreement and Plan of Share Exchange with Bank of Chickamauga 3
10.3*	Employment Agreement with Daniel W. Brinks 4
10.4*	First Amendment to Employment Agreement with Daniel W. Brinks
10.5*	Salary Continuation Agreement with Daniel W. Brinks 5
10.6*	First Amendment to Salary Continuation Agreement with Daniel W. Brinks
10.7*	Joint Beneficiary Designation Agreement with Daniel W. Brinks 5
10.8*	Employment Agreement with Larry T. Kuglar 6
10.9*	First Amendment to Employment Agreement with Larry T. Kuglar
10.10*	Salary Continuation Agreement with Larry T. Kuglar 5
10.11*	First Amendment to Salary Continuation Agreement with Larry T. Kuglar
10.12*	Joint Beneficiary Designation Agreement with Larry T. Kuglar 5
10.13*	Employment Agreement with Douglas J. Hertha 6
10.14*	First Amendment to Employment Agreement with Douglas J. Hertha
10.15*	Salary Continuation Agreement with Douglas J. Hertha 5
10.16*	First Amendment to Salary Continuation Agreement with Douglas J. Hertha
10.17*	Joint Beneficiary Designation Agreement with Douglas J. Hertha 5
10.18*	Employment Agreement with Harvey N. Clapp 7
10.19*	First Amendment to Employment Agreement with Harvey N. Clapp
10.20*	Executive Salary Continuation Agreement with Harvey N. Clapp 7
10.21*	First Amendment Executive Salary Continuation Agreement with Harvey N. Clapp
10.22*	SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan 8
10.23*	Form of Incentive Stock Option under the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan 5

_________________________

* Indicates a compensatory plan or contract.

1 Incorporated by reference to the Registration Statement on Form S-4 (Registration No. 333-112845), as filed with the SEC on February 13, 2004.

2 Incorporated by reference to the Current Report on Form 8-K dated October 31, 2006.

3 Incorporated by reference to the Current Report on Form 8-K dated February 23, 2007.

4 Incorporated by reference to the Current Report on Form 8-K dated September 30, 2004.

5 Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2006.

6 Incorporated by reference to the Current Report on Form 8-K dated February 15, 2005.

7 Incorporated by reference to the Current Report on Form 8-K dated October 31, 2006.

8 Incorporated by reference to the Annual Report on Form 10-KSB for the year ended December 31, 2004.

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Number	Exhibit
10.23*	Form of Incentive Stock Option under the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan 5
10.24*	Form of Nonqualified Stock Option under the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan 5
13.1	Excerpts from the SouthCrest Financial Group, Inc. 2008 Annual Report to Shareholders – Management’s Discussion and Analysis
13.2	Excerpts from the SouthCrest Financial Group, Inc. 2008 Annual Report to Shareholders – Consolidated Financial Statements
21.1	Subsidiaries of the Registrant
23.1	Consent of Dixon Hughes PLLC
24.1	Power of Attorney (appears on the signature pages to the Annual Report on Form 10-K)
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

29

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

SOUTHCREST FINANCIAL GROUP, INC.
By:	/s/ Larry T. Kuglar
	Larry T. Kuglar
	Chief Executive Officer
Date:	April 3, 2009

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on the signature page to this Report constitutes and appoints Daniel W. Brinks and Larry T. Kuglar, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits hereto, and other documents in connection herewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Daniel W. Brinks	Chairman and Chief Operating Officer	April 3, 2009
Daniel W. Brinks
/s/ Larry T. Kuglar	Director, President and Chief Executive Officer	April 3, 2009
Larry T. Kuglar	(Principal Executive Officer)
/s/ Douglas J. Hertha	Senior Vice President and Chief Financial Officer	April 3, 2009
Douglas J. Hertha	(Principal Financial and Accounting Officer)

Signature Title Date

/s/ Richard T. Bridges	Director	April 3, 2009
Richard T. Bridges
/s/ Harvey N. Clapp	Director	April 3, 2009
Harvey N. Clapp
/s/ Joan B. Cravey	Director	April 3, 2009
Joan B. Cravey
/s/ Zack D. Cravey, Jr.	Director	April 3, 2009
Zack D. Cravey, Jr.
/s/ Dr. Warren Patrick	Director	April 3, 2009
Dr. Warren Patrick
/s/ Michael D. McRae	Director	April 3, 2009
Michael D. McRae
/s/ Harold W. Wyatt, Jr.	Director	April 3, 2009
Harold W. Wyatt, Jr.
/s/ Harold W. Wyatt, III	Director	April 3, 2009
Harold W. Wyatt, III

EXHIBIT INDEX

Number	Exhibit
3.1	Articles of Incorporation9
3.2	Amended and Restated Bylaws 1
3.3	Amendment to Bylaws 10
4.1	See Exhibits 3.1, and 3.2 for provisions of the Articles of Incorporation and Bylaws defining rights of holders of the Common Stock
10.1	Lease Contract, dated September 14, 1993, between Truitt A. Mallory and Bank of Upson 1
10.2	Agreement and Plan of Share Exchange with Bank of Chickamauga 11
10.3*	Employment Agreement with Daniel W. Brinks 12
10.4*	First Amendment to Employment Agreement with Daniel W. Brinks
10.5*	Salary Continuation Agreement with Daniel W. Brinks 13
10.6*	First Amendment to Salary Continuation Agreement with Daniel W. Brinks
10.7*	Joint Beneficiary Designation Agreement with Daniel W. Brinks 5
10.8*	Employment Agreement with Larry T. Kuglar 14
10.9*	First Amendment to Employment Agreement with Larry T. Kuglar
10.10*	Salary Continuation Agreement with Larry T. Kuglar 5
10.11*	First Amendment to Salary Continuation Agreement with Larry T. Kuglar
10.12*	Joint Beneficiary Designation Agreement with Larry T. Kuglar 5
10.13*	Employment Agreement with Douglas J. Hertha 6
10.14*	First Amendment to Employment Agreement with Douglas J. Hertha
10.15*	Salary Continuation Agreement with Douglas J. Hertha 5
10.16*	First Amendment to Salary Continuation Agreement with Douglas J. Hertha
10.17*	Joint Beneficiary Designation Agreement with Douglas J. Hertha 5
10.18*	Employment Agreement with Harvey N. Clapp 15
10.19*	First Amendment to Employment Agreement with Harvey N. Clapp
10.20*	Executive Salary Continuation Agreement with Harvey N. Clapp 7
10.21*	First Amendment Executive Salary Continuation Agreement with Harvey N. Clapp
10.22*	SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan 16
10.23*	Form of Incentive Stock Option under the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan 5

_________________________

* Indicates a compensatory plan or contract.

1 Incorporated by reference to the Registration Statement on Form S-4 (Registration No. 333-112845), as filed with the SEC on February 13, 2004.

2 Incorporated by reference to the Current Report on Form 8-K dated October 31, 2006.

3 Incorporated by reference to the Current Report on Form 8-K dated February 23, 2007.

4 Incorporated by reference to the Current Report on Form 8-K dated September 30, 2004.

5 Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2006.

6 Incorporated by reference to the Current Report on Form 8-K dated February 15, 2005.

7 Incorporated by reference to the Current Report on Form 8-K dated October 31, 2006.

8 Incorporated by reference to the Annual Report on Form 10-KSB for the year ended December 31, 2004.

Number Exhibit

10.24*	Form of Nonqualified Stock Option under the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan 5
13.1	Excerpts from the SouthCrest Financial Group, Inc. 2008 Annual Report to Shareholders – Management’s Discussion and Analysis
13.2	Excerpts from the SouthCrest Financial Group, Inc. 2008 Annual Report to Shareholders – Consolidated Financial Statements
21.1	Subsidiaries of the Registrant
23.1	Consent of Dixon Hughes PLLC
24.1	Power of Attorney (appears on the signature pages to the Annual Report on Form 10-K)
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EX-10.4

Exhibit 10.4

FIRST AMENDMENT TO

EMPLOYMENT AGREEMENT

THIS AMENDMENT (“Amendment”), made and entered into as of December 11, 2008 (the “Effective Date”) by and among Daniel W. Brinks, a resident of the State of Georgia (“Employee”), SouthCrest Financial Group, Inc. (f/k/a Upson Bankshares, Inc.), a Georgia corporation (“SouthCrest”), and Bank of Upson, a financial institution organized under the laws of the State of Georgia (“Bank”) (collectively, SouthCrest and Polk are the “Employer”).

W I T N E S S E T H:

WHEREAS, Employer currently employs Employee as Chairman and Chief Operating Officer of SouthCrest and the President and Chief Executive Officer of Bank pursuant to that certain employment agreement between Employer and Employee dated September 29, 2004 (the “Employment Agreement”);

WHEREAS, Employer and Employee desire to continue such employment;

WHEREAS, Employer and Employee now desire to revise the Employment Agreement to reflect the change in the name of “Upson Bankshares, Inc.” to “SouthCrest Financial Group, Inc.”; and

WHEREAS, Employer and Employee also desire to amend the Employment Agreement primarily so that the payments and benefits under the Employment Agreement comply with, or are exempt from, the rules of Section 409A of the Internal Revenue Code of 1986, as amended;

NOW, THEREFORE, in consideration of the continued employment of Employee by Employer, of the premises and the mutual promises and covenants contained herein, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree to modify the Employment Agreement as follows, effective as of January 1, 2009:

1.             By substituting each reference to “Upson Bankshares, Inc.” with a reference to “SouthCrest Financial Group, Inc.” and each reference to “Upson” with a reference to “SouthCrest” wherever such references appear in the Employment Agreement.

2.             By adding the following to the end of the existing Section 4:

“All reimbursements shall be paid as soon as administratively practicable, but in no event shall any reimbursement be paid after the last day of the taxable year following the taxable year in which the expense was incurred, nor shall the amount of reimbursable expenses incurred or in-kind benefits provided in one taxable year affect the expenses eligible for reimbursement or the in-kind benefits provided, as applicable, in any other taxable year.  The right to a reimbursement or an in-kind benefit under this Agreement will not be subject to liquidation or exchange for another benefit.”

3.             By deleting the existing Section 12.5 and substituting therefor the following:

“12.5           If this Agreement and Employee’s employment are terminated either (i) by the Employer at any time for any reason other than for Cause or (ii) by Employee upon the Employer’s breach of this Agreement; then Employer, as Employer’s sole remaining obligation under this Agreement, shall: (i) pay Employee’s Base Salary to Employee for the remaining months of the term of this Agreement in substantially equal monthly installments beginning with the month following the month of Employee’s termination of employment at the Base Salary rate then in effect; and (ii) reimburse Employee for the cost of COBRA health continuation coverage for Employee for the lesser of (a) the remaining term of this Agreement, or (b) the period during which Employee is entitled to COBRA health continuation coverage from the Employer, provided that, in either case, Employee must elect such coverage and pay the applicable premium.”

4.             By adding the following immediately following the phrase “pursuant to Section 12.4” in Section 12.6: “, or for any reason other than pursuant to Section 12.2,”.

5.             By adding the following new Section 12.7:

“12.7           Notwithstanding anything in this Agreement to the contrary (i) Employee shall be treated as having incurred a termination of employment hereunder, and shall be entitled to payments and benefits under Section 12.5 or 15.3, as applicable, only if he has incurred a ‘separation from service,’ within the meaning of Section 409A of the Internal Revenue Code, as amended (the ‘Code’), from SouthCrest and the Bank and all affiliated companies that, together with SouthCrest and the Bank, constitute the ‘service recipient’ within the meaning of the regulations issued under Code Section 409A; and (ii) if Employee is a ‘specified employee’ within the meaning of Code Section 409A, at the date of his termination of employment, then any payments made in connection with Employee’s termination of employment that would result in a tax under Code Section 409A if paid during the first six (6) months after termination of employment shall be withheld, starting with the payments latest in time during such six (6) month period, and paid to Employee during the seventh month following the date of his termination of employment.”

6.             By deleting the existing Section 15.2 and substituting therefor the following:

“15.2           ‘Change in Control’ shall be deemed to have occurred during the term of this Agreement if:

15.2.1           on or after January 1, 2009 (the ‘Amendment Date’), any one person, or more than one person acting as a group (other than any person or more than one person acting as a group who is considered to own more than fifty percent (50%) of the total fair market value of the stock of SouthCrest or Bank prior to such acquisition), acquires stock of SouthCrest or the Bank, as applicable, that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of SouthCrest or the Bank, as applicable;

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15.2.2       within any twelve-month period (beginning on or after Amendment Date), a majority of members of SouthCrest’s Board of Directors is replaced by directors whose appointment or election is not endorsed by a majority of the members of SouthCrest’s Board of Directors before the date of the appointment or election;

15.2.3      within any twelve-month period (beginning on or after the Amendment Date), any one person, or more than one person acting as a group, acquires ownership of stock of SouthCrest possessing thirty percent (30%) or more of the total voting power of the stock of SouthCrest; or

15.2.4      within any twelve-month period (beginning on or after the Amendment Date), any one person, or more than one person acting as a group, acquires assets of SouthCrest or the Bank, as applicable, that have a total gross fair market value of eighty-five percent (85%) or more of the total gross fair market value of all of the assets of SouthCrestor the Bank, as applicable, immediately before such acquisition or acquisitions; provided, however, that transfers to the following entities or person(s) shall not be deemed to result in a Change in Control under this subsection 15.2.4:

(i)            a shareholder (determined immediately before the asset transfer) of SouthCrest or the Bank in exchange for or with respect to its stock;

(ii)            an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by SouthCrest or the Bank;

(iii)           a person, or more than one person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of SouthCrest or the Bank; or

(iv)           an entity, at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a person described in the above subsection 15.2.4(iii).

For purposes of this Section 15.2, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with Employer, to the extent provided under Code Section 409A.”

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7.             By deleting the first clause of Section 15.3 up through and including the phrase “(‘Termination of Employment’)” and substituting therefor the following:

“In the event of a Change in Control, if Bank terminates Employee without Cause contemporaneously with or subsequent to the Change in Control, or if Bank takes any action specified in Section 15.4 of this Agreement during the term of this Agreement contemporaneously with or subsequent to a Change in Control and Employee terminates his employment contemporaneously with or subsequent to such action and, in either case, Employee’s termination of employment occurs within two (2) years following the Change in Control (‘Termination of Employment’)”.

8.             By deleting the last sentence of Section 15.3 and substituting therefor the following:

“In the event the Aggregate Severance is required to be reduced pursuant to this Section, the portions of the Aggregate Severance paid or provided latest in time will be reduced first and if portions of the Aggregate Severance to be paid or provided at the same time must be reduced, noncash benefits will be reduced before cash payments.”

9.             By deleting the first sentence of the existing Section 15.4 and substituting therefor the following:

“During the remaining term of this Agreement following the effective date of a Change in Control, if the Bank takes any of the following actions and Employee terminates his employment contemporaneously with or subsequent to such action and such termination occurs within two (2) years following the Change in Control, such termination shall be deemed to be a termination of employment by Employer without Cause.”

10.           By deleting the last sentence of the existing Section 15.4 and substituting therefor the following:

“In any such event, if Employee terminates his employment contemporaneously with or subsequent to such action and such termination occurs within two (2) years following the Change in Control, Employee shall be entitled to all payments provided for in Section 15.3 of this Agreement.”

[SIGNATURES ON THE NEXT PAGE]

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           IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first written above.

	“Employee”
/s/ J. Douglas Head	/s/ Daniel W. Brinks		(SEAL)
Witness	Daniel W. Brinks
ATTEST	“SouthCrest”
	SouthCrest Financial Group, Inc.
/s/ Michael Hobbs	By:	/s/ Douglas J. Hertha
(CORPORATE SEAL)	Its:	Senior Vice President
	“Bank”
ATTEST	Bank of Upson
	By:	/s/ Imogene B. Johnson
/s/ J. Michael Jones	Its:	Assisstant Vice President
(CORPORATE SEAL)

5

EX-10.6

Exhibit 10.6

FIRST AMENDMENT TO THE

BANK OF UPSON

EXECUTIVE SALARY CONTINUATION AGREEMENT

This FIRST AMENDMENT is made and entered into on the 11th day of December, 2008, by and between Bank of Upson (the “Bank”), a bank organized and existing under the laws of the State of Georgia, and Daniel W. Brinks, an executive of the Bank (the “Officer”).

WITNESSETH:

WHEREAS, the Bank and the Officer previously entered into that certain Officer Salary Continuation Agreement, dated January 24, 2007, (the “Agreement”); and

WHEREAS, the Bank and the Officer desire to amend the Agreement to comply with the final regulations issued under Internal Revenue Code Section 409A.

NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Bank and the Officer do hereby agree, effective as of January 1, 2009, to amend the Agreement as follows:

1.             By deleting Paragraph III(A) in its entirety and substituting therefor the following:

“A.           Retirement Date:

‘Retirement Date’ shall mean the date the Officer experiences a Separation from Service on or after the Officer’s Normal Retirement Age.”

2.             By deleting from Paragraph III(D) the phrase “without cause” and substituting therefor the phrase “other than for cause”.

3.             By deleting Paragraph III(E) in its entirety and substituting therefor the following:

“E.           Separation from Service:

‘Separation from Service’ shall mean a termination of the Officer’s employment where either (1) the Officer has ceased to perform any services for the Bank and all affiliated companies that, together with the Bank, constitute the ‘service recipient’ within the meaning of Code Section 409A and the regulations thereunder (collectively, the ‘Service Recipient’) or (2) the level of bona fide services the Officer performs for the Service Recipient after a given date (whether as an employee or as an independent contractor) permanently decreases (excluding either a decrease as a result of military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six (6) months, or if longer, so long as the Officer retains a right to reemployment with the Service Recipient under an applicable statute or by contract or any other decrease permitted under Code Section 409A) to no more than twenty percent (20%) of the average level of bona fide services performed for the Service Recipient (whether as an employee or an independent contractor) over the immediately preceding thirty-six-(36)-month period (or the full period of service if the Officer has been providing services to the Service Recipient for less than thirty-six (36) months).”

4.             By deleting Paragraph III(G) in its entirety and substituting therefor the following:

“G.           Change of Control:

‘Change of Control’ means (1) with respect to the Bank or Southcrest Financial Group, Inc. (the ‘Holding Company’) a ‘change in ownership of a corporation’ as defined under Code Section 409A; (2) with respect to the Holding Company, a ‘change in effective control of a corporation’ as defined under Code Section 409A; or (3) with respect to the Bank or the Holding Company, a ‘change in ownership of a substantial portion of a corporation’s assets’ as defined under Code Section 409A, but substituting ‘eighty-five percent (85%)’ for the phrase ‘40 percent’ in Treasury Regulation Section 1.409A-3(i)(5)(vii)(A), or any successor thereto.”

5.             By deleting Paragraph III(H) in its entirety and substituting therefor the following:

“H.           Restriction on Timing of Distribution:

Notwithstanding any provision in the Agreement to the contrary, to the extent necessary to avoid the imposition of tax on the Officer under Code Section 409A, any payments that are otherwise payable to the Officer within the first six (6) months following the effective date of his Separation from Service, shall be suspended and paid as soon as practicable following the end of the six-month period following such effective date if, immediately prior to the Officer’s Separation from Service, the Officer is determined to be a “specified employee” (within the meaning of Code Section 409A(a)(2)(B)(i)) of the Bank (or any related “service recipient” within the meaning of Code Section 409A and the regulations thereunder).  Any payments suspended by operation of the foregoing sentence shall be paid as a lump sum to the Officer during the seventh month following the date of his Separation from Service.  Payments (or portions thereof) that would be paid latest in time during the six-month period will be suspended first.”

6.             By adding the following new Paragraph III(J):

“J.           Accrued Liability Retirement Account:

‘Accrued Liability Retirement Account’ means the bookkeeping account established and maintained by the Bank to reflect the liability that should be accrued by the Bank under generally accepted accounting principles (“GAAP”) for the Bank’s obligation to the Officer under this Agreement.”

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7.             By capitalizing the phrase “accrued liability retirement account” wherever it appears in the Agreement.

8.             By deleting the last sentence of Paragraph IV in its entirety and substituting therefor the following:

“Such monthly installments shall be paid on the first business day of each month, commencing with the month following the month in which such Separation from Service occurs.”

9.             By deleting from Paragraph V(A) the phrase “Retirement Date” and substituting therefor the phrase “Normal Retirement Age”.

9.             By inserting into the first sentence of Paragraph V(B) the phrase “following Normal Retirement Age” after the word “Officer” and before the comma.

10.           By deleting Paragraph VI in its entirety and substituting therefor the following:

“VI. [RESERVED]”

11.           By deleting the first paragraph of Paragraph VIII in its entirety and substituting therefor the following:

“In the event that the employment of the Officer shall terminate prior to Normal Retirement Age, by the Officer’s voluntary action, or by the Officer’s discharge by the Bank other than for cause, then this Agreement shall terminate upon the date of such Termination of Employment and the Bank shall pay to the Officer an amount of money equal to the balance of the Officer’s Accrued liability Retirement Account on the date of said termination, multiplied by the Officer’s cumulative vested percentage.  This compensation shall be paid in one (1) lump sum the first day of the second month following Separation from Service on or after the date of the Termination of Employment.”

12.           By deleting the third paragraph of Paragraph VIII in its entirety and substituting therefor the following:

“In the event the Officer’s employment is terminated by the Bank for cause at any time, this Agreement shall terminate and all benefits provided herein shall be forfeited.”

13.           By deleting Paragraph X in its entirety and substituting therefor the following:

“X.          CHANGE OF CONTROL

If the Officer experiences a Separation from Service on or after the date of the Officer’s Termination of Employment (voluntarily or involuntarily), except a termination for cause, within two (2) years after a Change of Control, then the Officer shall receive one hundred percent (100%) of the benefits in Paragraph IV herein upon attaining Normal Retirement Age.  Said benefit shall be paid in equal monthly installments (1/12th of the annual benefit) commencing on the first day of the month following the month in which the Officer attains Normal Retirement Age.”

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14.           By deleting Paragraph XI(C) in its entirety and substituting therefor the following:

“C.           Amendment or Termination:

This Agreement may be amended, at any time, by mutual written consent of the Officer and the Bank, except that no amendment may reduce the Officer’s Accrued Liability Retirement Account.  The Bank may unilaterally amend the Agreement to conform with written directives to the Bank to comply with legislative changes or tax law, including, without limitation, Section 409A of the Code and any and all Treasury regulations and guidance promulgated thereunder.  No amendment shall provide for or otherwise permit any acceleration of the time or schedule of any payment under the Agreement in a manner that would be prohibited under Section 409A(a)(3) of the Code.

The Bank may, at any time, terminate the Agreement except that no termination may reduce the Officer’s Accrued Liability Retirement Account.  Except as provided in this Subparagraph XI(C), the termination of the Agreement shall not cause a distribution of benefits.  Rather, after such termination, benefit distributions will be made in accordance with the provisions of this Agreement as if no such termination had occurred.  Notwithstanding the preceding provisions of this Subparagraph XI(C), the Bank may elect to terminate the Agreement under any circumstances permitted by Treasury Regulations Section 1.409A-3(j)(4)(ix).  In any such event, the Bank shall distribute the Officer’s Accrued Liability Retirement Account, determined as of the date of the termination of the Agreement, to the Officer in a lump sum at the earliest date permitted under such Treasury guidance.”

15.           By deleting Paragraph XI(I) in its entirety and substituting therefor the following:

“I.           Tax Withholding:

The Officer is responsible for payment of all taxes applicable to compensation and benefits paid or provided to the Officer under the Agreement, including federal and state income tax withholding, except the Bank shall withhold any taxes that, in its reasonable judgment, are required to be withheld, including but not limited to taxes owed under Section 409A of the Code and regulations thereunder and all employment taxes due to be paid by the Bank pursuant to Section 3121(v) of the Code and regulations promulgated thereunder (i.e., Federal Insurance Contributions Act (“FICA”) taxes on the present value of payments hereunder which are no longer subject to vesting).  The Bank’s sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authority(ies).  By participating in the Agreement, the Officer consents to the deduction of all tax withholdings attributable to participation in the Agreement from the benefits due under the Agreement or other payments due to the Officer by the Bank to satisfy the employee-portion of such obligations.  If insufficient cash wages are available or if the Officer so desires, the Officer may remit payment in cash for the withholding amounts.

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Notwithstanding any other provision in the Agreement to the contrary, payments due under the Agreement may be accelerated to pay, where applicable, the FICA tax imposed under Sections 3101, 3121(a), and 3121(v)(2) of the Code and any state, local, and foreign tax obligations (the ‘Tax Obligations’) that may be imposed on amounts deferred pursuant to the Agreement prior to the time such amounts are paid or made available and to pay the income tax at source on wages imposed under Section 3401 of the Code or the corresponding withholding provisions of applicable state, local, or foreign tax laws as a result of an accelerated payment of the Tax Obligations (the ‘Income Tax Obligations’).  Accelerated payments pursuant to this Subparagraph XII(I) shall not exceed the amount of the Tax Obligations and Income Tax Obligations and shall be made as a payment directly to taxing authorities pursuant to the applicable withholding provisions.  Any accelerated payments pursuant to this Subparagraph XII(I) shall reduce the benefit otherwise payable to the Officer pursuant to the Agreement.”

16.           By adding the following new Paragraph XI(L):

“L.           Accelerated Payouts in the Event of 409A Violations.

Notwithstanding any other provision of the Agreement to the contrary, the Bank shall make payments hereunder before such payments are otherwise due if it determines that the provisions of the Agreement fail to meet the requirements of Code Section 409A and the rules and regulations promulgated thereunder; provided, however, that such payment(s) may not exceed the amount required to be included in income as a result of such failure to comply the requirements of Code Section 409A and the rules and regulations promulgated thereunder and, to the extent permissible therein, any taxes, penalties, interest and costs attributable thereto.”

17.           By deleting the last sentence of Paragraph XIII in its entirety.

[Signatures on Next Page]

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Except as provided herein, the terms of the Agreement shall remain in full force and effect.

IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed as of the date first above written.

BANK OF UPSON
Thomaston, Georgia
By:	/s/ Imogene B. Johnson
Print Name:	Imogene B. Johnson
Title:	Assisstant Vice President
/s/ Daniel W. Brinks
[Officer]

 6

EX-10.9

Exhibit 10.9

FIRST AMENDMENT TO

EMPLOYMENT AGREEMENT

THIS AMENDMENT (“Amendment”), made and entered into as of December 9, 2008 (the “Effective Date”) by and among Larry T. Kuglar, a resident of the State of Georgia (“Employee”), SouthCrest Financial Group, Inc. (f/k/a Upson Bankshares, Inc. which was f/k/a First Polk Bankshares, Inc.), a Georgia corporation (“SouthCrest”), and The First National Bank of Polk County, a national banking association (“Bank”) (collectively, SouthCrest and Bank are the “Employer”).

W I T N E S S E T H:

WHEREAS, Employer currently employs Employee as the President and Chief Executive Officer of SouthCrest and the President and Chief Executive Officer of Bank pursuant to that certain employment agreement between Employer and Employee dated September 29, 2004 (the “Employment Agreement”);

WHEREAS, Employer and Employee desire to continue such employment;

WHEREAS, Employer and Employee now desire to revise the Employment Agreement to reflect the change in the name of “Upson Bankshares, Inc.” to “SouthCrest Financial Group, Inc.”; and

WHEREAS, Employer and Employee also desire to amend the Employment Agreement primarily so that the payments and benefits under the Employment Agreement comply with, or are exempt from, the rules of Section 409A of the Internal Revenue Code of 1986, as amended;

NOW, THEREFORE, in consideration of the continued employment of Employee by Employer, of the premises and the mutual promises and covenants contained herein, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree to modify the Employment Agreement as follows, effective as of January 1, 2009:

1.             By substituting each reference to “Upson Bankshares, Inc.” with a reference to “SouthCrest Financial Group, Inc.” and each reference to “Upson” with a reference to “SouthCrest” wherever such references appear in the Employment Agreement.

2.             By adding the following to the end of the existing Section 4:

“All reimbursements shall be paid as soon as administratively practicable, but in no event shall any reimbursement be paid after the last day of the taxable year following the taxable year in which the expense was incurred, nor shall the amount of reimbursable expenses incurred or in-kind benefits provided in one taxable year affect the expenses eligible for reimbursement or the in-kind benefits provided, as applicable, in any other taxable year.  The right to a reimbursement or an in-kind benefit under this Agreement will not be subject to liquidation or exchange for another benefit.”

3.             By deleting the existing Section 12.5 and substituting therefor the following:

“12.5           If this Agreement and Employee’s employment are terminated either (i) by the Employer at any time for any reason other than for Cause or (ii) by Employee upon the Employer’s breach of this Agreement; then Employer, as Employer’s sole remaining obligation under this Agreement, shall: (i) pay Employee’s Base Salary to Employee for the remaining months of the term of this Agreement in substantially equal monthly installments beginning with the month following the month of Employee’s termination of employment at the Base Salary rate then in effect; (ii) reimburse Employee for the cost of COBRA health continuation coverage for Employee for the lesser of (a) the remaining term of this Agreement, or (b) the period during which Employee is entitled to COBRA health continuation coverage from the Employer, provided that, in either case, Employee must elect such coverage and pay the applicable premium; and (iii) pay to Employee the cost for term life insurance coverage provided by the Employer to the Employee for the remaining months of the term of this Agreement in substantially equal monthly installments beginning with the month following the month of Employee’s termination of employment in an amount not to exceed the monthly cost of premiums for such coverage in effect on the effective date of termination.”

4.              By adding the following immediately following the phrase “pursuant to Section 12.4” in Section 12.6: “, or for any reason other than pursuant to Section 12.2,”.

5.             By adding the following new Section 12.7:

“12.7           Notwithstanding anything in this Agreement to the contrary (i) Employee shall be treated as having incurred a termination of employment hereunder, and shall be entitled to payments and benefits under Section 12.5 or 15.3, as applicable, only if he has incurred a ‘separation from service,’ within the meaning of Section 409A of the Internal Revenue Code, as amended (the ‘Code’), from SouthCrest and the Bank and all affiliated companies that, together with SouthCrest and the Bank, constitute the ‘service recipient’ within the meaning of the regulations issued under Code Section 409A; and (ii) if Employee is a ‘specified employee’ within the meaning of Code Section 409A, at the date of his termination of employment, then any payments made in connection with Employee’s termination of employment that would result in a tax under Code Section 409A if paid during the first six (6) months after termination of employment shall be withheld, starting with the payments latest in time during such six (6) month period, and paid to Employee during the seventh month following the date of his termination of employment.”

6.             By deleting the existing Section 15.2 and substituting therefor the following:

“15.2           ‘Change in Control’ shall be deemed to have occurred during the term of this Agreement if:

15.2.1      on or after January 1, 2009 (the ‘Amendment Date’), any one person, or more than one person acting as a group (other than any person or more than one person acting as a group who is considered to own more than fifty percent (50%) of the total fair market value of the stock of SouthCrest or Bank prior to such acquisition), acquires stock of SouthCrest or the Bank, as applicable, that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of SouthCrest or the Bank, as applicable;

15.2.2      within any twelve-month period (beginning on or after Amendment Date), a majority of members of SouthCrest’s Board of Directors is replaced by directors whose appointment or election is not endorsed by a majority of the members of SouthCrest’s Board of Directors before the date of the appointment or election;

15.2.3      within any twelve-month period (beginning on or after the Amendment Date), any one person, or more than one person acting as a group, acquires ownership of stock of SouthCrest possessing thirty percent (30%) or more of the total voting power of the stock of SouthCrest; or

15.2.4      within any twelve-month period (beginning on or after the Amendment Date), any one person, or more than one person acting as a group, acquires assets of SouthCrest or the Bank, as applicable, that have a total gross fair market value of eighty-five percent (85%) or more of the total gross fair market value of all of the assets of SouthCrestor the Bank, as applicable, immediately before such acquisition or acquisitions; provided, however, that transfers to the following entities or person(s) shall not be deemed to result in a Change in Control under this subsection 15.2.4:

(i)              a shareholder (determined immediately before the asset transfer) of SouthCrest or the Bank in exchange for or with respect to its stock;

(ii)             an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by SouthCrest or the Bank;

(iii)            a person, or more than one person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of SouthCrest or the Bank; or

(iv)           an entity, at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a person described in the above subsection 15.2.4(iii).

For purposes of this Section 15.2, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with Employer, to the extent provided under Code Section 409A.”

7.             By deleting the first clause of Section 15.3 up through and including the phrase “(‘Termination of Employment’)” and substituting therefor the following:

“In the event of a Change in Control, if Bank terminates Employee without Cause contemporaneously with or subsequent to the Change in Control, or if Bank takes any action specified in Section 15.4 of this Agreement during the term of this Agreement contemporaneously with or subsequent to a Change in Control and Employee terminates his employment contemporaneously with or subsequent to such action and, in either case, Employee’s termination of employment occurs within two (2) years following the Change in Control (‘Termination of Employment’)”.

8.             By deleting the last sentence of Section 15.3 and substituting therefor the following:

“In the event the Aggregate Severance is required to be reduced pursuant to this Section, the portions of the Aggregate Severance paid or provided latest in time will be reduced first and if portions of the Aggregate Severance to be paid or provided at the same time must be reduced, noncash benefits will be reduced before cash payments.”

9.             By deleting the first sentence of the existing Section 15.4 and substituting therefor the following:

“During the remaining term of this Agreement following the effective date of a Change in Control, if the Bank takes any of the following actions and Employee terminates his employment contemporaneously with or subsequent to such action and such termination occurs within two (2) years following the Change in Control, such termination shall be deemed to be a termination of employment by Employer without Cause.”

10.           By deleting the last sentence of the existing Section 15.4 and substituting therefor the following:

“In any such event, if Employee terminates his employment contemporaneously with or subsequent to such action and such termination occurs within two (2) years following the Change in Control, Employee shall be entitled to all payments provided for in Section 15.3 of this Agreement.”

[SIGNATURES ON THE NEXT PAGE]

           IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first written above.

	“Employee”
/s/ Deborah L. Putnal	/s/ Larry T. Kuglar		(SEAL)
Witness	Larry T. Kuglar
	“SouthCrest”
ATTEST	SouthCrest Financial Group, Inc.
	By:	/s/ Douglas J. Hertha
/s/ Michael Hobbs	Its:	Senior Vice President
(CORPORATE SEAL)
	“Bank”
ATTEST	The First National Bank of Polk County
	By:	/s/ Patsy Campbell
/s/ David Lee	Its:	Vice President/Board Secretary
(CORPORATE SEAL)

 5

EX-10.11

Exhibit 10.11

FIRST AMENDMENT TO THE

FIRST NATIONAL BANK OF POLK COUNTY

EXECUTIVE SALARY CONTINUATION AGREEMENT

This FIRST AMENDMENT is made and entered into on the 9th day of December, 2008, by and between The First National Bank of Polk County (the “Bank”), a national banking association, and Larry T. Kuglar, an executive of the Bank (the “Executive”).

WITNESSETH:

WHEREAS, the Bank and the Executive previously entered into that certain Executive Salary Continuation Agreement, dated February 7, 2000, (the “Agreement”); and

WHEREAS, the Bank and the Executive desire to amend the Agreement to comply with the final regulations issued under Internal Revenue Code Section 409A.

NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Bank and the Executive do hereby agree, effective as of January 1, 2009, to amend the Agreement as follows:

1.             By deleting Paragraph III(A) in its entirety and substituting therefor the following:

“A.           Retirement Date:

‘Retirement Date’ shall mean the date the Executive experiences a Separation from Service on or after the Executive’s Normal Retirement Age.”

2.             By deleting from Paragraph III(D) the phrase “without cause” and substituting therefor the phrase “other than for cause”.

3.             By deleting Paragraph III(E) in its entirety and substituting therefor the following:

“E.           Separation from Service:

‘Separation from Service’ shall mean a termination of the Executive’s employment where either (1) the Executive has ceased to perform any services for the Bank and all affiliated companies that, together with the Bank, constitute the ‘service recipient’ within the meaning of Code Section 409A and the regulations thereunder (collectively, the ‘Service Recipient’) or (2) the level of bona fide services the Executive performs for the Service Recipient after a given date (whether as an employee or as an independent contractor) permanently decreases (excluding either a decrease as a result of military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six (6) months, or if longer, so long as the Executive retains a right to reemployment with the Service Recipient under an applicable statute or by contract or any other decrease permitted under Code Section 409A) to no more than twenty percent (20%) of the average level of bona fide services performed for the Service Recipient (whether as an employee or an independent contractor) over the immediately preceding thirty-six-(36)-month period (or the full period of service if the Executive has been providing services to the Service Recipient for less than thirty-six (36) months).”

4.             By deleting Paragraph III(G) in its entirety and substituting therefor the following:

“G.           Change of Control:

‘Change of Control’ means (1) with respect to the Bank or Southcrest Financial Group, Inc. (the ‘Holding Company’) a ‘change in ownership of a corporation’ as defined under Code Section 409A; (2) with respect to the Holding Company, a ‘change in effective control of a corporation’ as defined under Code Section 409A; or (3) with respect to the Bank or the Holding Company, a ‘change in ownership of a substantial portion of a corporation’s assets’ as defined under Code Section 409A, but substituting ‘eighty-five percent (85%)’ for the phrase ‘40 percent’ in Treasury Regulation Section 1.409A-3(i)(5)(vii)(A), or any successor thereto.”

5.             By deleting Paragraph III(H) in its entirety and substituting therefor the following:

“H.           Restriction on Timing of Distribution:

Notwithstanding any provision in the Agreement to the contrary, to the extent necessary to avoid the imposition of tax on the Executive under Code Section 409A, any payments that are otherwise payable to the Executive within the first six (6) months following the effective date of his Separation from Service, shall be suspended and paid as soon as practicable following the end of the six-month period following such effective date if, immediately prior to the Executive’s Separation from Service, the Executive is determined to be a “specified employee” (within the meaning of Code Section 409A(a)(2)(B)(i)) of the Bank (or any related “service recipient” within the meaning of Code Section 409A and the regulations thereunder).  Any payments suspended by operation of the foregoing sentence shall be paid as a lump sum to the Executive during the seventh month following the date of his Separation from Service.  Payments (or portions thereof) that would be paid latest in time during the six-month period will be suspended first.”

6.             By adding the following new Paragraph III(J):

“J.           Accrued Liability Retirement Account:

‘Accrued Liability Retirement Account’ means the bookkeeping account established and maintained by the Bank to reflect the liability that should be accrued by the Bank under generally accepted accounting principles (“GAAP”) for the Bank’s obligation to the Executive under this Agreement.”

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7.             By capitalizing the phrase “accrued liability retirement account” wherever it appears in the Agreement.

8.             By adding to the end of Section IV the following sentence:

“Each subsequent annual payment shall be made on the anniversary of the original payment.”

9.             By deleting from Paragraph V(A) the phrase “Separation from Service” and substituting therefor the phrase “Normal Retirement Age”.

10.           By inserting into the first sentence of Paragraph V(B) the phrase “following Normal Retirement Age” after the word Executive and before the comma.

11.           By deleting Paragraph VI in its entirety and substituting therefor the following:

VI.           [RESERVED]”

12.           By deleting the first paragraph of Paragraph VIII in its entirety and substituting therefor the following:

“In the event that the employment of the Executive shall terminate prior to Normal Retirement Age, by the Executive’s voluntary action, or by the Executive’s discharge by the Bank other than for cause, then this Agreement shall terminate upon the date of such Separation from Service and the Bank shall pay to the Executive an amount of money equal to the balance of the Executive’s Accrued Liability Retirement Account on the date of such Separation from Service, multiplied by the Executive’s cumulative vested percentage (Paragraph VII).  This compensation shall be paid in one (1) lump sum on the first day of the second month following said Separation from Service.”

13.           By deleting the third paragraph of Paragraph VIII in its entirety and substituting therefor the following:

“In the event the Executive’s employment is terminated by the Bank for cause at any time, this Agreement shall terminate and all benefits provided herein shall be forfeited.”

14.           By deleting Paragraph X in its entirety and substituting therefor the following:

“X.          CHANGE OF CONTROL

If the Executive experiences a Separation from Service on or after the date of the Executive’s Termination of Employment (voluntarily or involuntarily), except a termination for cause, within two (2) years after a Change of Control, then the Executive shall receive one hundred percent (100%) of the benefits in Paragraph IV herein upon attaining Normal Retirement Age.  Said benefit shall be paid in equal annual installments commencing on the first day of the month following the month in which the Executive attains the Executive’s Normal Retirement Age.”

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15.           By deleting Paragraph XI(C) in its entirety and substituting therefor the following:

“C.           Amendment or Termination:

This Agreement may be amended, at any time, by mutual written consent of the Executive and the Bank, except that no amendment may reduce the Executive’s Accrued Liability Retirement Account.  The Bank may unilaterally amend the Agreement to conform with written directives to the Bank to comply with legislative changes or tax law, including, without limitation, Section 409A of the Code and any and all Treasury regulations and guidance promulgated thereunder.  No amendment shall provide for or otherwise permit any acceleration of the time or schedule of any payment under the Agreement in a manner that would be prohibited under Section 409A(a)(3) of the Code.

The Bank may, at any time, terminate the Agreement except that no termination may reduce the Executive’s Accrued Liability Retirement Account.  Except as provided in this Subparagraph XI(C), the termination of the Agreement shall not cause a distribution of benefits.  Rather, after such termination, benefit distributions will be made in accordance with the provisions of this Agreement as if no such termination had occurred.  Notwithstanding the preceding provisions of this Subparagraph XI(C), the Bank may elect to terminate the Agreement under any circumstances permitted by Treasury Regulations Section 1.409A-3(j)(4)(ix).  In any such event, the Bank shall distribute the Executive’s Accrued Liability Retirement Account, determined as of the date of the termination of the Agreement, to the Executive in a lump sum at the earliest date permitted under such Treasury guidance.”

16.           By deleting Paragraph XI(I) in its entirety and substituting therefor the following:

“I.           Tax Withholding:

The Executive is responsible for payment of all taxes applicable to compensation and benefits paid or provided to the Executive under the Agreement, including federal and state income tax withholding, except the Bank shall withhold any taxes that, in its reasonable judgment, are required to be withheld, including but not limited to taxes owed under Section 409A of the Code and regulations thereunder and all employment taxes due to be paid by the Bank pursuant to Section 3121(v) of the Code and regulations promulgated thereunder (i.e., Federal Insurance Contributions Act (“FICA”) taxes on the present value of payments hereunder which are no longer subject to vesting).  The Bank’s sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authority(ies).  By participating in the Agreement, the Executive consents to the deduction of all tax withholdings attributable to participation in the Agreement from the benefits due under the Agreement or other payments due to the Executive by the Bank to satisfy the employee-portion of such obligations.  If insufficient cash wages are available or if the Executive so desires, the Executive may remit payment in cash for the withholding amounts.

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Notwithstanding any other provision in the Agreement to the contrary, payments due under the Agreement may be accelerated to pay, where applicable, the FICA tax imposed under Sections 3101, 3121(a), and 3121(v)(2) of the Code and any state, local, and foreign tax obligations (the ‘Tax Obligations’) that may be imposed on amounts deferred pursuant to the Agreement prior to the time such amounts are paid or made available and to pay the income tax at source on wages imposed under Section 3401 of the Code or the corresponding withholding provisions of applicable state, local, or foreign tax laws as a result of an accelerated payment of the Tax Obligations (the ‘Income Tax Obligations’).  Accelerated payments pursuant to this Subparagraph XII(I) shall not exceed the amount of the Tax Obligations and Income Tax Obligations and shall be made as a payment directly to taxing authorities pursuant to the applicable withholding provisions.  Any accelerated payments pursuant to this Subparagraph XII(I) shall reduce the benefit otherwise payable to the Executive pursuant to the Agreement.”

17.           By adding the following new Paragraph XI(M):

“M.         Accelerated Payouts in the Event of 409A Violations.

Notwithstanding any other provision of the Agreement to the contrary, the Bank shall make payments hereunder before such payments are otherwise due if it determines that the provisions of the Agreement fail to meet the requirements of Code Section 409A and the rules and regulations promulgated thereunder; provided, however, that such payment(s) may not exceed the amount required to be included in income as a result of such failure to comply the requirements of Code Section 409A and the rules and regulations promulgated thereunder and, to the extent permissible therein, any taxes, penalties, interest and costs attributable thereto.”

18.           By deleting the last sentence of Paragraph XIV in its entirety.

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Except as provided herein, the terms of the Agreement shall remain in full force and effect.

IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed as of the date first above written.

THE FIRST NATIONAL BANK OF POLK COUNTY
Cedartown, Georgia
By:	/s/ Patsy Campbell
Print Name:	Patsy Campbell
Title:	Vice President/Board Secretary
/s/ Larry T. Kuglar
[Executive]

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EX-10.14

Exhibit 10.14

FIRST AMENDMENT TO

EMPLOYMENT AGREEMENT

THIS AMENDMENT (“Amendment”), made and entered into as of December 11th, 2008 (the “Effective Date”) by and between Douglas J. Hertha, a resident of the State of Georgia (“Employee”), and SouthCrest Financial Group, Inc., a Georgia corporation (“Employer”).

W I T N E S S E T H:

WHEREAS, Employer currently employs Employee as its Senior Vice President and Chief Financial Officer pursuant to that certain employment agreement between Employer and Employee dated February 10, 2005 (the “Employment Agreement”);

WHEREAS, Employer and Employee desire to continue such employment; and

WHEREAS, Employer and Employee now desire to amend the Employment Agreement primarily so that the payments and benefits under the Employment Agreement comply with, or are exempt from, the rules of Section 409A of the Internal Revenue Code of 1986, as amended;

                NOW, THEREFORE, in consideration of the continued employment of Employee by Employer, of the premises and the mutual promises and covenants contained herein, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree to modify the Employment Agreement as follows, effective as of January 1, 2009:

1.             By adding the following to the end of the existing Section 4:

“All reimbursements shall be paid as soon as administratively practicable, but in no event shall any reimbursement be paid after the last day of the taxable year following the taxable year in which the expense was incurred, nor shall the amount of reimbursable expenses incurred or in-kind benefits provided in one taxable year affect the expenses eligible for reimbursement or the in-kind benefits provided, as applicable, in any other taxable year.  The right to a reimbursement or an in-kind benefit under this Agreement will not be subject to liquidation or exchange for another benefit.”

2.             By deleting the existing Section 12.5 and substituting therefor the following:

“12.5           If this Agreement and Employee’s employment are terminated either (i) by the Employer at any time for any reason other than for Cause or (ii) by Employee upon the Employer’s breach of this Agreement; then Employer, as Employer’s sole remaining obligation under this Agreement, shall: (i) pay Employee’s Base Salary to Employee for the remaining months of the term of this Agreement in substantially equal monthly installments beginning with the month following the month of Employee’s termination of employment at the Base Salary rate then in effect; (ii) reimburse Employee for the cost of COBRA health continuation coverage for Employee for the lesser of (a) the remaining term of this Agreement, or (b) the period during which Employee is entitled to COBRA health continuation coverage from the Employer, provided that, in either case, Employee must elect such coverage and pay the applicable premium; and (iii) pay to Employee the cost for term life insurance coverage provided by the Employer to the Employee for the remaining months of the term of this Agreement in substantially equal monthly installments beginning with the month following the month of Employee’s termination of employment in an amount not to exceed the monthly cost of premiums for such coverage in effect on the effective date of termination.”

3.              By adding the following immediately following the phrase “pursuant to Section 12.4” in Section 12.6: “, or for any reason other than pursuant to Section 12.2,”.

4.             By adding the following new Section 12.7:

“12.7           Notwithstanding anything in this Agreement to the contrary (i) Employee shall be treated as having incurred a termination of employment hereunder, and shall be entitled to payments and benefits under Section 12.5 or 15.2, as applicable, only if he has incurred a ‘separation from service,’ within the meaning of Section 409A of the Internal Revenue Code, as amended (the ‘Code’), from Employer and all affiliated companies that, together with Employer, constitute the ‘service recipient’ within the meaning of the regulations issued under Code Section 409A; and (ii) if Employee is a ‘specified employee’ within the meaning of Code Section 409A, at the date of his termination of employment, then any payments made in connection with Employee’s termination of employment that would result in a tax under Code Section 409A if paid during the first six (6) months after termination of employment shall be withheld, starting with the payments latest in time during such six (6) month period, and paid to Employee during the seventh month following the date of his termination of employment.”

5.             By deleting the existing Section 15.1 and substituting therefor the following:

“15.1           ‘Change in Control’ shall be deemed to have occurred during the term of this Agreement if:

15.1.1      on or after January 1, 2009 (the ‘Amendment Date’), any one person, or more than one person acting as a group (other than any person or more than one person acting as a group who is considered to own more than fifty percent (50%) of the total fair market value of the stock of Employer prior to such acquisition), acquires stock of Employer that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of Employer;

15.1.2      within any twelve-month period (beginning on or after the Amendment Date), a majority of members of Employer’s Board of Directors is replaced by directors whose appointment or election is not endorsed by a majority of the members of Employer’s Board of Directors before the date of the appointment or election;

15.1.3      within any twelve-month period (beginning on or after the Amendment Date), any one person, or more than one person acting as a group, acquires ownership of stock of Employer possessing thirty percent (30%) or more of the total voting power of the stock of Employer; or

15.1.4      within any twelve-month period (beginning on or after the Amendment Date), any one person, or more than one person acting as a group, acquires assets of Employer that have a total gross fair market value of eighty-five percent (85%) or more of the total gross fair market value of all of the assets of Employer immediately before such acquisition or acquisitions; provided, however, that transfers to the following entities or person(s) shall not be deemed to result in a Change in Control under this subsection 15.1.4:

(i)             a shareholder (determined immediately before the asset transfer) of Employer in exchange for or with respect to its stock;

(ii)            an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by Employer;

(iii)            a person, or more than one person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of Employer; or

(iv)           an entity, at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a person described in the above subsection 15.1.4(iii).

For purposes of this Section 15.1, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with Employer, to the extent provided under Code Section 409A.”

6.             By deleting the first clause of Section 15.2 up through and including the phrase “(‘Termination of Employment’)” and substituting therefor the following:

“In the event of a Change in Control, if Employer terminates Employee without Cause contemporaneously with or subsequent to the Change in Control, or if Employer takes any action specified in Section 15.4 of this Agreement during the term of this Agreement contemporaneously with or subsequent to a Change in Control and Employee terminates his employment contemporaneously with or subsequent to such action and, in either case, Employee’s termination of employment occurs within two (2) years following the Change in Control (‘Termination of Employment’)”.

7.             By deleting the last sentence of Section 15.2 and substituting therefor the following:

“In the event the Aggregate Severance is required to be reduced pursuant to this Section, the portions of the Aggregate Severance paid or provided latest in time will be reduced first and if portions of the Aggregate Severance to be paid or provided at the same time must be reduced, noncash benefits will be reduced before cash payments.”

8.             By deleting the first sentence of the existing Section 15.3 and substituting therefor the following:

“During the remaining term of this Agreement following the effective date of a Change in Control, if Employer takes any of the following actions and Employee terminates his employment contemporaneously with or subsequent to such action and such termination occurs within two (2) years following the Change in Control, such termination shall be deemed to be a termination of employment by Employer without Cause.”

9.             By deleting the last sentence of the existing Section 15.3 and substituting therefor the following:

“In any such event, if Employee terminates his employment contemporaneously with or subsequent to such action and such termination occurs within two (2) years following the Change in Control, Employee shall be entitled to all payments provided for in Section 15.2 of this Agreement.”

IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first written above.

	“Employee”
/s/ Michael Hobbs	/s/ Douglas J. Hertha		(SEAL)
Witness	Douglas J. Hertha
	“Employer”
ATTEST	SouthCrest Financial Group, Inc.
	By:	Daniel W. Brinks
/s/ Imogene B. Johnson	Its:	Chairman
(CORPORATE SEAL)

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EX-10.16

Exhibit 10.16

FIRST AMENDMENT TO THE

BANK OF UPSON

EXECUTIVE SALARY CONTINUATION AGREEMENT

This FIRST AMENDMENT is made and entered into on the 11th day of December, 2008, by and between Bank of Upson (the “Bank”), a bank organized and existing under the laws of the State of Georgia, and Douglas Hertha, an executive of the Bank (the “Officer”).

WITNESSETH:

WHEREAS, the Bank and the Officer previously entered into that certain Officer Salary Continuation Agreement, dated March 30, 2007, (the “Agreement”); and

WHEREAS, the Bank and the Officer desire to amend the Agreement to comply with the final regulations issued under Internal Revenue Code Section 409A.

NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Bank and the Officer do hereby agree, effective as of January 1, 2009, to amend the Agreement as follows:

1.             By deleting Paragraph III(A) in its entirety and substituting therefor the following:

“A.           Retirement Date:

‘Retirement Date’ shall mean the date the Officer experiences a Separation from Service on or after the Officer’s Normal Retirement Age.”

2.             By deleting from Paragraph III(D) the phrase “without cause” and substituting therefor the phrase “other than for cause”.

3.             By deleting Paragraph III(E) in its entirety and substituting therefor the following:

“E.           Separation from Service:

‘Separation from Service’ shall mean a termination of the Officer’s employment where either (1) the Officer has ceased to perform any services for the Bank and all affiliated companies that, together with the Bank, constitute the ‘service recipient’ within the meaning of Code Section 409A and the regulations thereunder (collectively, the ‘Service Recipient’) or (2) the level of bona fide services the Officer performs for the Service Recipient after a given date (whether as an employee or as an independent contractor) permanently decreases (excluding either a decrease as a result of military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six (6) months, or if longer, so long as the Officer retains a right to reemployment with the Service Recipient under an applicable statute or by contract or any other decrease permitted under Code Section 409A) to no more than twenty percent (20%) of the average level of bona fide services performed for the Service Recipient (whether as an employee or an independent contractor) over the immediately preceding thirty-six-(36)-month period (or the full period of service if the Officer has been providing services to the Service Recipient for less than thirty-six (36) months).”

4.             By deleting Paragraph III(G) in its entirety and substituting therefor the following:

“G.           Change of Control:

‘Change of Control’ means (1) with respect to the Bank or Southcrest Financial Group, Inc. (the ‘Holding Company’) a ‘change in ownership of a corporation’ as defined under Code Section 409A; (2) with respect to the Holding Company, a ‘change in effective control of a corporation’ as defined under Code Section 409A; or (3) with respect to the Bank or the Holding Company, a ‘change in ownership of a substantial portion of a corporation’s assets’ as defined under Code Section 409A, but substituting ‘eighty-five percent (85%)’ for the phrase ‘40 percent’ in Treasury Regulation Section 1.409A-3(i)(5)(vii)(A), or any successor thereto.”

5.             By deleting Paragraph III(H) in its entirety and substituting therefor the following:

“H.           Restriction on Timing of Distribution:

Notwithstanding any provision in the Agreement to the contrary, to the extent necessary to avoid the imposition of tax on the Officer under Code Section 409A, any payments that are otherwise payable to the Officer within the first six (6) months following the effective date of his Separation from Service, shall be suspended and paid as soon as practicable following the end of the six-month period following such effective date if, immediately prior to the Officer’s Separation from Service, the Officer is determined to be a “specified employee” (within the meaning of Code Section 409A(a)(2)(B)(i)) of the Bank (or any related “service recipient” within the meaning of Code Section 409A and the regulations thereunder).  Any payments suspended by operation of the foregoing sentence shall be paid as a lump sum to the Officer during the seventh month following the date of his Separation from Service.  Payments (or portions thereof) that would be paid latest in time during the six-month period will be suspended first.”

6.             By adding the following new Paragraph III(J):

“J.           Accrued Liability Retirement Account:

‘Accrued Liability Retirement Account’ means the bookkeeping account established and maintained by the Bank to reflect the liability that should be accrued by the Bank under generally accepted accounting principles (“GAAP”) for the Bank’s obligation to the Officer under this Agreement.”

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7.             By capitalizing the phrase “accrued liability retirement account” wherever it appears in the Agreement.

8.             By deleting the last sentence of Paragraph IV in its entirety and substituting therefor the following:

“Such monthly installments shall be paid on the first business day of each month, commencing with the month following the month in which such Separation from Service occurs.”

9.             By deleting from Paragraph V(A) the phrase “Retirement Date” and substituting therefor the phrase “Normal Retirement Age”.

9.             By inserting into the first sentence of Paragraph V(B) the phrase “following Normal Retirement Age” after the word “Officer” and before the comma.

10.           By deleting Paragraph VI in its entirety and substituting therefor the following:

“VI. [RESERVED]”

11.           By deleting the first paragraph of Paragraph VIII in its entirety and substituting therefor the following:

“In the event that the employment of the Officer shall terminate prior to Normal Retirement Age, by the Officer’s voluntary action, or by the Officer’s discharge by the Bank other than for cause, then this Agreement shall terminate upon the date of such Termination of Employment and the Bank shall pay to the Officer an amount of money equal to the balance of the Officer’s Accrued liability Retirement Account on the date of said termination, multiplied by the Officer’s cumulative vested percentage.  This compensation shall be paid in one (1) lump sum the first day of the second month following Separation from Service on or after the date of the Termination of Employment.”

12.           By deleting the third paragraph of Paragraph VIII in its entirety and substituting therefor the following:

“In the event the Officer’s employment is terminated by the Bank for cause at any time, this Agreement shall terminate and all benefits provided herein shall be forfeited.”

13.           By deleting Paragraph X in its entirety and substituting therefor the following:

“X.          CHANGE OF CONTROL

If the Officer experiences a Separation from Service on or after the date of the Officer’s Termination of Employment (voluntarily or involuntarily), except a termination for cause, within two (2) years after a Change of Control, then the Officer shall receive one hundred percent (100%) of the benefits in Paragraph IV herein upon attaining Normal Retirement Age.  Said benefit shall be paid in equal monthly installments (1/12th of the annual benefit) commencing on the first day of the month following the month in which the Officer attains Normal Retirement Age.”

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14.           By deleting Paragraph XI(C) in its entirety and substituting therefor the following:

“C.           Amendment or Termination:

This Agreement may be amended, at any time, by mutual written consent of the Officer and the Bank, except that no amendment may reduce the Officer’s Accrued Liability Retirement Account.  The Bank may unilaterally amend the Agreement to conform with written directives to the Bank to comply with legislative changes or tax law, including, without limitation, Section 409A of the Code and any and all Treasury regulations and guidance promulgated thereunder.  No amendment shall provide for or otherwise permit any acceleration of the time or schedule of any payment under the Agreement in a manner that would be prohibited under Section 409A(a)(3) of the Code.

The Bank may, at any time, terminate the Agreement except that no termination may reduce the Officer’s Accrued Liability Retirement Account.  Except as provided in this Subparagraph XI(C), the termination of the Agreement shall not cause a distribution of benefits.  Rather, after such termination, benefit distributions will be made in accordance with the provisions of this Agreement as if no such termination had occurred.  Notwithstanding the preceding provisions of this Subparagraph XI(C), the Bank may elect to terminate the Agreement under any circumstances permitted by Treasury Regulations Section 1.409A-3(j)(4)(ix).  In any such event, the Bank shall distribute the Officer’s Accrued Liability Retirement Account, determined as of the date of the termination of the Agreement, to the Officer in a lump sum at the earliest date permitted under such Treasury guidance.”

15.           By deleting Paragraph XI(I) in its entirety and substituting therefor the following:

“I.           Tax Withholding:

The Officer is responsible for payment of all taxes applicable to compensation and benefits paid or provided to the Officer under the Agreement, including federal and state income tax withholding, except the Bank shall withhold any taxes that, in its reasonable judgment, are required to be withheld, including but not limited to taxes owed under Section 409A of the Code and regulations thereunder and all employment taxes due to be paid by the Bank pursuant to Section 3121(v) of the Code and regulations promulgated thereunder (i.e., Federal Insurance Contributions Act (“FICA”) taxes on the present value of payments hereunder which are no longer subject to vesting).  The Bank’s sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authority(ies).  By participating in the Agreement, the Officer consents to the deduction of all tax withholdings attributable to participation in the Agreement from the benefits due under the Agreement or other payments due to the Officer by the Bank to satisfy the employee-portion of such obligations.  If insufficient cash wages are available or if the Officer so desires, the Officer may remit payment in cash for the withholding amounts.

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Notwithstanding any other provision in the Agreement to the contrary, payments due under the Agreement may be accelerated to pay, where applicable, the FICA tax imposed under Sections 3101, 3121(a), and 3121(v)(2) of the Code and any state, local, and foreign tax obligations (the ‘Tax Obligations’) that may be imposed on amounts deferred pursuant to the Agreement prior to the time such amounts are paid or made available and to pay the income tax at source on wages imposed under Section 3401 of the Code or the corresponding withholding provisions of applicable state, local, or foreign tax laws as a result of an accelerated payment of the Tax Obligations (the ‘Income Tax Obligations’).  Accelerated payments pursuant to this Subparagraph XII(I) shall not exceed the amount of the Tax Obligations and Income Tax Obligations and shall be made as a payment directly to taxing authorities pursuant to the applicable withholding provisions.  Any accelerated payments pursuant to this Subparagraph XII(I) shall reduce the benefit otherwise payable to the Officer pursuant to the Agreement.”

16.           By adding the following new Paragraph XI(L):

“L.           Accelerated Payouts in the Event of 409A Violations.

Notwithstanding any other provision of the Agreement to the contrary, the Bank shall make payments hereunder before such payments are otherwise due if it determines that the provisions of the Agreement fail to meet the requirements of Code Section 409A and the rules and regulations promulgated thereunder; provided, however, that such payment(s) may not exceed the amount required to be included in income as a result of such failure to comply the requirements of Code Section 409A and the rules and regulations promulgated thereunder and, to the extent permissible therein, any taxes, penalties, interest and costs attributable thereto.”

17.           By deleting the last sentence of Paragraph XIII in its entirety.

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Except as provided herein, the terms of the Agreement shall remain in full force and effect.

IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed as of the date first above written.

BANK OF UPSON
Thomaston, Georgia
By:	/s/ Imogene B. Johnson
Print Name:	Imogene B. Johnson
Title:	Assisstant Vice President
/s/ Douglas Hertha
[Officer]

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EX-10.19

Exhibit 10.19       

FIRST AMENDMENT TO

EMPLOYMENT AGREEMENT

THIS FIRST AMENDMENT (“First Amendment”), made and entered into as of December 16, 2008 by and between Harvey Clapp, a resident of the State of Alabama (“Employee”), and Peachtree Bank, an Alabama bank (“Employer”).

W I T N E S S E T H:

WHEREAS, Employer currently employs Employee as its President and Chief Executive Officer pursuant to that certain employment agreement between Employer and Employee dated as of October 31, 2006 (the “Employment Agreement”);

WHEREAS, Employer and Employee desire to continue such employment;

WHEREAS, Employer and Employee desire to amend the agreement to provide that the term of the agreement will be extended for one additional year as of each October 31 if Employer and Employee agree to so extend it within thirty (30) days prior to the applicable October 31; and

WHEREAS, Employer and Employee now desire to amend the Employment Agreement primarily so that the payments and benefits under the Employment Agreement comply with, or are exempt from, the rules of Section 409A of the Internal Revenue Code of 1986, as amended;

                NOW, THEREFORE, in consideration of the continued employment of Employee by Employer, of the premises and the mutual promises and covenants contained herein, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree to modify the Employment Agreement as follows, effective as of January 1, 2009:

 1.            By adding the following to the end of the existing Section 2:

“The term of this Agreement shall expire at the end of such three (3)-year period, unless the parties agree, at least thirty (30) days in advance of the expiration of such term, to extend the term for one (1) additional year beginning on the third anniversary of the Effective Date.  If the term of this Agreement is extended as of any anniversary of the Effective Date, then the term may be extended for one (1) additional year as of the next anniversary of the Effective Date if the parties agree to extended it at least thirty (30) days in advance of the time the term would otherwise expire.”

2.             By adding the following to the end of the existing Section 4:

“All reimbursements shall be paid as soon as administratively practicable, but in no event shall any reimbursement be paid after the last day of the taxable year following the taxable year in which the expense was incurred, nor shall the amount of reimbursable expenses incurred or in-kind benefits provided in one taxable year affect the expenses eligible for reimbursement or the in-kind benefits provided, as applicable, in any other taxable year.  The right to a reimbursement or an in-kind benefit under this Agreement will not be subject to liquidation or exchange for another benefit.”

3.             By deleting the existing Section 12.6 and substituting therefor the following:

“12.6           If this Agreement and Employee’s employment are terminated pursuant to either Section 12.2 or Section 12.3, then Employer, as Employer’s sole remaining obligation under this Agreement, shall pay to Employee in a lump sum within thirty (30) days following Employee’s termination of employment an amount equal to the sum of the following: (i) Employee’s Base Salary for the remaining months of the term of this Agreement at the Base Salary rate then in effect; (ii) the cost of COBRA health continuation coverage for Employee for the lesser of (a) the remaining months of the term of this Agreement or (b) eighteen (18) months; and (iii) the cost for term life insurance coverage provided by the Employer to the Employee for the remaining months of the term of this Agreement based on the monthly cost of premiums for such coverage in effect on the effective date of termination.”

4.             By adding the following new Section 12.8:

“12.8           Notwithstanding anything in this Agreement to the contrary (i) Employee shall be treated as having incurred a termination of employment hereunder, and shall be entitled to payments and benefits under Section 12.6 or 15.2, as applicable, only if he has incurred a ‘separation from service,’ within the meaning of Section 409A of the Internal Revenue Code, as amended (the ‘Code’), from Employer and all affiliated companies that, together with Employer, constitute the ‘service recipient’ within the meaning of regulations issued under Code Section 409A; and (ii) if Employee is a ‘specified employee’ within the meaning of Code Section 409A, at the date of his termination of employment, then any payments made in connection with Employee’s termination of employment that would result in a tax under Code Section 409A if paid during the first six (6) months after termination of employment shall be withheld, starting with the payments latest in time during such six (6) month period, and paid to Employee during the seventh month following the date of his termination of employment.”

5.             By adding the following immediately before the phrase “(‘Termination of Employment’)” in Section 15.2: “and Employee contemporaneously or subsequently resigns”.

6.             By deleting the last sentence of Section 15.2 and substituting therefor the following:

“In the event the Aggregate Severance is required to be reduced pursuant to this Section, the portions of the Aggregate Severance paid or provided latest in time will be reduced first and if portions of the Aggregate Severance to be paid or provided at the same time must be reduced, noncash benefits will be reduced before cash payments.”

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7.             By deleting the first sentence of the existing Section 15.3 and substituting therefor the following:

“During the remaining term of this Agreement following the effective date of a Change in Control, if Employer takes any of the following actions and Employee contemporaneously or subsequently resigns, such resignation shall be deemed to be a termination by Employer without Cause.”

8.             By deleting the last sentence of the existing Section 15.3 and substituting therefor the following:

“In any such event, upon Employee’s contemporaneous or subsequent resignation, Employee shall be entitled to all payments provided for in Section 15.2 of this Agreement.”

IN WITNESS WHEREOF, the parties have executed this First Amendment as of the day and year first written above.

	“Employee”
/s/ Tina C. Smith	/s/ Harvey Clapp		(SEAL)
Witness	Harvey Clapp
	“Employer”
ATTEST	Peachtree Bank
	By:	/s/ Clem Clapp
/s/ Douglas J. Hertha	Its:	Executive Vice President
(CORPORATE SEAL)

3

EX-10.21

Exhibit 10.21

AMENDMENT TO THE

PEACHTREE BANK

EXECUTIVE SALARY CONTINUATION AGREEMENT

This AMENDMENT is made and entered into on the 16 day of December, 2008, by and between Peachtree Bank (the “Bank”), a bank organized and existing under the laws of the State of Alabama, and Harvey Clapp, an executive of the Bank (the “Executive”).

WITNESSETH:

WHEREAS, the Bank and the Executive previously entered into that certain Executive Salary Continuation Agreement, dated September 6, 2006, (the “Agreement”); and

WHEREAS, the Bank and the Executive desire to amend the Agreement to comply with the final regulations issued under Internal Revenue Code Section 409A.

NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Bank and the Executive do hereby agree, effective as of January 1, 2009, to amend the Agreement as follows:

1.             By deleting the first WHEREAS clause in the introduction to the Agreement and substituting the phrase “Holding Company” for the word “Bancorp” wherever it appears in the Agreement.

2.             By deleting Paragraph IV(A) in its entirety and substituting therefor the following:

“A.           Retirement Date:

‘Retirement Date’ shall mean the date the Executive experiences a Separation from Service on or after the Executive’s Normal Retirement Age.”

3.             By deleting from Paragraph IV(D) the phrase “without cause” and substituting therefor the phrase “other than for cause”.

4.             By deleting Paragraph IV(F) in its entirety and substituting therefor the following:

“F.           Change of Control:

‘Change of Control’ means (1) with respect to the Bank or Southcrest Financial Group, Inc. (the ‘Holding Company’) a ‘change in ownership of a corporation’ as defined under Code Section 409A; (2) with respect to the Holding Company, a ‘change in effective control of a corporation’ as defined under Code Section 409A; or (3) with respect to the Bank or the Holding Company, a ‘change in ownership of a substantial portion of a corporation’s assets’ as defined under Code Section 409A, but substituting ‘eighty-five percent (85%)’ for the phrase ‘40 percent’ in Treasury Regulation Section 1.409A-3(i)(5)(vii)(A), or any successor thereto.”

5.             By adding the following new Paragraphs IV(H), IV(I), and IV(J):

“H.           Separation from Service:

‘Separation from Service’ shall mean a termination of the Executive’s employment where either (1) the Executive has ceased to perform any services for the Bank and all affiliated companies that, together with the Bank, constitute the ‘service recipient’ within the meaning of Code Section 409A and the regulations thereunder (collectively, the ‘Service Recipient’) or (2) the level of bona fide services the Executive performs for the Service Recipient after a given date (whether as an employee or as an independent contractor) permanently decreases (excluding either a decrease as a result of military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six (6) months, or if longer, so long as the Executive retains a right to reemployment with the Service Recipient under an applicable statute or by contract or any other decrease permitted under Code Section 409A) to no more than twenty percent (20%) of the average level of bona fide services performed for the Service Recipient (whether as an employee or an independent contractor) over the immediately preceding thirty-six-(36)-month period (or the full period of service if the Executive has been providing services to the Service Recipient for less than thirty-six (36) months).

I.             Restriction on Timing of Distribution:

Notwithstanding any provision in the Agreement to the contrary, to the extent necessary to avoid the imposition of tax on the Executive under Code Section 409A, any payments that are otherwise payable to the Executive within the first six (6) months following the effective date of his Separation from Service, shall be suspended and paid as soon as practicable following the end of the six-month period following such effective date if, immediately prior to the Executive’s Separation from Service, the Executive is determined to be a “specified employee” (within the meaning of Code Section 409A(a)(2)(B)(i)) of the Bank (or any related “service recipient” within the meaning of Code Section 409A and the regulations thereunder).  Any payments suspended by operation of the foregoing sentence shall be paid as a lump sum to the Executive during the seventh month following the date of his Separation from Service.  Payments (or portions thereof) that would be paid latest in time during the six-month period will be suspended first.

J.             Accrued Liability Retirement Account:

‘Accrued Liability Retirement Account’ means the bookkeeping account established and maintained by the Bank to reflect the liability that should be accrued by the Bank under generally accepted accounting principles (“GAAP”) for the Bank’s obligation to the Executive under this Agreement.”

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6.             By capitalizing the phrase “accrued liability retirement account” wherever it appears in the Agreement.

7.             By inserting into the second sentence of Paragraph V the phrase “commencing on the first day of the second month following the Executive’s Retirement Date and continuing” immediately prior to the phrase “until the death of the Executive”.

8.             By deleting the second paragraph of Paragraph V in its entirety.

9.             By deleting Paragraph VII in its entirety and substituting therefor the following:

“VII.       DISABILITY

In the event the Executive becomes subject to a Disability and the Executive experiences a Separation from Service because of such Disability prior to the Executive’s Normal Retirement Age, the Executive shall become one hundred percent (100%) vested in the balance of the Accrued Liability Retirement Account.  Said balance shall be paid in a lump sum on the first day of the second month following the Executive’s Separation from Service.”

10.           By deleting Paragraph VIII in its entirety and substituting therefor the following:

“VIII.      [RESERVED]”

11.           By deleting the first paragraph of Paragraph X in its entirety and substituting therefor the following:

“Subject to Subparagraph IV(E), in the event that the employment of the Executive shall terminate prior to Normal Retirement Age, as provided in Subparagraph IV(B), by the Executive’s voluntary action, or by the Executive’s discharge by the Bank other than for cause, then this Agreement shall terminate upon the date of such Termination of Employment and the Bank shall pay to the Executive an amount of money equal to the balance of the Executive’s Accrued Liability Retirement Account on the date of said termination, multiplied by the Executive’s cumulative vested percentage (Paragraph IX).  Such amount shall be paid to the Executive in one (1) lump sum payment on the first day of the second month following the Executive’s Separation from Service on or after the date of such Termination of Employment.”

12.           By deleting the second paragraph of Paragraph X in its entirety.

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13.           By deleting Paragraph XI in its entirety and substituting therefor the following:

“XI.        CHANGE OF CONTROL

If the Executive experiences a Separation from Service on or after the date of the Executive’s Termination of Employment (voluntarily or involuntarily), except a termination for cause, within two (2) years after a Change of Control, but prior to the Executive’s Normal Retirement Age, then the Bank shall pay to the Executive the annual benefit described in Paragraph V upon attaining Normal Retirement Age as if the Executive had been continuously employed by the Bank until the Executive’s Normal Retirement Age.  Said benefit shall be paid in equal monthly installments (1/12th of the annual benefit) commencing on the first day of the second month following the month in which the Executive attains his Normal Retirement Age and continuing until the death of the Executive.  Nothing in this Paragraph XI precludes the Executive’s beneficiary(ies) from receiving any death benefits provided by any other provisions of this Agreement.”

14.           By deleting Paragraph XIII(C) in its entirety and substituting therefor the following:

“C.           Amendment or Termination:

This Agreement may be amended, at any time, by mutual written consent of the Executive and the Bank, except that no amendment may reduce the Executive’s Accrued Liability Retirement Account.  The Bank may unilaterally amend the Agreement to conform with written directives to the Bank to comply with legislative changes or tax law, including, without limitation, Section 409A of the Code and any and all Treasury regulations and guidance promulgated thereunder.  No amendment shall provide for or otherwise permit any acceleration of the time or schedule of any payment under the Agreement in a manner that would be prohibited under Section 409A(a)(3) of the Code.

The Bank may, at any time, terminate the Agreement except that no termination may reduce the Executive’s Accrued Liability Retirement Account.  Except as provided in this Subparagraph XIII(C), the termination of the Agreement shall not cause a distribution of benefits.  Rather, after such termination, benefit distributions will be made in accordance with the provisions of this Agreement as if no such termination had occurred.  Notwithstanding the preceding provisions of this Subparagraph XIII(C), the Bank may elect to terminate the Agreement under any circumstances permitted by Treasury Regulations Section 1.409A-3(j)(4)(ix).  In any such event, the Bank shall distribute the Executive’s Accrued Liability Retirement Account, determined as of the date of the termination of the Agreement, to the Executive in a lump sum at the earliest date permitted under such Treasury guidance.”

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15.           By adding the following new Paragraphs XIII(K) and XIII(L):

“K.           Tax Withholding:

The Executive is responsible for payment of all taxes applicable to compensation and benefits paid or provided to the Executive under the Agreement, including federal and state income tax withholding, except the Bank shall withhold any taxes that, in its reasonable judgment, are required to be withheld, including but not limited to taxes owed under Section 409A of the Code and regulations thereunder and all employment taxes due to be paid by the Bank pursuant to Section 3121(v) of the Code and regulations promulgated thereunder (i.e., Federal Insurance Contributions Act (“FICA”) taxes on the present value of payments hereunder which are no longer subject to vesting).  The Bank’s sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authority(ies).  By participating in the Agreement, the Executive consents to the deduction of all tax withholdings attributable to participation in the Agreement from the benefits due under the Agreement or other payments due to the Executive by the Bank to satisfy the employee-portion of such obligations.  If insufficient cash wages are available or if the Executive so desires, the Executive may remit payment in cash for the withholding amounts.

Notwithstanding any other provision in the Agreement to the contrary, payments due under the Agreement may be accelerated to pay, where applicable, the FICA tax imposed under Sections 3101, 3121(a), and 3121(v)(2) of the Code and any state, local, and foreign tax obligations (the ‘Tax Obligations’) that may be imposed on amounts deferred pursuant to the Agreement prior to the time such amounts are paid or made available and to pay the income tax at source on wages imposed under Section 3401 of the Code or the corresponding withholding provisions of applicable state, local, or foreign tax laws as a result of an accelerated payment of the Tax Obligations (the ‘Income Tax Obligations’).  Accelerated payments pursuant to this Subparagraph XIII(K) shall not exceed the amount of the Tax Obligations and Income Tax Obligations and shall be made as a payment directly to taxing authorities pursuant to the applicable withholding provisions.  Any accelerated payments pursuant to this Subparagraph XIII(K) shall reduce the benefit otherwise payable to the Executive pursuant to the Agreement.

L.             Accelerated Payouts in the Event of 409A Violations.

Notwithstanding any other provision of the Agreement to the contrary, the Bank shall make payments hereunder before such payments are otherwise due if it determines that the provisions of the Agreement fail to meet the requirements of Code Section 409A and the rules and regulations promulgated thereunder; provided, however, that such payment(s) may not exceed the amount required to be included in income as a result of such failure to comply the requirements of Code Section 409A and the rules and regulations promulgated thereunder and, to the extent permissible therein, any taxes, penalties, interest and costs attributable thereto.”

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Except as provided herein, the terms of the Agreement shall remain in full force and effect.

IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed as of the date first above written.

PEACHTREE BANK
Maplesville, Alabama
By:	/s/ Clement M. Clapp
Print Name:	Clement M. Clapp
Title:	Executive Vice President
/s/ Harvey Clapp
[Executive]

 6

EX-13.1

Exhibit 13.1

Selected Financial Data

The following tables present certain selected historical financial information for SouthCrest Financial Group, Inc. and subsidiaries. The data should be read in conjunction with the historical financial statements, including the notes thereto, and other financial information concerning the Company.

SouthCrest Financial Group, Inc. and Subsidiaries
Summary Financial Data
For the Periods Ended December 31,
(all dollars in thousands except per share amounts)
	2008			2007			2006			2005			2004
Income Statement
Net interest income	$	21,801		$	22,552		$	19,191		$	17,469		$	11,460
Provision for loan losses		4,002			639			839			751			375
Net interest income after
provision for loan losses		17,799			21,913			18,352			16,718			11,085
Other income		6,580			6,797			5,364			4,478			3,357
Other expense		30,363			19,634			15,167			14,196			8,925
Income taxes		15			2,776			2,775			2,156			1,660
Net income (loss)		(5,999	)		6,300			5,774			4,844			3,857
Per Common Share
Basic and diluted earnings (loss) per share	$	(1.53	)	$	1.60		$	1.58		$	1.36		$	1.52
Cash dividends declared	$	0.52		$	0.52		$	0.50		$	0.48		$	0.46
Dividend payout ratio		(C	)		32.5	%		31.4	%		35.3	%		30.3	%
Book value	$	16.29		$	18.24		$	17.09		$	14.93		$	14.21
Tangible book value (B)	$	14.00		$	13.40		$	13.57		$	11.81		$	12.00
Average shares outstanding		3,916,357			3,946,689			3,643,218			3,572,904			2,545,724
Period End
Total loans	$	396,137		$	374,054		$	335,452		$	276,475		$	229,232
Net loans		388,852			369,102			330,972			272,998			226,071
Earning assets (A)		541,119			532,475			483,653			410,897			374,684
Assets		610,551			606,009			544,017			450,848			407,512
Deposits		519,701			513,931			462,622			377,900			352,252
Stockholders' equity		64,028			71,721			67,555			53,456			50,740
Common shares outstanding		3,931,528			3,931,528			3,952,328			3,581,193			3,571,556
Average Balances
Loans	$	387,105		$	353,581		$	293,489		$	249,394		$	156,003
Earning assets (A)		546,093			510,869			430,130			394,076			269,651
Assets		618,590			573,421			473,173			428,360			292,446
Deposits		523,999			483,484			397,637			366,877			256,035
Other borrowings		11,746			10,829			12,960			4,695			580
Stockholders' equity		71,864			69,677			57,456			52,125			33,062
Performance Ratios
Return on average assets		-0.97	%		1.10	%		1.22	%		1.13	%		1.32	%
Return on average stockholders 'equity		-8.35	%		9.04	%		10.05	%		9.29	%		11.67	%
Net interest margin		3.99	%		4.41	%		4.46	%		4.43	%		4.25	%
Average equity to average assets		11.62	%		11.81	%		12.15	%		12.17	%		11.31	%
Average loans to average deposits		73.88	%		73.13	%		73.81	%		67.98	%		60.93	%

(A)  Earning assets include interest-bearing deposits in banks, federal funds sold, securities available for sale and held to maturity, restricted equity securities, and loans net of unearned income.

(B)  Tangible book value per share is equal to stockholders' equity minus intangible assets divided by the number of common shares outstanding.

(C)  Not meaningful.

1

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The purpose of the following discussion is to address information relating to the financial condition and results of operations of SouthCrest Financial Group, Inc. that may not be readily apparent from a review of the consolidated financial statements and notes thereto. This discussion should be read in conjunction with information provided in the Company’s consolidated financial statements and accompanying footnotes.

Critical Accounting Policies

Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Our significant accounting policies are described in the notes to the consolidated financial statements. Certain accounting policies require management to make significant estimates and assumptions, which have a material impact on the carrying value of certain assets and liabilities, and we consider these to be critical accounting policies. The estimates and assumptions used are based on historical experience and other factors that management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and results of operations for the reporting periods.

We believe the following are critical accounting policies that require the most significant estimates and assumptions that are particularly susceptible to a significant change in the preparation of our financial statements.

Allowance for Loan Losses. A provision for loan losses is based on management’s opinion of an amount that is adequate to absorb losses inherent in the existing loan portfolio. The allowance for loan losses is established through a provision for losses based on management’s evaluation of current economic conditions, volume and composition of the loan portfolio, the fair market value or the estimated net realizable value of underlying collateral, historical charge-off experience, the level of nonperforming and past due loans, and other indicators derived from reviewing the loan portfolio. The evaluation includes a review of all loans on which full collection may not be reasonably assumed. Should the factors that are considered in determining the allowance for loan losses change over time, or should management’s estimates prove incorrect, a different amount may be reported for the allowance and the associated provision for loan losses. For example, if economic conditions in our market areas experience an unexpected and adverse change, we may need to increase our allowance for loan losses by taking a charge against earnings in the form of an additional provision for loan loss.  Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses.  Such agencies may require adjustments to the allowance for loan losses based on their judgments of information available to them at the time of their examination.

Investment Securities. Investment securities are classified into three categories. Debt securities that we have the intent and ability to hold to maturity are classified as “held-to-maturity securities” and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling in the near term are classified as “trading securities” and reported as fair value, with unrealized gains and losses included in earnings. Debt securities not classified as either held-to-maturity securities or trading securities and equity securities not classified as trading securities are classified as “available-for-sale securities” and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of other comprehensive income. We did not have any securities classified as trading securities as of December 31, 2008 or 2007.

Management conducts regular reviews to assess whether the values of our investments are impaired and if any impairment is other than temporary. If we determine that the value of any investment is other than temporarily impaired, we record a charge against earnings in the amount of the impairment. The determination of whether other than temporary impairment has occurred involves significant assumptions, estimates and judgments by management. Changing economic conditions — global, regional or related to industries of specific issuers — could adversely affect these values. Impairment losses recognized for securities totaled $570,000, $-0-, and $-0-, for the years ending December 31, 2008, 2007, and 2006.

Goodwill and Intangible Assets.  Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired.  Other intangible assets include core deposit intangibles recognized in bank and branch acquisitions, and mortgage servicing rights recognized in connection with the sale of mortgage loans in which the Company retains the servicing rights.    Goodwill impairment testing is performed annually or more frequently if events or circumstances indicate possible impairment.  The evaluation of goodwill for impairment uses both the income and market approaches to value the reporting units of the Company.  The income approach consists of discounting projected long-term future cash flows (earnings), which are derived from internal forecasts and economic expectations for the Company and its reporting units.  The significant inputs to the income approach include the long-term target tangible equity to tangible assets ratio and the discount rate, which is determined utilizing the Company’s cost of capital adjusted for a company-specific risk factor.   The company-specific risk factor is used to address the uncertainty of growth estimates and earnings projections of management.  Under the market approach, a value is calculated from an analysis of comparable acquisition transactions based on earnings, book value, assets and deposit premium multiples from the sale of similar financial institutions.  Our goodwill testing for 2008, which was updated as of December 31, 2008, indicated that the intangible assets recorded at the time of acquisition of FNB Polk, Peachtree and Chickamauga were impaired based on the substantial decline in our common stock price and the economic outlook for our industry.  As a result, the Company recorded goodwill impairment charges of $7,858,000 and core deposit intangible impairment charges of $1,263,000 for the year ended December 31, 2008.  If our stock price continues to decline, if the Company does not produce anticipated cash flows, or if comparable banks begin selling at significantly lower prices than in the past, our goodwill may be further impaired in the future.

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Recent Accounting Pronouncements

Information regarding accounting pronouncements affecting future periods are summarized in Note 1, “Summary of Significant Accounting Policies” on page F-10.

Business Combinations

On July 1, 2007, the Company completed its acquisition of Bank of Chickamauga (“Chickamauga”).  Under terms of the agreement, the shareholders of Chickamauga were to receive approximately $18 million cash, less certain costs related to the merger and the termination of the Chickamauga defined benefit plan.  The Chickamauga shareholders received $17.2 million in cash with an additional $687,000 being placed in a reserve account to fund the costs related to terminating the Chickamauga defined benefit plan that are in excess of the $568,500 that was accrued by  Chickamauga as a liability to the pension plan.  The reserve account is recorded as a liability in the financial statements.  Any funds remaining after the termination of the defined benefit plan will be distributed to the Chickamauga shareholders, which will increase the purchase amount recorded at acquisition.  In February 2009 the Company received approval by the Internal Revenue Service for the plan termination, and the plan termination is scheduled for June 2009.  A final actuarial report will be completed to determine termination benefits to be distributed.

The merger was accounted for under the purchase method of accounting. Accordingly, results of operations for Bank of Chickamauga are included in the results of operations of SouthCrest prospectively from the date of merger, and the purchase price of $17.35 million, which includes merger costs of $150,000, was allocated to the fair values of Chickamauga’s assets and liabilities.

Statement of Position 03-03, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-03”) addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality.  It includes loans acquired in purchase business combinations.  The SOP does not apply to loans originated by the entity.  At July 1, 2007 the Company identified $559,000 in loans to which the application of the provisions of SOP 03-03 was required.  The carrying amount of these loans was reduced to $376,000 at July 1, 2007, representing a nonaccretable adjustment of $183,000.  Because the Company could not reasonably estimate cash flows expected to be collected from these loans, interest income is only recognized when cash payments are received on such loans.  The purchase accounting adjustments reflect a reduction in loans for $183,000 related to Chickamauga’s impaired loans, thus reducing the carrying value of these loans to $376,000 as of July 1, 2007.  At December 31, 2008, the carrying value of these loans had been reduced to $267,000 due to foreclosures and cash payments received from the borrowers.  Interest income recognized on such loans is not material for the year ended December 31, 2008 and the six month period ended December 31, 2007.

On October 31, 2006, the Company completed its merger with Maplesville Bancorp (“Maplesville”), the parent company of Peachtree Bank (“Peachtree”).  Under terms of the merger, shareholders of Maplesville received approximately 371,135 shares of SouthCrest stock and $7,557,000 in cash.  The merger was accounted for using the purchase method of accounting.  Accordingly, results of operations for Peachtree are included in the results of operations of SouthCrest prospectively from the date of merger, and the purchase price of $17.3 million was allocated to the fair values of Maplesville’s assets and liabilities.

The mergers with Chickamauga and Maplesville are summarized in Note 2, “Business Combinations” in the Notes to Consolidated Financial Statements on page F-13.

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Results of Operations for the Years Ended December 31, 2008, 2007, and 2006

Net loss for 2008 was $5,999,000 or $(1.53) per share compared to income of $6,300,000 or $1.60 per share in 2007.      The primary reasons for the decline in include a $9,121,000 impairment charge related to the Company’s goodwill and core deposit intangible assets, $3,363,000 increase in the provision for loan losses, a $751,000 reduction in net interest income, and a $570,000 charge for the impairment of certain securities.

For 2007, net income was $6,300,000 or $1.60 per share compared to net income of $5,774,000 or $1.58 per share for 2006, an increase of $526,000 or 9.1%.    The primary reasons for the increase in net income in 2007 relate to the inclusion of the results of operations of Peachtree Bank for a full year in 2007 compared to two months in 2006 as that merger was completed on October 31, 2006, and the inclusion of six months of operations for Bank of Chickamauga as that merger was completed on July 1, 2007.

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 as previously reported.

Net interest income. A significant portion of SouthCrest’s results of operations are determined by its ability to manage effectively interest income and expense. Since market forces and economic conditions beyond the control of management determine interest rates, the ability to generate net interest income is dependent upon SouthCrest’s ability to maintain an adequate spread between the rate earned on earning assets and the rate paid on interest-bearing liabilities, such as deposits and borrowings. Thus, net interest income is the key performance measure of income.

Table 1 below presents various components of assets and liabilities, interest income and expense as well as their yield/cost for the fiscal years ended 2008, 2007 and 2006. In this table, amounts related to average balances and interest income and interest expense for Chickamauga and Peachtree are included prospectively from the dates of their respective mergers:

Table 1. Average Consolidated Balance Sheets and Net Interest Income Analysis
For the Years Ended December 31,
(Dollars in thousands)
	2008								2007								2006
	Average			Income /		Yields /			Average			Income /		Yields /			Average			Income /		Yields /
	Balances(1)			Expense		Rates			Balances(1)			Expense		Rates			Balances(1)			Expense		Rates
Loans	$	387,105		$	27,836		7.19	%	$	353,581		$	29,455		8.33	%	$	293,489		$	23,314		7.94	%
Taxable securities		110,049			5,296		4.81	%		118,846			5,695		4.79	%		111,511			4,859		4.36	%
Nontaxable securities (2)		23,262			900		3.87	%		21,398			830		3.88	%		12,492			551		4.41	%
Federal funds sold		10,655			248		2.33	%		10,207			497		4.87	%		9,569			509		5.32	%
Interest bearing deposits in banks		15,022			559		3.72	%		6,837			382		5.59	%		3,569			191		5.35	%
Total earning assets		546,093			34,839		6.38	%		510,869			36,859		7.21	%		430,630			29,424		6.83	%
Cash and due from banks		15,187								13,930								12,987
Allowance for loan losses		(5,768	)							(4,861	)							(3,832	)
Other assets		63,078								53,483								33,388
Total	$	618,590							$	573,421							$	473,173
Interest bearing demand (3)	$	150,994		$	2,092		1.39	%	$	132,690		$	2,461		1.85	%	$	116,232		$	1,900		1.63	%
Savings		43,877			300		0.68	%		40,163			293		0.73	%		34,454			211		0.61	%
Certificates of deposit		251,309			10,205		4.06	%		231,194			10,927		4.73	%		183,650			7,497		4.08	%
Total interest bearing deposits		446,180			12,597		2.82	%		404,047			13,681		3.39	%		334,336			9,608		2.87	%
Borrowed funds		11,746			441		3.75	%		10,829			626		5.78	%		12,960			625		4.82	%
Total interest bearing liabilties		457,926			13,038		2.85	%		414,876			14,307		3.45	%		347,296			10,233		2.95	%
Noninterest bearing demand deposits		77,816								79,437								63,301
Other liabilities		10,151								8,427								4,095
Redeemable common stock held by ESOP		833								1,004								1,025
Stockholders' equity		71,864								69,677								57,456
Total	$	618,590							$	573,421							$	473,173
Net interest income				$	21,801							$	22,552							$	19,191
Net interest yield on earning assets							3.99	%							4.41	%							4.46	%
Net interest spread							3.53	%							3.76	%							3.88	%

(1)  Daily averages

(2)  Tax-equi valent yields are not provided as effect is deemed immaterial.

(3)  Includes money market accounts.

(4)  Nonaccrual loans are included in the average balances of loans receivable.

Table 2 presents a Rate/Volume Analysis of Net Interest Income. For each category of interest ­earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) change in volume (change in volume multiplied by old rate); (2) change in rate (change in rate multiplied by old volume); and (3) a combination of change in rate and change in volume. The changes in interest income and interest expense attributable to both volume and rate have been allocated proportionately on a consistent basis to the change due to volume and the change due to rate.

4

Table 2. Changes In Interest Income and Expense
(Dollars in thousands)
	2008 Compared to 2007									2007 Compared to 2006
	Increase (Decrease) Due to Changes In									Increase (Decrease) Due to Changes In
	Volume			Rate			Total			Volume			Rate			Total
Loans	$	2,637		$	(4,256	)	$	(1,619	)	$	4,952		$	1,189		$	6,141
Taxable securities		(423	)		24			(399	)		335			501			836
Nontaxable securities		72			(2	)		70			352			(73	)		279
Federal funds sold		21			(270	)		(249	)		33			(45	)		(12	)
Interest bearing deposits in banks		338			(161	)		177			182			9			191
Total earning assets		2,645			(4,665	)		(2,020	)		5,854			1,581			7,435
Interest bearing demand		304			(673	)		(369	)		287			274			561
Savings		27			(20	)		7			38			44			82
Certificates of deposit		904			(1,626	)		(722	)		2,123			1,307			3,430
Total deposits		1,235			(2,319	)		(1,084	)		2,448			1,625			4,073
Borrowed funds		50			(235	)		(185	)		(112	)		113			1
Total interest bearing liabilties		1,285			(2,554	)		(1,269	)		2,336			1,738			4,074
Net interest income	$	1,360		$	(2,111	)	$	(751	)	$	3,518		$	(157	)	$	3,361

Net interest income declined $751,000, or 3.3% to $21,801,000 for 2008.  Interest income declined $2,020,000 due primarily to a $1,619,000 reduction in interest earned on loans.  The average rate earned on loans declined from 8.33% for 2007 to 7.19% for 2008, resulting in a $4,256,000 reduction in interest income earned on loans.  This was offset by a $2,637,000 increase in interest income earned on loans attributable to an increase in the average balance outstanding of loans of $33,524,000.   The decline in interest income was partially offset by a $1,269,000 reduction in interest expense.  Interest expense on deposit accounts for 2008 declined $1,084,000 from 2007, of which $2,319,000 is attributable to a reduction in the average rate paid on such deposits from 3.39% in 2007 to 2.82% in 2008.  This reduction was partially offset by a $1,235,000 increase in interest expense caused by a $42,133,000 increase in the average balance of interest bearing deposit accounts.  Interest expense on certificates of deposit declined $722,000, primarily the result of a reduction of $1,626,000 caused by a reduction in the average rates paid on these accounts from 4.73% in 2007 to 4.06% in 2008.

For 2007, net interest income increased $3,361,000, or 17.5%, to $22,552,000 for 2007.  Interest income increased $7,435,000 due mostly to an increase of $6,141,000 in interest income on loans.  The average balance outstanding of loans during 2007 increased $60.1 million over 2006 of which $51 million resulted from the addition of Peachtree and Chickamauga, and this growth contributed approximately $4,952,000 to the increase in interest income earned on loans.  The average yield earned on loans increased from 7.94% in 2006 to 8.33% in 2007 primarily due to a 20 basis point increase in the average prime rate for 2007 over 2006.  In addition, the inclusion of Peachtree and Chickamauga also increased the yield as the average yield of the loan portfolios of these banks for 2007 was 8.70%.  The total increase in yield for 2007 accounted for approximately $1,189,000 of the increase in interest income on loans.  The increase in interest income was partially offset by an increase in interest expense of $4,074,000.  The primary reason for the increase in interest expense is the increase of $3,430,000 in interest on certificate accounts.   The growth in the average balance of these accounts of $47.5 million accounted for $2,123,000 of the increase in interest expense, and the increase in rate from 4.08% for 2006 to 4.73% for 2007 accounted for $1,307,000 of the increase in interest expense on certificates.  The increase in the average rate paid on certificate accounts results from competition for this type of deposit in the markets served by the Company.  In general, the growth in the loan portfolio has been funded with certificate accounts.  In 2007, certificates represented 55.7% of interest bearing liabilities compared to 52.9% in 2006.

The net interest yield on earning assets was 3.99% for 2008 compared to 4.41% earned in 2007 and 4.46% in 2006.  The average yield on earning assets was 6.38% in 2008 compared to 7.21% in 2007 and 6.83% in 2006, while the average rate paid on interest bearing liabilities was 2.85% for 2008, 3.45% for 2007, and 2.95% in 2006.  In 2008, the decline in the average yield on earning assets is the result of reductions of 425 basis points in the Federal Reserve Discount Rate in 2008 and the resulting declines in the Prime Rate.  This caused a significant decline in interest income on loans, which are the largest component of earning assets.  The increase in the average yield on earning assts from 2006 to 2007 relates to the increase in loans as a percentage of total earning assets from 63.2% in 2005 to 68.2% in 2006 and 69.2% in 2007 coupled with the increased average market interest rates in the respective 2007 and 2006 periods.  Loans generally earn a higher rate of interest than other earning assets.

5

Provision for Loan Losses. The provision for loan losses for 2008 was $4,002,000 compared to $639,000 for 2007 and $839,000 in 2006. In 2008, the Company charged-off loans, net of recoveries, totaling $1,669,000 or 0.43% of average loans outstanding compared to net chargeoffs in 2007 of $531,000, or 0.15% of average loans outstanding,  and net chargeoffs in 2006 of $467,000, or 0.16% of average loans.

The provision for loan losses is determined primarily by management’s evaluation concerning the level of the allowance for loan losses. For further discussion, refer to the discussion below titled “Allowance for Loan Losses.”

Other Income. Total other income in 2008 was $6,580,000 compared to $6,797,000 in 2007, a decrease of $217,000 or 3.2%.  Other income in 2006 was $5,364,000.  The following table provides information about our other income.

Table 3. Summary of Other Income
(Dollars in thousands)
	2008			2007		2006
Service charges on deposits	$	600		$	585	$	529
NSF and overdraft charges		3,378			3,261		2,775
Other service charges		1,592			1,336		1,104
Net gain on sale of loans		298			423		159
Income from bank-owned life insurance		696			594		340
Impairment charge on investments		(570	)		-		-
Gain on sale of securities available for sale		78			-		-
Loss on disposal of assets		-			-		-
Other operating income		508			598		457
	$	6,580		$	6,797	$	5,364

Service charges (including NSF and overdraft charges) on deposit accounts were $3,979,000 in 2008 compared to $3,846,000 in 2007 and $3,304,000 for 2006, an increase of $133,000 or 3.5%.  As a percent of the average balances of interest-bearing checking and noninterest-bearing checking accounts, these service charges were 1.74% of such accounts for 2008, 1.81% for 2007 and 1.84% for 2006.  As shown in Table 3 below, the fees the Company earns from services charges is primarily due to NSF fees.  As a percent of the average balances of interest-bearing checking and noninterest bearing checking, NSF and overdraft fees were 1.48% in 2008, 1.54% in 2007, and 1.55% in 2006.  The downward trend in this income as a percentage of average transaction account balances is attributable to customers maintaining higher balances which enable them to avoid such fees and charges.

Other service charges were $1,592,000 in 2008 compared to $1,336,000 in 2007 and $1,104,000 in 2006, an increase of $256,000 in the current year.  Of the increase from 2007 to 2008, $87,000 relates to increased fee income from debit cards and $71,000 relates to increased ATM and ATM Surcharge income.  Of the increase from 2006 to 2007, $74,000 relates to increased fees from debit cards.

The net gain on the sale of loans was $298,000, $423,000, and $159,000 for 2008, 2007, and 2006, respectively.  The recognition of mortgage servicing rights accounts for $143,000 of the gain in 2008 and $266,000 of the gain in 2007.  Mortgage volume was $14.4 million, $12.3 million, and $15.2 million for 2008, 2007, and 2006, respectively.

Income from bank-owned life insurance was $696,000, $594,000, and $340,000 for the years ended December 31, 2008, 2007, and 2006, respectively, which represents increases of $102,000 in 2008 and $254,000 in 2007.  The increase in 2008 is primarily the result of the inclusion in 2008 of a full year of earnings for the policies acquired in the Chickamauga acquisition versus only a half year in 2007.  The increase in 2007 relates primarily to bank-owned life insurance policies assumed in the acquisitions of Peachtree and Chickamauga.   The weighted average earnings yields earned on these policies were 4.18%, 4.13%, and 4.34% for 2008, 2007, and 2006, respectively.

In the third quarter of 2008, the Company recorded a $570,000 impairment loss on its investment in preferred stock of the Federal National Mortgage Association (“Fannie Mae”).  The loss was recognized as Fannie Mae was taken into conservatorship by the federal government in September, 2008.  Losses on the securities were previously recognized in the equity section of the balance sheet.  In the fourth quarter of 2008, in order to realize the income tax benefit from this loss, the Company sold all of the shares of the Fannie Mae preferred stock.

6

Gain on securities available for sale totaled $78,000 for 2008 due to gains recognized on the calls of securities.  In general, issuers have exercised call options as interest rates have fallen to levels such that it is advantageous for the issuers of the bonds to call its bonds and issue new debt at substantially lower interest rates.  There were no security gains or losses in 2007 or 2006.

Other Expenses.  The following table provides information about our other expenses.

Table 4. Summary of Other Expenses
(Dollars in thousands)
	2008		2007		2006
Salaries and benefits	$	11,386	$	10,543	$	8,073
Equipment and occupancy		2,507		2,120		1,650
Impairment of intangibles		9,121		-		-
Amortization of core deposit intangibles		967		926		807
Amortization of mortgage servicing rights		128		131		-
Professional fees		740		620		439
Postage and supplies		707		692		527
Telephone		395		325		197
Advertising		297		337		261
Director fees		441		409		370
Data processing expenses		1,486		1,454		1,222
Other operating expenses		2,188		2,077		1,621
	$	30,363	$	19,634	$	15,167

For 2008, other expenses were $30,363,000, an increase of $10,729,000 over 2007 expenses of $19,634,000.  The primary component of this increase was the $9.1 million intangible impairment charge.  The impairment charge is explained more fully on page 2 under the Critical Accounting Policies section.    Excluding the impairment charge, other expense would have increased $1,608,000 or 8.2%.  Approximately $981,000 of the increase in 2008 relates to the July 1, 2007 acquisition of Bank of Chickamauga, as its results of operations are included in the consolidated results prospectively from the date of acquisition.  Total expenses in 2007 increased $4,467,000 or 29.5% over 2006 expenses of $15,167,000.  The largest component of other expenses, salaries and benefits, increased $843,000 or 8.0% to $11,386,000 from $10,543,000 in 2007.  Of the $843,000 increase in 2008, the Chickamauga acquisition accounts for $472,000.  In addition, $100,000 of the increase related to the implementation in 2008 of EITF Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements which requires the expensing the estimated cost of providing a life insurance benefit in retirement as the employee is actively employed.  In 2007, salaries and benefits increased $2,470,000 from 2006.  The increase in 2007, in addition to the increases caused by the acquisitions of Peachtree and Chickamauga, relates to added staffing in anticipation of opening the new branch in Tyrone, Georgia.

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 “Plan”), which provides for up to 549,000 shares of the Company’s stock to be awarded in the form of stock options. In December, 2005 the Company awarded 183,500 stock options to officers of the Company and the Banks and 7,900 options in December 2006.  The Company recorded compensation expenses of $105,000, $106,000 and $95,000 in 2008, 2007 and 2006, respectively relating to  stock options.  No tax benefit was recorded because all of the related stock options were considered tax qualifying.  The accounting implications of the stock option plan are more fully explained in Notes 1 and 10 of Notes to Consolidated Financial Statements.

Equipment and occupancy expenses increased $387,000 in 2008 and $477,000 in 2007.  The addition of Chickamauga accounts for $119,000 of the increase in 2008, and the addition of Peachtree and Chickamauga accounted for $240,000 of the increase in 2007.  Depreciation expense increased $130,000 in 2008 and $273,000 in 2007 of which $97,000 results from the acquisitions.  Amortization of intangibles increased $38,000 in 2008 and $119,000 in 2007.  The 2008 increase is primarily due to the addition of Chickamauga for the full year in 2008, while the increase in 2007 is due to the addition of Peachtree and Chickamauga.  Other operating expenses increased $208,000 in 2008 and $1,401,000 in 2007.  The addition of Chickamauga accounted for $346,000 of the increase in 2008, and in 2007 the addition of Peachtree and Chickamauga accounted for $889,000 of the increase.  In addition, in 2007 the Company recorded losses on the sale of OREO totaling $138,000.

7

On February 27, 2009, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) voted to amend the restoration plan for the Deposit Insurance Fund. The Board took action by imposing a special assessment on insured institutions of 20 basis points, implementing changes to the risk-based assessment system, and increased regular premium rates for 2009, which banks must pay on top of the special assessment. The 20 basis point special assessment on the industry will be as of June 30, 2009 payable on September 30, 2009. As a result of the special assessment and increased regular assessments, the Company projects it will experience an increase in FDIC assessment expense by approximately $1.5 million from 2008 to 2009. The 20 basis point special assessment represents $1.1 million of this increase.

On March 5, 2009, the FDIC Chairman announced that the FDIC would consider lowering the special assessment from 20 basis points to 10 basis points if Congress raises the FDIC’s line of credit with the Treasury to $100 billion. Legislation to this end is currently before Congress.

The assessment rates, including the special assessment, are subject to change at the discretion of the Board of Directors of the FDIC.

Excluding the intangible impairment, other expenses amounted to 3.43% of average assets in 2008 compared to 3.42% of average assets in 2007 and 3.21% of average assets in 2006.

Income Tax Expense. Income tax expense in 2008 was $15,000 compared to $2,776,000 in 2007 and  $2,775,000 in 2006. The Company’s effective tax rate was -0.25% for 2008 compared to 30.6% for 2007 and 32.5% for 2006.  The Company’s effective tax rate is lower than statutory tax rates due primarily to certain elements of income that are not subject to taxation, such as the Banks’ earnings from tax-exempt securities and income on bank-owned life insurance.  The decline in the effective tax rate from 2007 to 2008 is the result of the impairment charge for goodwill, which totaled $7.8 million and is not tax effected.  The decline in the effective tax rate from 2006 to 2007 results from the addition of Peachtree and Chickamauga, as both banks have higher levels of tax exempt income relative to pretax income than do Upson and FNB Polk.

FINANCIAL CONDITION

Management regularly monitors the financial condition of the Company in order to protect depositors, monitor asset quality and increase current and future earnings. At December 31, 2008 total assets were $610.6 million compared to $606.0 million at December 31, 2007, an increase of $4.6 million.  The loan portfolio grew from $374.0 million at December 31, 2007 to $396.1 million at December 31, 2008, an increase of $22.1 million.

Interest-bearing deposits at other financial institutions increased $6.1 million to $16.8 million at December 31, 2008.  These deposits consist of time deposits at other financial institutions and are structured such that, at maturity, the principal balance plus accrued interest remains under FDIC insurance coverage.  Securities available for sale decreased $1.1 million to $78.1 million while securities held to maturity declined $18.8 million to $40.0 million.

Fixed assets increased $1.3 million to $19.4 million at December 31, 2008.  The increase primarily relates to the completion in August 2008 of the Company’s new 12,500 square foot operations center in Thomaston to house the Company’s computer operations and to a project to replace a branch banking office at the Bank of Chickamauga with a new and larger facility.  The branch facility is expected to be completed in May 2009. Intangible assets, as a result of the impairment charge and normal amortization, declined $10.1 million.

Deposits increased $5.8 million, from $513.9 million at December 31, 2007 to $519.7 million December 31, 2008.  Interest-bearing checking accounts increased $12.2 million, and savings accounts increased $0.7 million.  These increases were offset by a $4.8 million decrease in noninterest bearing deposits, a $1.1 million decrease in money market accounts, and a $1.2 million decrease in certificates of deposits.  Short-term borrowed funds, consisting of Federal Home Loan Bank advances maturing in less than a year and a $6.4 million note payable by the parent company, increased $12.1 million to $15.1 million.  Long-term borrowed funds decreased $4.9 million to $1.7 million, and consist of a long-term Federal Home Loan Bank advance.  The parent company note is payable in quarterly principal payments of $164,000 plus interest at prime minus 0.5%.  The terms of the parent company note contains certain restrictive covenants including, among others, a requirement of each subsidiary bank to maintain certain minimum capital levels as well as maximum ratios related to the levels of nonperforming assets, to be measured quarterly.  At the inception of the loan, the restriction relative to maximum levels of nonperforming assets required that these assets not exceed 1% of each subsidiary’s total assets.  The Company was in violation of this covenant for the second and third quarters of 2008 for which it received waivers from the lender.  The Company and the lender agreed to amend the covenants such that each subsidiary’s nonperforming assets may not exceed 5% of total assets as of December 31, 2008 and for each quarter of 2009.  Thereafter, this ratio would reduce by 1% during each quarter in 2010 so that the maximum ratio returns to 1% of total assets by December 31, 2010.  At December 31, 2008, as a result of its impairment of its goodwill and core deposit intangible assets, the Company was not in compliance with its covenant to maintain a minimum debt service coverage ratio, defined as net income of subsidiary banks multiplied by 50%, divided by the annual debt service of the Company.  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.

8

Stockholders’ equity decreased $7.7 million due primarily to the net loss of $6.0 million, caused by the charge for intangible impairment of $9.1 million and cash dividends of $2.0 million.  Equity also increased by $360,000 due to increases in the fair value of securities available for sale, net of deferred taxes and by $597,000 for the adjustment in the fair value of shares owned by the Company’s Employee Stock Ownership Plan.    Also, effective January 1, 2008, the Company recorded a $735,000 reduction to beginning retained earnings as it implemented EITF Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements.

The Company provides an Employee Stock Ownership Plan (“ESOP”) for its employees.  Because the ESOP provides for the participants to have the option to diversify their account balances or to receive all or a portion of their account balance in cash upon termination, accounting rules require that the fair value of allocated shares held by the ESOP be classified on the balance sheet as a liability and therefore reflected as a reduction of retained earnings.  The ESOP owned 69,388 and 66,666 shares at December 31, 2008 and 2007, respectively.  At December 31, 2008 and 2007, the number of shares allocated to participant accounts totaled 57,315 and 50,786, and the fair values of those allocated shares were $494,000 and $1,091,000 respectively.  In the fourth quarter of 2007, the ESOP purchased 15,880 shares of stock which was funded by a $349,000 loan from the Company.  The loan carries interest at Prime minus 0.50% and is for a term of fifteen years.  The balance of the loan is carried as a reduction of stockholders’ equity, which was $326,000 and $349,000 at December 31, 2008 and 2007, respectively.

Securities. As of December 31, 2008, investment securities comprised 19.4% of the Company’s total assets compared to 22.8% at December 31, 2007, while federal funds sold and interest-bearing deposits in banks comprised approximately 4.0% of total assets at December 31, 2008 and 3.3% of total assets at December 31, 2007.  As the Company’s loan portfolio has grown, investment securities and other earning assets represent a smaller portion of the Company’s balance sheet.

The following table presents, for the periods indicated, the carrying value of the Company’s investments. All securities classified as held to maturity are presented at adjusted cost while securities classified as available for sale are presented at their fair values. There are no securities classified as trading securities. For all securities classified as held to maturity, the Company has the intent and ability to hold them until they mature.

9

Table 5.  Composition of Securities Portfolio

	As of December 31,
	2008		2007		2006
	(Dollars in thousands)
Securities held to maturity (at amortized cost):
U.S. Treasuries and Agency bonds	$	2,989	$	20,289	$	22,216
State and municipal bonds		6,403		6,773		7,387
Mortgage backed securities		29,647		30,823		36,665
Corporate bonds		1,000		1,000		1,000
Total securities held to maturity		40,039		58,885		67,268
Securities available for sale (at estimated fair value):
U.S. Treasuries and Agency bonds		25,212		30,555		34,533
State and municipal bonds		16,974		18,226		11,058
Mortgage backed securities		33,098		28,601		14,198
Equity securities		2,826		1,826		1,730
Total securities available for sale		78,110		79,208		61,519
Total securities	$	118,149	$	138,093	$	128,787

Total securities declined from 2007 to 2008 as the Company used maturities to fund its loan growth, and in the latter half of 2008, to increase its short-term liquidity in response to the slowing economy and uncertainties surrounding liquidity in the banking industry.  In 2008, the Company began to invest excess liquidity in Certificates of Deposits in other financial institutions as the average rates earned on those funds were more favorable than if purchasing government agency bonds.  The following table indicates, at December 31, 2008, the Company’s security portfolio segregated by major category with maturity and average yields presented:

Table 6. Maturity of Securities Portfolio
(Dollars in Thousands)
	Within One Year					One to Five Years					Five to Ten Years					Over Ten Years					Total
			$		%			$		%			$		%			$		%			$		%
U.S. Government Agencies	$	4,054		4.71	%	$	15,607		4.03	%	$	7,541		4.52	%	$	999		5.03	%	$	28,201		4.30	%
State and municipal bonds (1)		1,938		3.85	%		8,522		4.14	%		7,174		4.23	%		5,743		4.50	%		23,377		4.23	%
Mortgage-backed securities (2)		581		3.57	%		8,279		4.02	%		12,791		4.63	%		41,094		4.87	%		62,745		4.70	%
Other securities (3)		-		0.00	%		378		6.36	%		2,805		6.77	%		643		4.11	%		3,826		6.29	%
Total	$	6,573		4.36	%	$	32,786		4.08	%	$	30,311		4.71	%	$	48,479		4.82	%	$	118,149		4.56	%

Notes

(1) Yields on state and municipal bonds are not calculated on a tax-equivalent basis.

(2) Mortgage backed securities are presented according to their final stated maturity.  Their weighted average maturity is shorter because of monthly repayments of principal.

(3) Includes corporate bonds and various equity securities.

Loan Portfolio.  The following table presents various categories of loans contained in the Company’s loan portfolio for the periods indicated.

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Table 7.  Composition of Loan Portfolio

As of December 31,

(Dollars in thousands)

Types of Loans	2008		2007		2006		2005		2004
Commercial loans	$	18,740	$	22,595	$	23,996	$	19,841	$	18,560
Real estate — construction		74,095		66,069		59,745		52,122		25,265
Real estate — mortgage		261,866		241,316		211,676		169,555		145,413
Consumer		35,552		38,834		33,690		31,567		35,680
Other loans		5,547		5,162		6,058		3,554		4,415
Subtotal		395,800		373,976		335,165		276,639		229,333
Less: Unearned income		12		151		159		164		101
Less: Allowance for loan losses		7,285		4,952		4,480		3,477		3,161
Total (net of allowance)	$	388,503	$	368,873	$	330,526	$	272,998	$	226,071

The following presents an analysis of maturities of the Company’s loans as of December 31, 2008, including the dollar amount of the loans maturing subsequent to the year ending December 31, 2009 distinguished between those with predetermined interest rates and those with variable interest rates:

Table 8. Loan Maturity Schedule
(Dollars in thousands)
			Due in		Due
	Due in one		one through		after
	year or less		five years		five years		Total
Commercial loans	$	8,521	$	9,688	$	531	$	18,740
Real estate — construction		33,108		35,168		5,819		74,095
Real estate — mortgage		48,005		131,279		82,582		261,866
Consumer		8,646		25,705		1,201		35,552
Other loans		256		796		4,495		5,547
Total	$	98,536	$	202,636	$	94,628	$	395,800
Loans maturing after one year with:
Fixed interest rates			$	176,172	$	57,251	$	233,423
Floating or adjustable interest rates				26,464		37,377		63,841
Total			$	202,636	$	94,628	$	297,264

Nonaccrual, Past Due and Restructured Loans.  The following table presents various categories of nonaccrual, past due and restructured loans in the Company’s loan portfolio as of the dates indicated.

Table 9. Nonaccrual, Past Due, and Restructured Loans
As of December 31,
(Dollars in thousands)
	2008		2007		2006		2005		2004
Nonaccrual loans	$	9,164	$	1,633	$	479	$	232	$	190
Loans past due 90 days or more and still accruing	$	779	$	247	$	1,015	$	549	$	186
Loans restructured under troubled debt	$	-	$	-	$	-	$	-	$	-

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Impaired loans and the average investment in impaired loans was as follows:

Table 10. Impaired Loans
As of December 31,
(Dollars in thousands)
	2008		2007		2006		2005		2004
Impaired loans without a valuation allowance	$	-	$	-	$	-	$	-	$	-
Impaired loans with valuation allowances of $1,603, $245, $72,  $35 and $29, respectively	$	9,164	$	1,633	$	479	$	232	$	190
Average investment in impaired loans for the period	$	5,920	$	507	$	659	$	323	$	47

At December 31, 2008, 2007, 2006, 2005, and 2004, the Company had $9,164,000, $1,633,000, $479,000, $232,000 and $190,000 in impaired loans with a valuation allowance and no impaired loans without a valuation allowance. The average investment in impaired loans during 2008, 2007, 2006, 2005 and 2004 was $5,920,000, $507,000, $659,000, $323,000 and $47,000, respectively.  Interest income recognized on impaired loans for the years ended December 31, 2008, 2007, 2006, 2005, and 2004 was not material.  Accrual of interest is discontinued on a loan when management determines, upon consideration of economic and business factors affecting collection efforts, that collection of interest or principal is not reasonably expected.

Nonaccrual loans increased by $7,531,000 from December 31, 2007.  Impaired loans at December 31, 2008 consisted of a $7.8 million in construction and development loans, $1.1 million in first mortgage loans secured by single family dwellings, $186,000 in second mortgages, $122,000 in nonresidential real estate, and $12,000 in consumer loans.  Impaired construction and development loans include a $3.45 million loan secured by an apartment complex for which a valuation allowance of $846,000 was established; a $1.98 million loan by a the development of a retail shopping center; a $698,000 residential development loan; a $662,000 residential development loan secured by property in Arizona with an established valuation allowance of $500,000; a $604,000 residential development loan, and a $376,000 construction loan secured by a partially completed office building.    Impaired first mortgage loans consist of 16 loans, the largest of which is $164,000.

In addition to the above, the Company had at December 31, 2008 $13,647,000 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.

At December 31, potential problem loans consisted of $2.4 million in construction and development loans, $6.0 million in first mortgage loans, $258,000 in second mortgage loans, $3.7 million in commercial real estate, $292,000 in commercial loans, and $997,000 in consumer loans.  Construction and development loans includes a $1.47 million loan secured by developed lots in a townhouse development.  First mortgage loans consist of 82 loans, 22 of which have balances greater than $100,000.  The largest loan has a balance of $248,000.   Commercial real estate loans include a $2.6 million loan secured by a mini storage facility and retail shopping center in the metro Atlanta area and $478,000 secured by commercial property in Alabama.

Other real estate.  Other real estate increased $5.3 million to $5.6 million at December 31, 2008, as a result of increased foreclosures in 2008 in large part caused by the deepening of the current recessionary economic conditions.  The largest component of other real estate, totaling $4.9 million, was the Company’s 75 percent interest in foreclosed property consisting of 96 developed residential lots and 24 partially developed lots in a golf course development in Jackson County, Georgia.  The Company sold a 25 percent participation interest at the time the loan was originated.  At the time the property was foreclosed in September 2008, the Company recorded a charge against the loan loss allowance.  The remainder of other real estate consists of seven properties, the largest having a balance of $245,000.

Allowance for Loan Losses. The allowance for loan losses at December 31, 2008 was $7,285,000 compared to $4,952,000 at December 31, 2007 and $4,480,000 at December 31, 2006. The allowance for loan losses, as a percentage of total gross loans, at December 31, 2008 was 1.84% compared to 1.32% at December 31, 2007 and 1.34% as of December 31, 2006. The increase in this percentage from 2007 to 2008 was made in response to the downturn in the economic environment and resulting increase in net chargeoffs, nonperforming loans and potential problem loans.  The provision for loan losses during the years ended December 31, 2008, 2007 and 2006 was $4,002,000, $639,000, and $839,000.

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In making its estimate of the required loan loss allowance, management 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.  Management also evaluates each category of loans within the loan portfolio for its recent net charge-off history and makes adjustments for certain qualitative factors which management believes could impact the level of estimated losses inherent in the loan portfolio, including economic conditions in general and relating to specific categories, changes in the level of classified and past due loans, changes in the levels of underlying collateral and concentrations.   Based on the net charge-off history and the qualitative factors, management assigns an estimated allowance ratio for each risk grade within each of the loan categories.  Management then determines the required allowance, which includes 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 any and all of the above factors.  In addition, as trends change in terms of net charge-offs, past due loans, and generally economic conditions of the market areas served by the Company’s subsidiary banks, the assumptions will be adjusted appropriately and these adjustments are reflected in the quarterly analysis of the adequacy of the reserve.

The loan concentrations within the loan portfolio have changed in recent years, both due to changes in the lending practices of Upson and FNB Polk, and more recently, as a result of the mergers with Peachtree and Chickamauga. The portion of the gross loan portfolio represented by real estate loans have gradually increased, from 55% as of December 31, 2003 to 63% as of December 31, 2006 , 65% at December 31, 2007 and 66% at December 31, 2008. Construction loans have increased from 8% of loans at December 31, 2003 to 18% at December 31, 2006 and 2007 and 19% at December 31, 2008.  The portion represented by consumer loans declined from 26% of gross loans as of December 31, 2003 to 10% at December 31, 2006 and 2007, and 9% at December 31, 2008. Finally, the portion represented by commercial loans decreased from 8% of gross loans as of December 31, 2003 to 7% of loans at December 31, 2006, 6% of loans at December 31, 2007, and 5% at December 31, 2008.

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

Summary of Loan Loss Experience. An analysis of the Company’s loan loss experience is included in the following table for the periods indicated.

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Table 11. Analysis of Allowance for Loan Losses
For the Periods Ended December 31,
(Dollars in thousands)
	2008			2007			2006			2005			2004
Balance at beginning of period	$	4,952		$	4,480		$	3,477		$	3,161		$	1,825
Chargeoffs
Commercial loans		68			80			102			31			50
Real estate - construction		638			110			-			-			-
Real estate - mortgage		390			188			263			50			46
Consumer		1,007			626			393			613			334
Other		141			138			145			199			175
Total Chargeoffs		2,244			1,142			903			893			605
Recoveries
Commercial loans		37			28			6			42			25
Real estate - construction		25			40			-			-			-
Real estate - mortgage		46			20			10			1			30
Consumer		384			448			328			310			172
Other		83			75			92			105			78
Total recoveries		575			611			436			458			305
Net (chargeoffs)		(1,669	)		(531	)		(467	)		(435	)		(300	)
Additions charged to operations		4,002			639			839			751			375
Addition to reserves resulting from business combination		-			364			631			-			1,261
Balance at end of period	$	7,285		$	4,952		$	4,480		$	3,477		$	3,161
Ratio of net chargeoffs during the period to average loans outstanding during the period		0.43	%		0.15	%		0.16	%		0.17	%		0.19	%

The following table summarizes the Company’s allowances for loan losses at year-end for 2008, 2007, 2006, 2005, and 2004.

Table 12. Allocation of Allowance For Loan Losses
At December 31,
(Dollars in thousands)
	2008				2007				2006				2005				2004
Loan Category	Amount		% of total loans		Amount		% of total loans		Amount		% of total loans		Amount		% of total loans		Amount		% of total loans
Commercial	$	308		5	$	450		6	$	477		7	$	296		7	$	1,019		8
Real estate - construction		2,677		19		1,420		18		896		18		782		19		76		11
Real estate - mortgage		2,914		66		2,130		65		1,895		63		1,418		61		582		63
Consumer		767		9		796		10		928		10		778		11		1,283		16
Other		126		1		87		1		94		2		72		2		201		2
Unallocated		493		-		69		-		190		-		131		-		-		-
Total	$	7,285			$	4,952			$	4,480			$	3,477			$	3,161

Also posing a high level of risk per loan are real estate construction loans, which have been a significant source of growth for the Company’s loan portfolio from 2004 through 2008, increasing from $9.0 million at year-end 2003 to $59.7 million at year-end 2006, $66.1 million at year-end 2007, and $74.1 million at year-end 2008.  The growth in loans real estate construction lending has primarily been for the construction and development of commercial real estate, which generally carries more risk than the construction of a single family dwelling due to the size of the loan and complexity of the project.   Because of this, the Company utilizes architectural firms independent of the contractor in determining the timing and amount of funds advanced for the various projects.

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During the latter part of 2007, real estate construction lending in the Atlanta metropolitan area experienced a marked increase in the levels foreclosures and loans designated as nonperforming.  At December 31, 2008, the Company’s construction loans secured by single family dwellings accounted for $7.4 million of this total.  In addition, at December 31, 2008 the Company had $16.1 million in loans outstanding for the purpose of residential development.

In 2008, the Company had $638,000 in chargeoffs related to residential construction loans compared to $110,000 in 2007.  Chargeoffs in 2008 related to a loan secured by 98 residential building lots and a 24 acre tract of undeveloped land in a golf course residential community.  This loan is currently classified as Other Real Estate.  Because the real estate development industry has experienced declines in collateral values and developers ability to service their debt, management monitors these loans closely.  Management increased its allocation of the allowance for loan losses to this category of loans from 28.7% in 2007 of total allowance to 36.7% of the allowance at year-end 2008 in recognition of the changes in the real estate market caused by reduced demand, particularly in the residential market, and slower economic conditions that began to develop in the latter part of 2007 and existed throughout 2008.

Real estate mortgage loans represent real estate mortgages secured by both residential and commercial properties.  At December 31, 2008, loans in this category totaled $261.9 million which represented 66% of total loans.  Loans secured by first liens on 1-4 family dwellings totaled $116.5 million with second mortgages and home equity line of credits totaling $19.8 million.  Loans secured by commercial real estate totaled $113.1 million with all other real estate loans, including those secured by multifamily dwellings and farmland, totaling $12.8 million.  Management allocated 40.0% of the total allowance for loan losses to these loans.

Commercial loans are susceptible to risks associated with local economic and employment conditions. In addition, the credit quality of a commercial loan is also often dependent on the borrower’s management and its ability to adapt to changes in the marketplace, both of which are difficult to gauge at the time a loan is made. For the five year period from 2004 through 2008, commercial loans charged off averaged $66,000 per year.  Management allocated 5% of the allowance for loan losses to commercial loans at December 31, 2008.

Consumer loans  have historically comprised a high percentage of the Company’s loan charge-offs, comprising 51.4% of total chargeoffs over the past five years, including 44.9% of total chargeoffs in 2008 and 54.8% of total chargeoffs in 2007. Management believes that the increased risk of loss in this loan category is a result of dependence on the borrower’s financial stability and the nature of the collateral for such loans, generally automobiles, boats and other personal property, which may make it more difficult to recover losses on such loans compared to loans in other categories, such as real estate-mortgage loans. As a result, management has allocated more of the allowance for loan losses to the consumer loan category than its relative composition of the entire portfolio.  Management allocated 10.5% of the allowance for loan losses to these loans.

The Company had unallocated reserves of approximately $493,000 and $69,000 at December 31, 2008 and  2007, respectively.  The increase in the unallocated portion of the reserves reflects the increased uncertainties inherent in the current economic environment.  While not allocated to any particular category of loans, Management believes it should be included in its estimation of the allowance based on the overall risk inherent in the loan portfolio.

Deposits.  Table 1 on Page 4 contains average amounts of the Company’s deposit accounts and the weighted average interest rates paid on those accounts. As illustrated in Table 1, the Company’s average balance of interest-bearing deposits increased by approximately $42.1 million from 2007 to 2008 and by $69.7 million from 2006 to 2007.  Of the $42.1 million increase from 2007 to 2008, $26.7 million relates to the inclusion of Chickamauga for the entire twelve months in 2008 compared to six months in 2007, while $60.1 million of the $69.7 million increase from 2006 to 2007 relates to the inclusion Peachtree for the entire twelve month period in 2007 compared to only two months in 2007, and to the inclusion of  Chickamauga for six months in 2007.   For 2008, certificates of deposit represented approximately 56.3% of total interest-bearing deposits, compared to 57.2% for 2007 and 54.9% for 2006.

The following table indicates amounts outstanding of time certificates of deposit of $100,000 or more and their respective maturities at December 31, 2008:

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Table 13.  Maturity of Certificates of Deposit

With Balances $100,000 Or More

(Dollars in thousands)

Three months or less	$	14,192
Three through six months		12,650
Six through twelve months		33,555
Over one year		26,787
Total	$	87,184

At December 31, 2008, the Company had no deposit relationships that represented concentrations and no brokered deposits.

Return on Equity and Assets. Returns on average consolidated assets and average consolidated equity presented below.

Table 14.  Selected Performance Measures

	2008			2007			2006
Return on average assets		-0.97	%		1.10	%		1.22	%
Return on average stockholders' equity		-8.35	%		9.04	%		10.05	%
Dividend payout ratio		(A	)		32.5	%		31.6	%
Average equity to average assets		11.62	%		11.81	%		12.15	%
(A) Not meaningful.

Short-term borrowings. The table below provides information about short-term borrowed funds.

Table 15.  Short-term Borrowed Funds

(Dollars in thousands)

	2008			2007			2006
Amount outstanding at year-end	$	15,115		$	3,000		$	110
Average rate		3.04	%		5.51	%		6.25	%
Average amounts outstanding during the year	$	4,030		$	2,228		$	7,627
Average rate		2.45	%		5.52	%		5.15	%
Maximum amount outstanding at any month-end during the year	$	15,115		$	5,550		$	10,000

Liquidity and Interest Rate Sensitivity.   Net interest income, the Company’s primary source of earnings, fluctuates with significant interest rate movements. To lessen the impact of these margin swings,  management strives to structure the balance sheet so that repricing opportunities exist for both assets and liabilities in roughly equivalent amounts at approximately the same time intervals. Imbalances in these repricing opportunities at any point in time constitute interest rate sensitivity.

Interest rate sensitivity refers to the responsiveness of interest-bearing assets and liabilities to changes in market interest rates. The rate sensitive position, or gap, is the difference in the volume of rate sensitive assets and liabilities, at a given time interval. The general objective of gap management is to manage actively rate sensitive assets and liabilities so as to reduce the impact of interest rate fluctuations on the net interest margin. Management generally attempts to maintain a balance between rate sensitive assets and liabilities as the exposure period is lengthened to minimize the Company’s overall interest rate risks.

The asset mix of the balance sheet is continually evaluated in terms of several variables: yield, credit quality, appropriate funding sources and liquidity. To effectively manage the liability mix of the balance sheet, there should be a focus on expanding the various funding sources. The interest rate sensitivity position at year-end 2008 is presented in the following table. The difference between rate sensitive assets and rate sensitive liabilities, or the interest rate sensitivity gap, is shown at the bottom of the table. Since all interest rates and yields do not adjust at the same velocity, the gap is only a general indicator of rate sensitivity.

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Table 16.  Interest Sensitivity Gap Analysis

(Dollars in thousands)

	0-3 months			3-12 months			1-5 years			After 5 years			Totals
RATE SENSITIVE ASSETS
Loans	$	134,998		$	90,362		$	167,118		$	3,659		$	396,137
Securities		2,152			4,422			32,785			78,790			118,149
Federal funds sold		7,776			-			-			-			7,776
Interest bearing deposits in other banks		7,510			9,253			-			-			16,763
Total rate sensitive assets	$	152,436		$	104,037		$	199,903		$	82,449		$	538,825
RATE SENSITIVE LIABILITIES
Interest bearing demand and savings deposits	$	-		$	-		$	193,175		$	-		$	193,175
Certificates less than $100 thousand		32,827			92,252			38,150			201			163,430
Certificates $100 thousand and over		14,192			46,205			26,787			-			87,184
Other borrowed funds		14,490			625			1,667			-			16,782
Total rate sensitive liabilties	$	61,509		$	139,082		$	259,779		$	201		$	460,571
Interest-sensitivity gap	$	90,927		$	(35,045	)	$	(59,876	)	$	82,248		$	78,254
Cumulative interest-sensitivity gap	$	90,927		$	55,882		$	(3,994	)	$	78,254
Interest-sensitivity gap ratio		247.8	%		74.8	%		77.0	%		41019.4	%		117.0	%
Cumulative interest-sensitivity gap ratio		247.8	%		127.9	%		99.1	%		117.0	%

As evidenced by the table above, as of December 31, 2008, SouthCrest was cumulatively asset sensitive within one year. In an increasing interest rate environment, an asset sensitive position (a gap ratio greater than 100%) is generally advantageous as interest earning assets reprice sooner than interest bearing liabilities. Conversely, in a decreasing interest rate environment, an asset sensitive position is generally not favorable since interest earning assets reprice to the lower interest rates sooner than interest bearing liabilities. With respect to SouthCrest, an increase in interest rates could result in higher net interest income while a decline in interest rates could result in decreased net interest income. This, however, assumes that all other factors affecting income remain constant. It also assumes no substantial prepayments in the loan or investment portfolios. In the table above, maturities in the investment portfolio are shown by their stated maturity. The Company’s mortgage­-backed securities portfolio, for example, provides the Company with monthly returns of principal while the balances are shown in the above table are included according to their stated maturity. Also, the table above assumes that interest bearing demand and savings deposits are not assumed to reprice in the short-term and are therefore included in the one to five year period as those accounts may not actually reprice in the event of a general increase in interest rates. Finally, if interest rates remain constant, it is possible for some of the Company’s certificate accounts to reprice at rates that are higher or lower than their current rates, as rates in effect at the time the certificates were opened may be different than those in effect currently.

SouthCrest generally structures its rate sensitivity position to hedge against rapidly rising or falling interest rates. The Asset/Liability Committees of the Banks meet regularly to analyze each bank’s position with respect to interest rate risk and develops future strategies for managing that risk. Such strategy includes anticipation of future interest rate movements.  At December 31, 2008, based on an interest rate risk simulation prepared by an independent firm, the Company estimates that if interest rates rose 200 basis points, net interest income over the next twelve months would increase by 3.69%.  Conversely, if interest rates declined by 200 basis points, the Company’s net interest income is estimated to decline by 7.77% over the next twelve months.

The Company, if needed, has the ability to cash out certificates with asset cash flow under normal circumstances. In the event that abnormal circumstances arise, the Banks have federal funds lines of credit in place totaling $23.0 million. In addition, if needed for both short-term and longer-term funding needs, the Banks have available lines of credit with the Federal Home Loan Bank of Atlanta on which $39.3 million was available at December 31, 2008.

Liquidity represents the ability to provide steady sources of funds for loan commitments and investment activities, as well as to maintain sufficient funds to cover deposit withdrawals and payment of debt and operating obligations. These funds can be obtained by converting assets to cash or by attracting new deposits. SouthCrest’s primary source of liquidity comes from its ability to maintain and increase deposits through its banks. Below are the pertinent liquidity balances and ratios for the periods ended December 31, 2008, 2007, and 2006.

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Table 17.  Liquid Assets and Liquidity Measures

(Dollars in thousands)

	2008			2007			2006
Cash and due from banks	$	18,267		$	16,060		$	16,926
Interest bearing deposits in banks		16,763			10,637			4,881
Federal funds sold		7,776			9,316			12,504
Securities		118,149			138,093			128,787
Ratio of CDs> $100 thousand to total deposits		16.78	%		16.46	%		13.77	%
Loan to deposit ratio		76.22	%		72.78	%		72.41	%
Brokered deposits		N/A			N/A			N/A

At December 31, 2008, large denomination certificates accounted for 16.78% of total deposits compared with 16.46% at December 31, 2007 and 13.77% at December, 31, 2006. Large denomination CDs are generally more volatile than other deposits. As a result, management monitors the competitiveness of the rates it pays on its large denomination CDs and periodically adjusts its rates in accordance with market demands. Despite the increase, SouthCrest is not heavily dependent on large deposits in relation to industry averages for institutions of similar size.

Cash and cash equivalents are the primary source of liquidity. At December 31, 2008, cash and due from banks amounted to $18.3 million, representing 2.9% of total assets.  Overnight federal funds sold totaled $7.8 million or 1.3% of total assets and interest-bearing deposits in other financial institutions totaled $16.8 million or 2.7% of total assets. Securities available for sale provide a secondary source of liquidity. Also securities that are classified as held to maturity provide liquidity through cash flows of maturing securities and monthly principal payments on mortgage-backed securities.

Brokered deposits are deposit instruments, such as certificates of deposit, deposit notes, bank investment contracts and certain municipal investment contracts that are issued through brokers and dealers who then offer and/or sell these deposit instruments to one or more investors. As of December 31, 2008, SouthCrest had no brokered deposits in its portfolio.

Capital Adequacy. There are two primary measures of capital adequacy for banks and bank holding companies: (i) risk-based capital guidelines and (ii) the leverage ratio.

The risk-based capital guidelines measure the amount of a bank’s required capital in relation to the degree of risk perceived in its assets and its off-balance sheet items. Note that under the risk-based capital guidelines, capital is divided into two “tiers.” Tier 1 capital consists of common shareholders’ equity, non-cumulative and cumulative (bank holding companies only) perpetual preferred stock and minority interest. Goodwill and other intangible assets are subtracted from the total. Tier 2 capital consists of the allowance for loan losses, hybrid capital instruments, term subordinated debt and intermediate term preferred stock. Banks are required to maintain a minimum risk-based capital (tier 1 plus tier 2) ratio of 8.0%, with at least 4.0% consisting of Tier 1 capital.

The second measure of capital adequacy relates to the leverage ratio. The leverage ratio is computed by dividing Tier 1 capital into average total assets.

As of December 31, 2008, 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 table below illustrates the regulatory capital ratios of SouthCrest, Bank of Upson, The First National Bank of Polk County, Peachtree Bank and Bank of Chickamauga as of December 31, 2008.

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Table 18.  Regulatory Capital Ratios at December 31, 2008

	Total			Tier 1
	Risk-based			Risk-based			Tier 1
	Capital			Capital			Leverage
	Ratio			Ratio			Ratio
Minimum required		8.00	%		4.00	%		4.00	%
Minimum required to be well-capitalized		10.00	%		6.00	%		5.00	%
Actual ratios
Consolidated		13.90	%		12.64	%		9.02	%
Bank of Upson		13.70	%		12.44	%		9.55	%
FNB Polk County		19.03	%		17.77	%		11.61	%
Peachtree Bank		13.34	%		12.09	%		8.31	%
Bank of Chickamauga		16.94	%		15.69	%		8.00	%

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

On October 14, 2008, Secretary Paulson announced that the Department of the Treasury will purchase equity stakes in a wide variety of banks and thrifts.  Under this program, known as the Troubled Asset Relief Program Capital Purchase Program (the “TARP Capital Purchase Program”), from the $700 billion authorized by the EESA, the Treasury will make $250 billion of capital available to U.S. financial institutions in the form of preferred stock. In conjunction with the purchase of preferred stock, the Treasury will either receive warrants to purchase common stock with an aggregate market price equal to 15% of the preferred investment or will receive at closing warrant preferred shares having a maturity value equal to 5% of the preferred shares issued.  Participating financial institutions will be required to adopt the Treasury’s standards for executive compensation and corporate governance for the period during which the Treasury holds equity issued under the TARP Capital Purchase Program.  Institutions that receive Treasury approval to participate in the TARP Capital Purchase Program have 30 days to satisfy all requirements for participation and to complete the issuance of the senior preferred shares to the Treasury.

Eligible financial institutions can generally apply to issue senior preferred shares to the U.S. Treasury in aggregate amounts between 1% to 3% of the institution’s risk-weighted assets. In the case of the Company, this would permit the Company to apply for an investment by the U.S. Treasury of between approximately $4.37 million and $13.12 million.  We believe that our current capital levels will be adequate to sustain our operations and growth.  Given the uncertainties present in the economy, the Company elected to apply for the maximum capital of $13.12 million.  The Company has not yet been notified as to the status of its application under this program.  However, we reserve the right to withdraw our application or refuse funding if we believe that participation in the program is no longer in the best interests of the Company.

Also, on October 14, 2008, after receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Paulson signed the systemic risk exception to the FDIC Act, enabling the FDIC to temporarily provide a 100% guarantee of the unsecured senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing transaction deposit accounts under a Temporary Liquidity Guarantee Program.  Coverage under the Temporary Liquidity Guarantee Program is available for 30 days without charge and thereafter at a cost of 75 basis points per annum for senior unsecured debt and 10 basis points per annum for non-interest bearing transaction deposits. All institutions are covered automatically under the Temporary Liquidity Guarantee Program until the opt out deadline of December 5, 2008.  The Company elected not to opt out of the Temporary Liquidity Guarantee Program.

Special Meeting of Shareholders

On January 27, 2009 the Company held a Special Meeting of Shareholders for the purpose of amending its articles of incorporation to allow for the issuance of 10,000,000 shares of blank-check preferred stock.  The shareholders approved the resolution.

19

Fourth Quarter Analysis

In the quarter ended December 31, 2008, the Company recorded a net loss of $8,487,000 or $(2.17) per share compared to $1,446,000 or $0.37 per share, for the same period in 2007, a decline of $9.9 million.  The primary component of the decline was the $9.1 million impairment charge relating to goodwill and core deposit intangibles and increased provision for loan losses of $1.5 million.  In comparison to the previous quarter ended September 30, 2008, net income declined $9.0 million from earnings of $476,000, or $0.12 per share.  The decline in net income from the third quarter of 2008 is primarily the result of the $9.1 million intangible impairment.  Table 19 contains a summary of our quarterly financial results for 2008 and 2007.

Table 19. Quarterly Financial Results
(Dollars in thousands except share and per share amounts)
	For the three months ended
Summary of Operations	3/31/2008		6/30/2008		9/30/2008			12/31/2008
Interest income	$	9,254	$	8,585	$	8,659		$	8,341
Interest expense		3,716		3,324		3,150			2,848
Net interest income		5,538		5,261		5,509			5,493
Provision for loan losses		355		1,115		837			1,695
Other income		1,921		1,841		1,170			1,648
Other expense		5,132		5,262		5,388			14,581
Income tax expense		567		118		(22	)		(648	)
Net income (loss)	$	1,405	$	607	$	476		$	(8,487	)
Basic and diluted earnings (loss) per share	$	0.41	$	0.40	$	0.12		$	(2.17	)
Dividends per share	$	0.13	$	0.13	$	0.13		$	0.13
Average shares outstanding		3,915,648		3,916,358		3,916,707			3,916,707
	For the three months ended
Summary of Operations	3/31/2007		6/30/2007		9/30/2007			12/31/2007
Interest income	$	8,555	$	8,684	$	9,815		$	9,805
Interest expense		3,187		3,217		3,911			3,992
Net interest income		5,368		5,467		5,904			5,813
Provision for loan losses		149		77		212			201
Other income		1,479		1,625		1,788			1,905
Other expense		4,357		4,688		5,120			5,469
Income tax expense		736		728		710			602
Net income	$	1,605	$	1,599	$	1,650		$	1,446
Basic and diluted earnings per share	$	0.41	$	0.40	$	0.42		$	0.37
Dividends per share	$	0.13	$	0.13	$	0.13		$	0.13
Average shares outstanding		3,952,328		3,952,328		3,952,328			3,929,956

Effects of Inflation and Changing Prices

Inflation generally increases the cost of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In addition, inflation affects financial institutions’ increased costs of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of shareholders’ equity. Mortgage originations and refinancings tend to slow as interest rates increase, and can reduce SouthCrest’s earnings from such activities and the income from the sale of residential mortgage loans in the secondary market.

20

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. Table 20 below contains a summary of our contractual obligations and commitments as of December 31, 2008.

Table 20. 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	$	269,087	$	-	$	-	$	-	$	269,087
Certificates of Deposit		185,476		46,802		18,135		201		250,614
FHLB advances and other borrowed funds		9,360		2,978		1,312		3,132		16,782
Deferred compensation		43		289		630		3,909		4,871
Construction in progress		1,133		-		-		-		1,133
Leases		121		156		163		315		755
Total contractual obligations	$	465,220	$	50,225	$	20,240	$	7,557	$	543,242
Commitments
Commitments to extend credit	$	29,842	$	-	$	-	$	-	$	29,842
Credit card commitments		8,545		-		-		-		8,545
Commercial standby letters of credit		926		-		-		-		926
Total commitments	$	39,313	$	-	$	-	$	-	$	39,313

Dividend Information

The table below provides the high and low trading prices for transactions during the given quarters for the previous two years on the Over-the-Counter Bulletin Board, as well as dividends paid in those quarters.

	2008						2007
	High		Low		Dividends		High		Low		Dividends
First Quarter	$	20.00	$	14.75	$	0.13	$	22.10	$	19.50	$	0.13
Second Quarter	$	17.00	$	12.50	$	0.13	$	23.50	$	21.40	$	0.13
Third Quarter	$	15.00	$	12.25	$	0.13	$	25.50	$	23.00	$	0.13
Fourth Quarter	$	13.25	$	7.60	$	0.13	$	24.80	$	23.02	$	0.13

Over the past two years, the Company has generally declared a dividend on the first business day of each quarter to be paid on the last business day of that month to the shareholders of record two weeks prior to the payment date.

21

EX-13.2

Exhibit 13.2

SouthCrest Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2008 and 2007

(Dollars in thousands, except per share data)

Assets	2008			2007
Cash and due from banks	$	18,267		$	16,060
Interest-bearing deposits in other banks		16,763			10,637
Federal funds sold		7,776			9,316
Securities available for sale		78,110			79,208
Securities held to maturity (fair value $40,302 and $58,632)		40,039			58,885
Restricted equity securities, at cost		2,294			2,008
Loans held for sale		349			229
Loans, net of unearned income		395,788			373,825
Less allowance for loan losses		7,285			4,952
Loans, net		388,503			368,873
Bank-owned life insurance		16,997			16,302
Premises and equipment, net		19,373			18,093
Goodwill		6,397			14,255
Intangible assets, net		2,577			4,792
Other real estate owned		5,592			256
Other assets		7,514			7,095
Total assets	$	610,551		$	606,009
Liabilities, Redeemable Common Stock, and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	75,912		$	80,685
Interest-bearing		443,789			433,246
Total deposits		519,701			513,931
Short-term borrowed funds		15,115			3,055
Long-term borrowed funds		1,667			6,555
Other liabilities		9,546			9,656
Total liabilities		546,029			533,197
Commitments and contingencies
Redeemable common stock held by ESOP		494			1,091
Stockholders' equity
Common stock, par value $1; 10,000,000 shares authorized, 3,931,528 and 3,931,528 issued		3,932			3,932
Additional paid in capital		49,812			49,707
Retained earnings		9,700			17,881
Unearned compensation - ESOP		(326	)		(349	)
Accumulated other comprehensive income		910			550
Total stockholders' equity		64,028			71,721
Total liabilities, redeemable common stock, and stockholders' equity	$	610,551		$	606,009

See Notes to Consolidated Financial Statements.

F-1

SouthCrest Financial Group, Inc. and Subsidiaries

Consolidated Statements of Operations

December 31, 2008, 2007, and 2006

(Dollars in thousands, except per share data)

	2008			2007		2006
Interest income:
Loans	$	27,836		$	29,455	$	23,314
Securities - taxable		5,296			5,695		4,859
Securities - nontaxable		900			830		551
Federal funds sold		248			497		509
Interest-bearing deposits in other banks		559			382		191
Total interest income		34,839			36,859		29,424
Interest expense:
Deposits		12,597			13,681		9,608
Borrowed funds		441			626		625
Total interest expense		13,038			14,307		10,233
Net interest income		21,801			22,552		19,191
Provision for loan losses		4,002			639		839
Net interest income after provision for loan losses		17,799			21,913		18,352
Other income:
Service charges on deposit accounts		3,979			3,846		3,304
Other service charges and fees		1,592			1,336		1,104
Net gain on sales and calls of securities available for sale		78			-		-
Impairment charge on investments		(570	)		-		-
Net gain on sale of loans		298			423		159
Income on bank-owned life insurance		695			594		340
Other operating income		508			598		457
Total other income		6,580			6,797		5,364
Other expenses:
Salaries and employee benefits		11,386			10,543		8,073
Equipment and occupancy expenses		2,507			2,120		1,643
Amortization of intangibles		1,095			926		807
Impairment of intangibles		9,121			-		-
Other operating expenses		6,254			6,045		4,644
Total other expenses		30,363			19,634		15,167
Income (loss) before income taxes		(5,984	)		9,076		8,549
Income tax expense		15			2,776		2,775
Net income (loss)	$	(5,999	)	$	6,300	$	5,774
Basic and diluted earnings (loss) per share	$	(1.53	)	$	1.60	$	1.58

See Notes to Consolidated Financial Statements.

F-2

SouthCrest Financial Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

Years Ended December 31, 2008, 2007, and 2006

(Dollars in thousands)

	2008			2007		2006
Net income (loss)	$	(5,999	)	$	6,300	$	5,774
Other comprehensive income (loss):
Unrealized holding gain on securities available for sale arising during period, net of taxes of $406, $436, and $144		666			721		328
Reclassification adjustment for gains included in net income, net of tax of $(186), $-0-, and $-0-		(306	)		-		-
Comprehensive income (loss)	$	(5,639	)	$	7,021	$	6,102

See Notes to Consolidated Financial Statements.

F-3

SouthCrest Financial Group, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

December 31, 2008, 2007 and 2006

(Dollars in thousands, except per share data)

													Accumulated
							Additional						Other Com-			Unearned			Total
	Common Stock						Paid In			Retained			prehensive			Compensation			Stockholders'
	Shares			Par Value			Capital			Earnings			Income (Loss)			(ESOP)			Equity
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 compensation		-			-			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
Net income		-			-			-			6,300			-			-			6,300
Cash dividends declared,
$.52 per share		-			-			-			(2,056	)		-			-			(2,056	)
Stock compensation		-			-			106			-			-			-			106
Purchase and retirement of stock		(20,800	)		(20	)		(433	)		-			-			-			(453	)
Adjustment for shares owned by ESOP		-			-			-			(103	)		-			-			(103	)
Change in unearned compensation - ESOP		-			-			-			-			-			(349	)		(349	)
Unrealized gain on securities available for sale		-			-			-			-			721			-			721
Balance, December 31, 2007		3,931,528		$	3,932		$	49,707		$	17,881		$	550		$	(349	)	$	71,721
Adjustment resulting from initial adoption of EITF Issue 06-4		-			-			-			(735	)		-			-			(735	)
Net loss		-			-			-			(5,999	)		-			-			(5,999	)
Cash dividends declared,$.52 per share		-			-			-			(2,044	)		-			-			(2,044	)
Stock compensation		-			-			105			-			-			-			105
Adjustment for shares owned by ESOP		-			-			-			597			-			-			597
Principal reduction of ESOP debt		-			-			-			-			-			23			23
Unrealized gain on securities available for sale		-			-			-			-			360			-			360
Balance, December 31, 2008		3,931,528		$	3,932		$	49,812		$	9,700		$	910		$	(326	)	$	64,028

See Notes to Consolidated Financial Statements.

F-4

SouthCrest Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For The Years Ended December 31, 2008, 2007, and 2006

(Dollars in thousands)

	2008			2007			2006
OPERATING ACTIVITIES
Net income (loss)	$	(5,999	)	$	6,300		$	5,774
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1,228			1,097			824
Amortization of intangibles		1,095			926			807
Impairment charge on intangibles		9,121			-			-
Other amortization		118			234			113
Provision for loan losses		4,002			639			839
Stock compensation expense		105			106			95
Deferred compensation expense		831			470			251
Impairment loss on investment securities		570			-			-
Gain on sale of securities available for sale		(78	)		-			-
Deferred income taxes		(1,415	)		(320	)		(312	)
Income on bank-owned life insurance		(695	)		(594	)		(340	)
Decrease (increase) in interest receivable		962			(113	)		(421	)
Decrease in income taxes payable		(618	)		(28	)		(198	)
Decrease in interest payable		(1,048	)		(360	)		1,069
Net gain on sale of loans		(298	)		(423	)		(159	)
Originations of mortgage loans held for sale		(14,475	)		(12,046	)		(15,323	)
Proceeds from sales of mortgage loans held for sale		14,510			12,420			15,341
Loss on disposal of equipment		-			25			-
Loss on sale of other real estate		179			-			-
Decrease (increase) in other assets		223			167			(1,266	)
Increase (decrease) in other liabilities		(419	)		(605	)		136
Net cash provided by operating activities		7,899			7,895			7,230
INVESTING ACTIVITIES
Purchases of securities held to maturity		(5,113	)		-			-
Proceeds from maturities of securities held to maturity		23,944			8,319			10,947
Purchases of securities available for sale		(37,320	)		(23,701	)		(11,243	)
Proceeds from calls, maturities, and sales of securities available for sale		38,456			31,312			8,725
Net (increase) decrease in restricted equity securities		(286	)		278			362
Net (increase) decrease in interest-bearing deposits in other banks		(6,126	)		(5,575	)		254
Net increase in loans		(30,439	)		(13,481	)		(24,529	)
Purchase of premises and equipment		(2,508	)		(2,982	)		(3,393	)
Proceeds from sale of other real estate owned		1,337			584			630
Purchase of bank-owned life insurance		-			-			(5,495	)
Net cash equivalents (used in) acquired in business combination		-			(6,147	)		9,144
Net cash (used in) investing activities		(18,055	)		(11,393	)		(14,598	)

See Notes to Consolidated Financial Statements.

F-5

SouthCrest Financial Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (continued)

For The Years Ended December 31, 2008, 2007,and  2006

(Dollars in thousands)

	2008			2007			2006
FINANCING ACTIVITIES
Net increase in deposits	$	5,672		$	1,637		$	32,692
Increases in short-term borrowed funds		7,870			-			-
Principal repayments on short-term borrowed funds		(3,055	)		(110	)		(15,110	)
Increases in long-term borrowed funds		2,500			5,775			6,280
Principal repayments on long-term borrowed funds		(143	)		(5,000	)		(5,500	)
Purchase and retirement of stock		-			(453	)		-
Change in unearned compensation - ESOP		23			(349	)		-
Dividends paid		(2,044	)		(2,056	)		(1,791	)
Net cash provided by (used in) financing activities		10,823			(556	)		16,571
Net increase (decrease) in cash and due from banks		667			(4,054	)		9,203
Cash and cash equivalents at beginning of year		25,376			29,430			20,227
Cash and cash equivalents at end of year	$	26,043		$	25,376		$	29,430
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest	$	12,273		$	14,207		$	9,164
Income taxes		1,718			2,982			3,156
NONCASH TRANSACTIONS
Principal balances of loans transferred to other real estate owned	$	6,852		$	704		$	506
Increase (decrease) in redeemable common stock held by ESOP		(597	)		103			4
Unrealized gain on securities available for sale, net		360			721			328
Adjustment for initial adoption of EITF 06-4		(735	)		-			-
BUSINESS COMBINATION
Cash and due from banks	$	-		$	3,103		$	8,497
Federal funds sold		-			8,100			3,204
Interest-bearing deposits in other banks		-			181			1,096
Securities available for sale		-			24,046			13,451
Restricted equity securities		-			257			121
Loans, net		-			26,344			33,229
Bank-owned life insurance		-			3,187			2,117
Premises and equipment		-			909			1,500
Goodwill		-			5,198			6,392
Core deposit intangible		-			715			1,052
Other assets		-			1,254			808
Total assets	$	-		$	73,294		$	71,467
Deposits	$	-		$	49,672		$	52,030
Short-term borrowed funds		-			3,000			-
Other liabilities		-			3,272			2,416
Total liabilities assumed		-			55,944			54,446
Purchase price	$	-		$	17,350		$	17,021

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”), Peachtree Bank (“Peachtree”), and Bank of Chickamauga (“Chickamauga”). Upson is a commercial bank located in Thomaston, Upson County, Georgia with seven branches located in Thomaston, Manchester, Warm Springs, Luthersville, Fayetteville, and Tyrone, 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.  Chickamauga is a commercial bank located in Chickamauga, Walker County, Georgia where it operates two branches.  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, amounts due from banks and federal funds sold. Cash flows from loans, interest-bearing deposits in other financial institutions, 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 $5,064,000 and $2,857,000 at December 31, 2008 and 2007, respectively.

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 collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

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 collectability of existing loans and prior loss experience. This evaluation also takes into

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)

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, 2008 and 2007 was $5,592,000 and $256,000.

Intangible Assets

Intangible assets consist of goodwill, core deposit premiums, and mortgage servicing rights.  Goodwill and core deposit premiums are 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.  Mortgage servicing rights are recognized initially at fair value as loans are sold into the secondary market with servicing rights retained and are amortized over the estimated life of underlying loans.  All intangible assets, including goodwill, are tested annually for potential impairment.  During 2008, the Company recorded impairment charges of $7,858,000 related to goodwill and $1,263,000 related to core deposit intangible.  No impairment charges were recorded in 2007 and 2006.

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

F-9

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes (Continued)

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, 2008 or 2007.

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.

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. In calculating the weighted-average shares outstanding, shares secured by the Company’s loan to its Employee Stock Ownership Plan (the “ESOP”) are subtracted from shares outstanding.  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 2006, 2007 and 2008.  The Stock Incentive Plan is explained more fully in Note 10.  The weighted average number of shares outstanding for the years ended December 31, 2008, 2007, and 2006 was 3,916,707, 3,946,689, and 3,643,218, respectively.

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 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. The Company has elected to amortize its mortgage servicing rights.  SFAS No. 156 is effective as of the beginning of the first fiscal year that begins after September 15, 2006. The Company adopted SFAS No. 156 as of January 1, 2007 and it did not have a material impact on the Company’s financial condition or results of operations.

F-10

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Standards (Continued)

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.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority.  The years 2004 through 2006 are still subject to audit for the Company’s Federal, Georgia, and Alabama income tax returns.  The Company adopted FIN 48 effective January 1, 2007, and its adoption did not have a material effect on the Company’s consolidated financial position or results of operation.  It is the Company’s policy to recognize interest and penalties associated with uncertain tax positions as components of income taxes.  There were no material interest or penalties accrued during the years ended December 31, 2008 and 2007.  No material tax uncertainties exist as of December 31, 2008 and 2007.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. SFAS No. 157 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation. This hierarchy is the basis for the disclosure requirements, with fair value estimates based on the least reliable inputs requiring more extensive disclosures about the valuation method used and the gains and losses associated with those estimates. The Company adopted SFAS No. 157 on January 1, 2008, with no material impact on the Company’s financial condition, results of operations, or liquidity.

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 $735,000 as of January 1, 2008 with a corresponding offset against retained earnings, and recorded compensation expense in 2008 of approximately $100,000 relating to these obligations.

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 did not 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.

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)

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 earnings.

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.

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 accounting on any assets or liabilities.

In November 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings (“SAB No. 109”). SAB No. 109 rescinds SAB No. 105’s prohibition on inclusion of expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. SAB No. 109 applies to any loan commitments for which fair value accounting is elected under SFAS No. 159. SAB No. 109 is effective prospectively for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. SAB No. 109 did not have a material impact on the Company’s financial condition or results of operations.

In March 2007, the FASB ratified EITF No. 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements. One objective of EITF No. 06-10 is to determine whether a liability for future benefits under a collateral assignment split-dollar life insurance arrangement that provides a benefit to an employee that extends into postretirement periods should be recognized in accordance with SFAS No. 106 or APB Opinion 12, as appropriate, based on the substantive agreement with the employee. Another objective of EITF No. 06-10 is to determine how the asset arising from a collateral assignment split-dollar life insurance arrangement should be recognized and measured. EITF No. 06-10 is effective for fiscal years beginning after December 15, 2007. The Company adopted the provisions of EITF No. 06-10 in the first quarter of 2008. The adoption of EITF No. 06-10 did not have a material impact on the Company’s financial condition or results of operations.

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

F-12

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Standards (Continued)

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 December 31, 2008, the Company had no acquired deferred income tax valuation allowances and income tax contingencies.  Management is currently evaluating the effects that SFAS 141(R) will have on the financial condition, results of operations, liquidity, and the disclosures that will be presented in the consolidated financial statements.

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

On July 1, 2007 the Company completed its acquisition of Bank of Chickamauga pursuant to the definitive agreement entered into on February 23, 2007.  Bank of Chickamauga is a community bank located in the City of Chickamauga, Walker County, Georgia where it maintains two offices.  The City of Chickamauga is located in the Chattanooga, Tennessee metropolitan area, and completing this merger allows the Company to enter a new market.  Under terms of the definitive agreement, the shareholders of Chickamauga were to receive $18 million cash, less certain costs related to the merger and the termination of the Chickamauga defined benefit plan, in exchange for 100% of the voting stock of Bank of Chickamauga.  At the completion of the acquisition, Chickamauga shareholders received $17.2 million in cash with an additional $687,000 being placed in a reserve account to fund the costs related to terminating the Chickamauga defined benefit plan that are in excess of the $568,500 that was recorded on the books of Chickamauga as accrued pension expense but not yet transferred into the pension plan.  The reserve account is recorded as a liability in the financial statements.  Any funds remaining after the termination of the defined benefit plan will be distributed to the Chickamauga shareholders.  In February 2009, the Company received approval by the Internal Revenue Service for the Chickamauga pension plan’s termination which is scheduled for June 2009.

The merger was accounted for under the purchase method of accounting. Accordingly, results of operations for Bank of Chickamauga are included in the results of operations of SouthCrest prospectively from the date of merger, and the purchase price of $17.35 million, which includes merger costs of $150,000, was allocated to the fair values of Chickamauga’s assets and liabilities.  As a result, the Company initially recorded a core deposit intangible of $715,000 and goodwill of $5,198,000.  The core deposit intangible is being amortized on an accelerated basis over the estimated life of the deposits.  During the year ended December 31, 2008, the Company recorded impairment charges of $3,803,000 relating to the Chickamauga goodwill and $493,000 relating to the Chickamauga core deposit intangible based on a fair value determination.

Statement of Position 03-03, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-03”) addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality.  It includes loans acquired in purchase business combinations.  The SOP does not apply to loans originated by the entity.  At July 1, 2007 the Company identified $559,000 in loans to which the application of the provisions of SOP 03-03 was required.  The carrying amount of these loans was

F-13

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. BUSINESS COMBINATIONS (Continued)

reduced to $376,000 at July 1, 2007, representing a nonaccretable adjustment of $183,000.  Because the Company could not reasonably estimate cash flows expected to be collected from these loans, interest income is only recognized when cash payments are received on such loans.  The purchase accounting adjustments reflect a reduction in loans for $183,000 related to Chickamauga’s impaired loans, thus reducing the carrying value of these loans to $376,000 as of July 1, 2007.  At December 31, 2008, the carrying value of these loans had been reduced to $267,000 due to foreclosures and cash payments received from the borrowers.  Interest income recognized on such loans is not material for the six months ended December 31, 2007 and the year ended December 31, 2008.

To fund the payments to the Chickamauga shareholders, the Company’s subsidiary banks paid $15 million in special dividends to the parent.  Additionally, the Company received an increase in its line of credit from $5.5 million to $8.0 million on the same terms and conditions as previously existed on the loan.  The interest rate for the line of credit is Prime minus 0.50%.  The Company drew $4 million on this line in connection with the merger.

On October 31, 2006, the Company completed its merger with Maplesville Bancorp. (“Maplesville”), a Maplesville, Alabama based bank holding company and the parent company of Peachtree Bank (“Peachtree”).  In connection with this merger, shareholders of Maplesville received approximately 371,135 shares of SouthCrest stock and $7,557,000 in cash.  The merger was accounted for using the purchase method of accounting.  Accordingly, results of operations for Peachtree Bank are included in the results of operations of SouthCrest prospectively from the date of merger, and the purchase price of $17.3 million, which includes merger costs of $254,000, was allocated to the fair values of Maplesville’s assets and liabilities.  As a result, the Company initially recorded a core deposit intangible of $1,052,000 and goodwill of $6,392,000.  The core deposit intangible was being amortized on an accelerated basis over the estimated life of the deposits. During the year ended December 31, 2008, the Company recorded impairment charges of $3,394,000 relating to the Peachtree goodwill and $771,000 relating to the Peachtree core deposit intangible based on a fair value determination.

The Company incurred certain merger costs related to the acquisitions of Maplesville and Chickamauga.  Presented in the table below is the activity in accrued merger costs related to Maplesville and Chickamauga:

	Beginning		Purchase		Charged to		Amounts		Ending
(Dollars in thousands)	Balance		Adjustments		Expense		Paid		Balance
Year ended December 31, 2008
Personnel costs	$	973	$	-	$	-	$	224	$	749
Professional fees		54		-		-		30		24
Data processing costs		545		-		-		545		-
Total	$	1,572	$	-	$	-	$	799	$	773
Year ended December 31, 2007
Severence and related costs	$	-	$	1,068	$	-	$	95	$	973
Professional fees		54		216		-		216		54
Data processing costs		150		585		-		190		545
Other		14		15		-		29		-
Total	$	218	$	1,884	$	-	$	530	$	1,572

The majority of the remaining accrued merger costs reflected above are expected to be paid out during 2009.   Personnel costs include change in control payments and the reserve for the termination of the Chickamauga defined benefit pension plan.  Professional fees primarily relate to investment banker fees, actuarial fees, legal fees and transfer agent fees. Data processing costs include fees paid for the early termination of service contracts with various data processing providers of the acquired banks and fees paid to SouthCrest’s data processing provider to convert the banks to SouthCrest’s data processing  system.

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:

F-14

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. BUSINESS COMBINATIONS (continued)

Assets Acquired and Liabilities Assumed
(Dollars in thousands)
	Chickamauga		Maplesville
Cash and due from banks	$	3,103	$	8,497
Federal funds sold		8,100		3,204
Interest bearing deposits in other banks		181		1,096
Securities available for sale		24,046		13,451
Restricted equity securities		257		121
Loans, net		26,344		33,229
Bank-owned life insurance		3,187		2,117
Premises and equipment		909		1,500
Goodwill		5,198		6,392
Intangible assets		715		1,052
Other assets		1,254		808
Total assets acquired	$	73,294	$	71,467
Deposits	$	49,672	$	52,030
Short-term borrowed funds		3,000		-
Other liabilities		3,272		2,416
Total liabilities assumed		55,944		54,446
Purchase price	$	17,350	$	17,021

NOTE 3. SECURITIES

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost		Gains		Losses			Value
Securities Available for Sale
December 31, 2008:
U.S. Government and agency securities	$	24,703	$	509	$	-		$	25,212
State and municipal securities		16,824		285		(135	)		16,974
Mortgage-backed securities		32,035		1,090		(27	)		33,098
Corporate bonds and equity securities		3,083		22		(279	)		2,826
	$	76,645	$	1,906	$	(441	)	$	78,110
December 31, 2007:
U.S. Government and agency securities	$	30,254	$	305	$	(4	)	$	30,555
State and municipal securities		17,958		276		(8	)		18,226
Mortgage-backed securities		28,350		371		(120	)		28,601
Equity securities		1,763		90		(27	)		1,826
	$	78,325	$	1,042	$	(159	)	$	79,208

F-15

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. SECURITIES (Continued)

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost		Gains		Losses			Value
Securities Held to Maturity
December 31, 2008:
U.S. Government and agency	$	2,989	$	28	$	-		$	3,017
State and municipal securities		6,403		105		(98	)		6,410
Mortgage-backed securities		29,647		369		(187	)		29,829
Corporate bonds		1,000		46		-			1,046
	$	40,039	$	548	$	(285	)	$	40,302
December 31, 2007:
U.S. Government and agency securities	$	20,289	$	45	$	(143	)	$	20,191
State and municipal securities		6,773		142		(18	)		6,897
Mortgage-backed securities		30,823		56		(388	)		30,491
Corporate bonds		1,000		53		-			1,053
	$	58,885	$	296	$	(549	)	$	58,632

The amortized cost and fair value of securities held to maturity and securities available for sale as of December 31, 2008 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
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
Due within one year	$	5,600	$	5,682	$	310	$	313
Due from one to five years		22,229		22,750		1,379		1,402
Due from five to ten years		10,223		10,368		5,347		5,486
Due after ten years		3,475		3,386		3,356		3,272
Mortgage-backed securities		32,035		33,098		29,647		29,829
Equity securities and corporate bonds		3,083		2,826		-		-
	$	76,645	$	78,110	$	40,039	$	40,302

Securities with a carrying value of $71,525,000 and $72,884,000 at December 31, 2008 and 2007, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

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, 2008.

F-16

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. SECURITIES (Continued)

(Dollars in thousands)	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of securities	Value		Losses			Value		Losses			Value		Losses
State and municipal securities	$	2,940	$	(147	)	$	364	$	(86	)	$	3,304	$	(233	)
Mortgage-backed securities		6,587		(71	)		5,858		(143	)		12,445		(214	)
Equity securities		1,021		(102	)		-		-			1,021		(102	)
Corporate bonds		767		(177	)		-		-			767		(177	)
Total	$	11,315	$	(497	)	$	6,222	$	(229	)	$	17,537	$	(726	)

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, 2007.

(Dollars in thousands)	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of securities	Value		Losses			Value		Losses			Value		Losses
U.S. Government and agency securities	$	1,987	$	(2	)	$	12,835	$	(145	)	$	14,822	$	(147	)
State and municipal securities		703		(8	)		627		(18	)		1,330		(26	)
Mortgage-backed securities		4,645		(27	)		30,234		(481	)		34,879		(508	)
Equity securities		613		(27	)		-		-			613		(27	)
Total	$	7,948	$	(64	)	$	43,696	$	(644	)	$	51,644	$	(708	)

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 third quarter of 2008, the Company recorded an impairment charge of $570,000 on $640,000 of 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 was based on the fair market value of the stock on at the time that the United States government took Fannie Mae into receivership.  Previous losses on the securities were recognized in the equity section of the balance sheet.  In order to take advantage of the tax benefit of the loss, the Company sold the securities in the fourth quarter of 2008 at an additional loss of $62,000 which is included in net gains on sale and calls of securities available for sale.  There were no sales of securities in 2007 and 2006.

NOTE 4. LOANS

The composition of loans is summarized as follows:

	December 31,
(Dollars in thousands)	2008			2007
Commercial, financial, and agricultural	$	18,740		$	22,595
Real estate – construction		74,095			66,069
Real estate – mortgage		261,866			241,316
Consumer		35,552			38,834
Other		5,547			5,162
		395,800			373,976
Unearned income		(12	)		(151	)
Allowance for loan losses		(7,285	)		(4,952	)
Loans, net	$	388,503		$	368,873

F-17

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. LOANS (Continued)

Loans serviced for others totaled $86,976,000, $83,856,000, and $79,680,000 at December 31, 2008, 2007 and 2006, respectively.

Changes in the allowance for loan losses are as follows:

	Years Ended December 31,
(Dollars in thousands)	2008			2007			2006
Balance, beginning of year	$	4,952		$	4,480		$	3,477
Provision for loan losses		4,002			639			839
Loans charged off		(2,244	)		(1,142	)		(903	)
Recoveries of loans previously charged off		575			611			436
Balance acquired in business combination		-			364			631
Balance, end of year	$	7,285		$	4,952		$	4,480

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

	As of and for the Years Ended
	December 31,
(Dollars in thousands)	2008		2007		2006
Impaired loans without a valuation allowance	$	-	$	-	$	-
Impaired loans with a valuation allowance		9,164		1,633		479
Total impaired loans	$	9,164	$	1,633	$	479
Valuation allowance related to impaired loans	$	1,603	$	245	$	72
Average investment in impaired loans	$	5,920	$	507	$	659

Interest income recognized on impaired loans for the years ended December 31, 2008, 2007, and 2006 was immaterial.

There were $9,164,000 and $1,633,000 in loans on nonaccrual status at December 31, 2008 and 2007, respectively.  Loans of $779,000 and $247,000 were past due ninety days or more and still accruing interest at December 31, 2008 and 2007, respectively.

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, 2008 are as follows:

(Dollars in thousands)
Balance, beginning of year	$	1,108
Advances		106
Repayments		(392	)
Balance, end of year	$	822

F-18

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

	December 31,
(Dollars in thousands)	2008			2007
Land	$	3,226		$	3,125
Buildings		14,513			12,720
Leasehold improvements		532			532
Construction in progress		243			393
Equipment		6,714			5,845
		25,228			22,615
Accumulated Depreciation		(5,855	)		(4,522	)
	$	19,373		$	18,093

Construction in progress amounts at December 31, 2008 relates to the construction of a branch facility to replace an existing branch at the Bank of Chickamauga in Chickamauga, Georgia, and at December 31, 2007 to the construction of the Company’s operations center in Thomaston, Georgia.  In 2007 the Company began operating a branch office in a leased facility in Tyrone, Fayette County, Georgia which is subject to a ten year lease.  Leasehold improvements for the office amounted to $513,000.

Leases:

In 2004 the Company leased a branch office location in Fayetteville, Fayette County, Georgia under a five year lease that will expire in August, 2009.  Effective April 30, 2009 the Company will consolidate its Fayette County banking operations at the Tyrone branch.  The Tyrone branch was opened in 2007 in a facility subject to a lease having a term of ten years with certain renewal options.

Rental expense under all operating leases amounted to $143,000, $114,000, and $91,000 for the years ended December 31, 2008, 2007 and 2006, respectively. Commitments for lease obligations are as follows:

(Dollars in thousands)
2009	$	121
2010		77
2011		79
2012		81
2013		82
Thereafter		315
	$	755

F-19

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, 2008					As of December 31, 2007
	Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated
(Dollars in thousands)	Amount		Amortization			Amount		Amortization
Goodwill	$	6,397		-		$	14,255		-
Core deposit intangible	$	9,441	$	(7,389	)	$	9,441	$	(5,159	)
Mortgage servicing rights		1,006		(481	)		863		(353	)
Total other intangible assets	$	10,447	$	(7,870	)	$	10,304	$	(5,512	)

Goodwill impairment testing is performed annually or more frequently if events or circumstances indicate possible impairment.  The evaluation of goodwill for impairment uses both the income and market approaches to value the reporting units of the Company.  The income approach consists of discounting projected long-term future cash flows (earnings), which are derived from internal forecasts and economic expectations for the Company and its reporting units.  The significant inputs to the income approach include the long-term target tangible equity to tangible assets ratio and the discount rate, which is determined utilizing the Company’s cost of capital adjusted for a company-specific risk factor.   The company-specific risk factor is used to address the uncertainty of growth estimates and earnings projections of management.  Under the market approach, a value is calculated from an analysis of comparable acquisition transactions based on earnings, book value, assets and deposit premium multiples from the sale of similar financial institutions.  The Company’s goodwill testing for 2008, which was updated as of December 31, 2008, indicated that the intangible assets recorded at the time of acquisition of FNB Polk, Peachtree and Chickamauga were impaired based on the substantial decline in the Company’s common stock price and the economic outlook for the Company’s industry.  As a result, the Company recorded goodwill impairment charges of $7,858,000 and core deposit intangible impairment charges of $1,263,000 for the year ended December 31, 2008.  If the Company’s stock price continues to decline, if the Company does not produce anticipated cash flows, or if comparable banks begin selling at significantly lower prices than in the past, the Company’s goodwill may be further impaired in the future.

Amortization expense for the core deposit intangibles was $967,000, $926,000, and $807,000 for the years ended December 31, 2008, 2007, and 2006, respectively.  Amortization expense for the mortgage servicing rights was $128,000 and $131,000 for the year ended December 31, 2008 and 2007.  The estimated amortization expense of all intangible assets in future years is as follows:

(Dollars in thousands)
2009	$	863
2010		618
2011		304
2012		285
2013		273
Thereafter		234
	$	2,577

The following reflects the activity in our mortgage servicing assets:

F-20

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. INTANGIBLE ASSETS (continued)

(Dollars in thousands)	2008			2007
Beginning balance	$	510		$	375
Amounts recognized upon sales		143			266
Amortization		(128	)		(131	)
Ending balance	$	525		$	510

The fair value of mortgage servicing rights for loans originated during the year ended December 31, 2006 approximated $153,000.

NOTE 7. DEPOSITS

Deposits are as follows:

	December 31,
(Dollars in thousands)	2008		2007
Noninterest bearing deposits	$	75,912	$	80,685
Interest checking		95,979		83,742
Money market		54,545		55,687
Savings		42,651		41,997
Certificates of deposit		250,614		251,820
		519,701		513,931

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2008 and 2007 was $87,184,000 and $84,616,000, respectively. The scheduled maturities of time deposits at December 31, 2008 are as follows:

(Dollars in thousands)
2009	$	185,476
2010		29,796
2011		17,006
2012		8,186
2013		9,949
Thereafter		201
	$	250,614

Overdraft demand deposits reclassified to loans totaled $321,000 and $272,000 at December 31, 2008 and 2007, respectively.

F-21

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. BORROWED FUNDS

Other borrowed funds consist of the following:

	December 31,
(Dollars in thousands)	2008		2007
Short-term borrowings
Federal Home Loan Bank line of credit with a maturity of August 13, 2009.  Interest is payable at a floating rate based on the daily rate credit.  The interest rate as of December 31, 2008 was 0.46%	$	7,870	$	-
Federal Home Loan Bank advance with a maturity of March 26, 2008.  Interest is payable monthly at a rate of 5.51%.		-		3,000
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.		-		55
Current portion of Federal Home Loan Bank advance with a maturity of October 6, 2011.  Interest is payable monthly at a rate of 3.53%.  Principal is due in quarterly installments of $208,333.		833		-
Line of credit maturing October 1, 2018 secured by common stock of subsidiary banks.  Principal balance outstanding at October 16, 2008 is due in quarterly payments for a period of ten years beginning January 1, 2009.  Interest is payable quarterly at Prime minus 0.50%.		6,412		-
Total short-term borrowings		15,115		3,055
Long-term borrowings
Federal Home Loan Bank advance with a maturity of October 6, 2011.  Interest is payable monthly at a rate of 3.53%.  Principal is due in quarterly installments of $208,333.		1,667		-
Line of credit maturing October 1, 2018 secured by common stock of subsidiary banks.  Principal balance of outstanding at October 16, 2008 is due in quarterly payments for a period of ten years beginning January 1, 2009.  Interest is payable quarterly at Prime minus 0.50%		-		6,555
Total long-term borrowings		1,667		6,555
Total borrowings	$	16,782	$	9,610

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 contain certain restrictive covenants including, among others, a requirement of each subsidiary bank to maintain certain minimum capital levels as well as maximum ratios related to the levels of nonperforming assets, to be measured quarterly.  At the inception of the loan, the restriction relative to maximum levels of nonperforming assets required that these assets not exceed 1% of each subsidiary’s total assets.  The Company was in violation of this covenant for the second and third quarters of 2008 for which it received waivers from the lender.  The Company and the lender agreed to amend the covenants such that each subsidiary’s nonperforming assets may not exceed 5% of total assets as of December 31, 2008 and for each quarter of 2009.  Thereafter, this ratio would reduce by 1% during each quarter in 2010 so that the maximum ratio returns to 1% of

F-22

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. BORROWED FUNDS (Continued)

total assets by December 31, 2010.  At December 31, 2008, as a result of the impairment of its goodwill and core deposit intangible assets, the Company was not in compliance with its covenant to maintain a minimum debt service coverage ratio, defined as net income of subsidiary banks multiplied by 50%, divided by the annual debt service of the Company.  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.

Contractual maturities of other borrowings as of December 31, 2008 are as follows:

2009	$	15,115
2010		833
2011		834
2012		-
2013		-
Thereafter		-
	$	16,782

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, 2008, 2007, and 2006 the total funds contributed approximated 8% of compensation less amounts paid as incentives and bonuses.

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 years ended December 31, 2008, 2007 and 2006, the Company contributed 6% of an employee’s compensation to the Plan without regard to an employee’s level of participation.  The contributions expensed were $538,000, $445,000, and $391,000 for the years ended December 31, 2008, 2007 and 2006, 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, 2008, 2007 and 2006, the Company contributed $203,000, $182,000, and $143,000  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 2009. However, since the redemption of common stock is outside the control of the Company, the Company’s

F-23

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9. EMPLOYEE BENEFIT PLANS (continued)

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, 2008 and 2007, the ESOP held 69,388 and 66,666 shares of the Company stock. Shares held by the ESOP considered outstanding for purposes of calculating the Company’s earnings per share were 54,315 and 50,786 shares as of December 31, 2008 and 2007, respectively.  In November 2007, the ESOP purchased 15,880 shares funded by a $349,000 direct loan from the Company.  At December 31, 2008 and 2007, the balance of the loan was $326,000 and $349,000, respectively, and is reported on the balance sheet as “Unearned Compensation – ESOP” and is a reduction of stockholders’ equity.  This loan carries an interest rate of Prime minus 0.50% and is to be repaid over a term of fifteen years.  As principal reductions are made to the loan, shares are released from the loan as collateral and allocated to participant accounts.  The number of shares originally secured by the loan and allocated to participant accounts totaled 1,059 at December 31, 2008.  No shares were allocated to participant accounts at December 31, 2007.  Shares secured by the loan are not allocated to participant accounts and therefore are not considered outstanding for purposes of computing 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, 2008 and 2007 is $16,997,000 and $16,302,000, respectively. Income recognized on the policies amounted to $695,000, $594,000, and $340,000 for the years ended December 31, 2008, 2007, and 2006, respectively. The balance of deferred compensation included in other liabilities at December 31, 2008 and 2007 is $4,871,000 and $4,139,000, respectively. Expense recognized for deferred compensation amounted to $776,000, $470,000, and $251,000 for the years ended December 31, 2008, 2007, and 2006, 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.  In connection with its July 1, 2007 merger with Chickamauga, the Company acquired bank-owned life insurance contracts with a fair value of $3,187,000 and assumed $927,000 in deferred compensation liabilities.

Defined Benefit Plan

In its July 1, 2007 acquisition of Bank of Chickamauga, the Company assumed the Bank of Chickamauga Defined Benefit Plan (the “Chickamauga Plan”).  In accordance with the Merger Agreement, the Chickamauga Plan  was terminated effective November 1, 2007.  The Company received Internal Revenue Service approval of the plan termination on February 19, 2009, and the final distribution is anticipated to be June 1, 2009.  When the Chickamauga Plan is terminated, participants will have the option of receiving a lump sum cash distribution or a private annuity that provides substantially the same benefit as they would have received under the Chickamauga Plan.   At December 31, 2007, the most recent period for which information is available, the Accumulated Benefit Obligation of the Chickamauga Plan was $2,510,000 and the plan assets were $1,879,000, leaving a plan shortfall of $631,000.  The Accumulated Benefit Obligation was calculated in accordance with IRS regulations governing plan terminations which will be in effect in 2008 when the Chickamauga Plan is terminated.  These regulations will require the use of multiple discount rates correlating to various durations of the estimated plan participant liabilities, resulting in an average discount rate of 4.85%.  At December 31, 2008 the Company had recorded on its books accrued pension expense totaling $568,500 to be used to fund any shortfall in plan assets at the time of the plan termination.  Any legal, actuarial, administrative or benefit costs to terminate the plan in excess of this amount will be funded from the $687,000 which was escrowed at the date of merger.  As of December 31, 2008, the balance of the escrowed account was $640,000.

F-24

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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.  For the years ended December 31, 2008, 2007 and 2006, the Company recorded compensation expense related to stock options of $105,000, $106,000 and $95,000, respectively.

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, 2008, 363,600 shares remained available for future grant.  Compensation cost that has been charged against income was approximately $105,000,  $106,000 and $95,000 for the years ended December 31, 2008, 2007 and 2006, respectively.  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 stock options during the year ended December 31, 2006 which had a fair value of $6.48 for each option.  No options were granted for the years ended December 31, 2008 and 2007.  The following table presents the assumptions for the Black-Scholes model used in determining the fair value of options granted to employees in December, 2006:

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

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

F-25

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. STOCK COMPENSATION PLAN (Continued)

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Options		Price		Term	Value
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
Granted		-
Exercised		-
Forfeited		-
Outstanding at December 31, 2007		191,400	$	23.44
Granted		-
Exercised		-
Forfeited		6,000	$	23.39
Outstanding at December 31, 2008		185,400	$	23.44	7 years	$	-
Options exercisable at December 31, 2008		148,700	$	23.39	7 years	$	-

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, 2008 had no intrinsic value.  As of December 31, 2008, there was $204,000 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 2.1 years.

Options outstanding at December 31, 2008 were as follows:

		Outstanding					Exercisable
						Weighted					Weighted
				Weighted		Average			Weighted		Average
				Average		Remaining			Average		Remaining
		Number of		Exercise		Contractual	Number of		Exercise		Contractual
Exercise Price		Options		Price		Term	Options		Price		Term
$	23.10		6,900	$	23.10	8 years		-	$	23.10	8 years
$	23.45		178,500	$	23.45	7 years		148,700	$	23.45	7 years
Total			185,400					148,700

F-26

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. INCOME TAXES

The components of income tax expense are as follows:

	Years Ended December 31,
(Dollars in thousands)	2008			2007			2006
Current
Federal	$	1,378		$	2,803		$	2,764
State		52			293			323
Total current		1,430			3,096			3,087
Deferred
Federal		(1,191	)		(276	)		(281	)
State		(224	)		(44	)		(31	)
Total deferred		(1,415	)		(320	)		(312	)
	$	15		$	2,776		$	2,775

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)	2008			2007			2006
Tax provision at statutory rate	$	(2,035	)	$	3,086		$	2,907
State income taxes, net of Federal benefit		(114	)		164			193
Tax-exempt income		(599	)		(504	)		(358	)
Goodwill impairment		2,672			-			-
Stock option expense		36			36			33
Other		55			(6	)		-
Income tax expense	$	15		$	2,776		$	2,775

The components of deferred income taxes are as follows:

F-27

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. INCOME TAXES (Continued)

	December 31,
(Dollars in thousands)	2008		2007
Deferred tax assets:
Loan loss reserves	$	2,611	$	1,686
Deferred compensation		1,847		1,434
Security impairment		-		136
Intangibles		209		674
Purchase accounting		318		-
		4,985		3,930
Deferred tax liabilities
Purchaes accounting		-		535
Securities available for sale		555		334
Mortgage servicing rights		198		192
Depreciation		647		479
		1,400		1,540
Net deferred tax assets	$	3,585	$	2,390

The years 2005 through 2008 are still subject to audit for the Company’s Federal, Georgia, and Alabama income tax returns.  No material tax uncertainties exist as of December 31, 2008 or 2007.

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)	2008		2007
Commitments to extend credit	$	29,842	$	33,929
Credit card commitments		8,545		9,323
Commercial letters of credit		926		1,282
	$	39,313	$	44,534

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

F-28

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12. COMMITMENTS AND CONTINGENCIES (Continued)

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 five 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 $6,273,000 for Upson, $3,228,000 for FNB Polk, $1,989,000 for Peachtree, and $1,414,000 for Chickamauga.

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, 2008, approximately $868,000 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.

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, 2008 and 2007, the Company and the Banks met all capital adequacy requirements to which they are subject.

As of December 31, 2008, 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

F-29

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. REGULATORY MATTERS (Continued)

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, 2008
Total Capital to Risk Weighted Assets
Consolidated	$	60,623		13.90	%	$	34,898		8	%	$	N/A		N/A
Bank of Upson		32,662		13.70	%		19,078		8	%		23,848		10	%
FNB Polk County		20,612		19.03	%		8,667		8	%		10,834		10	%
Peachtree Bank		6,268		13.34	%		3,759		8	%		4,699		10	%
Bank of Chickamauga		6,111		16.94	%		2,885		8	%		3,606		10	%
Tier 1 Capital to Risk Weighted Assets
Consolidated	$	55,150		12.64	%	$	17,449		4	%	$	N/A		N/A
Bank of Upson		29,675		12.44	%		9,539		4	%		14,309		6	%
FNB Polk County		19,252		17.77	%		4,334		4	%		6,500		6	%
Peachtree Bank		5,680		12.09	%		1,880		4	%		2,819		6	%
Bank of Chickamauga		5,658		15.69	%		1,443		4	%		2,164		6	%
Tier 1 Capital to Average Assets
Consolidated	$	55,150		9.02	%	$	24,109		4	%	$	N/A		N/A
Bank of Upson		29,675		9.55	%		12,424		4	%		15,530		5	%
FNB Polk County		19,252		11.61	%		6,631		4	%		8,289		5	%
Peachtree Bank		5,680		8.31	%		2,734		4	%		3,418		5	%
Bank of Chickamauga		5,658		8.00	%		2,829		4	%		3,536		5	%
As of December 31, 2007
Total Capital to Risk Weighted Assets
Consolidated	$	59,423		14.51	%	$	32,770		8.00	%	$	N/A		N/A
Bank of Upson		31,746		14.53	%		17,480		8.00	%		21,850		10.00	%
FNB Polk County		20,891		18.84	%		8,871		8.00	%		11,089		10.00	%
Peachtree Bank		6,083		13.72	%		3,547		8.00	%		4,434		10.00	%
Bank of Chickamauga		5,911		16.68	%		2,834		8.00	%		3,543		10.00	%
Tier 1 Capital to Risk Weighted Assets
Consolidated	$	54,604		13.33	%	$	16,385		4.00	%	$	N/A		N/A
Bank of Upson		29,304		13.41	%		8,740		4.00	%		13,110		6.00	%
FNB Polk County		19,504		17.59	%		4,436		4.00	%		6,653		6.00	%
Peachtree Bank		5,536		12.49	%		1,774		4.00	%		2,660		6.00	%
Bank of Chickamauga		5,468		8.75	%		1,417		4.00	%		2,126		6.00	%
Tier 1 Capital to Average Assets
Consolidated	$	54,604		9.14	%	$	23,883		4.00	%	$	N/A		N/A
Bank of Upson		29,304		9.94	%		11,796		4.00	%		14,745		5.00	%
FNB Polk County		19,504		11.65	%		6,694		4.00	%		8,368		5.00	%
Peachtree Bank		5,536		8.75	%		2,531		4.00	%		3,164		5.00	%
Bank of Chickamauga		5,468		7.61	%		2,873		4.00	%		3,591		5.00	%

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.

F-30

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Banks and Federal Funds Sold:  The carrying amount of cash, due from banks, interest-bearing deposits at other banks 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 with no readily determinable fair value, including restricted equity securities, 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.

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

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.

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

F-31

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

	2008				2007
	Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Amount		Value		Amount		Value
Financial assets
Cash, due from banks, interest bearing deposits in other banks, and federal funds sold	$	42,806	$	42,806	$	36,013	$	36,013
Securities		118,149		118,412		138,093		137,840
Restricted equity securities		2,294		2,294		2,008		2,008
Loans and loans held for sale, net		396,136		399,408		369,102		378,367
Accrued interest receivable		2,939		2,939		3,901		3,901
Bank-owned life insurance		16,997		16,997		16,302		16,302
Financial liabilities
Deposits		519,701		524,136		513,931		517,638
Short-term borrowings		15,115		15,115		3,055		3,059
Long-term borrowings		1,667		1,684		6,555		6,555
Accrued interest payable		1,927		1,927		2,692		2,692

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 and 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.

F-32

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

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 December 31, 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.

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

			Fair Value Measurments at December 31, 2008 Using:
			Quoted Prices
			In Active		Significant
			Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
(Dollars in thousands)	Value		(Level 1)		(Level 2)		(Level 3)
Securities available for sale	$	78,110	$	27	$	77,089	$	994

The securities measured as Level 3 include investment in the common stock of a bank holding company that is not listed on an exchange.  Its fair value is measured as a factor of book value.  There were no gains or losses for the year ended December 31, 2008  included in earnings that are attributable to the change in unrealized gains or losses of the Company’s securities available for sale at December 31, 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 for the year ended December 31, 2008:

F-33

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

	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		(139	)
Transfers in (out) of Level 3		853
Ending balance, December 31, 2008	$	994

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

Fair Value Measurments at December 31, 2008 Using:

Quoted Prices

In Active

Significant

Markets

Other

Significant

for Identical

Observable

Unobservable

Fair

Assets

Inputs

Inputs

(Dollars in thousands)

Value

(Level 1)

(Level 2)

(Level 3)

Impaired loans

$

7,561

$

-

$

-

$

7,561

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 16. SUPPLEMENTAL FINANCIAL DATA

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

	Years Ended December 31,
(Dollars in thousands)	2008		2007		2006
Data processing fees	$	1,486	$	1,454	$	1,222
Professional fees		740		620		439
Postage and supplies		707		692		527
Director fees		441		409		370

F-34

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, 2008 and 2007 and the condensed statements of income and cash flows for each of the three years ended December 31, 2008:

CONDENSED BALANCE SHEETS
(Dollars in thousands)	2008		2007
Assets
Cash	$	1,008	$	1,001
Investment in subsidiaries		69,656		78,072
Securities available for sale		168		313
Other assets		256		152
Total assets	$	71,088	$	79,538
Liabilities, redeemable common stock and stockholders' equity
Short-term borrowed funds	$	6,412	$	6,555
Other liabilities		154		171
Redeemable common stock and stockholders' equity
Redeemable common stock held by ESOP		494		1,091
Stockholders' equity		64,028		71,721
Total liabilities, redeemable common stock and stockholders' equity	$	71,088	$	79,538

CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)	2008			2007			2006
Dividend income from subsidiaries	$	2,873		$	17,942		$	9,120
Other income		76			-			-
Total income		2,949			17,942			9,120
Interest expense		307			191			4
Other expense		898			902			750
Total expenses		1,205			1,093			754
Income before income taxes and equity in undistributed income of subsidiaries		1,744			16,849			8,366
Income tax benefits		(389	)		(382	)		(250	)
Income before equity in undistributed income of subsidiaries		2,133			17,231			8,616
Equity in undistributed income (excess of distributions over income) of subsidiaries		(8,132	)		(10,931	)		(2,842	)
Net income (loss)	$	(5,999	)	$	6,300		$	5,774

F-35

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)	2008			2007			2006
OPERATING ACTIVITIES
Net income (loss)	$	(5,999	)	$	6,300		$	5,774
Adjustments to reconcile net income (loss) to net cash provided by operating activities
(Undistributed income) excess distributions over income of subsidiaries		8,132			10,931			2,842
Stock option expense		105			106			95
Change in other assets		(50	)		145			(167	)
Change in other liabilities		(17	)		83			115
Net cash provided by operating activities		2,171			17,565			8,659
INVESTING ACTIVITIES
Investment in subsidiaries		-			(2,250	)		-
Cash paid in business combination		-			(17,350	)		(7,987	)
Net cash used in investing activities		-			(19,600	)		(7,987	)
FINANCING ACTIVITIES
Proceeds from long-term borrowed funds		-			5,775			6,280
Repayment of long-term borrowed funds		(143	)		-			(5,500	)
(Increase) decrease in unearned compensation - ESOP		23			(349	)		-
Purchase and retirement of stock		-			(453	)		-
Dividends paid		(2,044	)		(2,056	)		(1,791	)
Net cash provided by (used in) financing activities		(2,164	)		2,917			(1,011	)
Net increase (decrease) in cash		7			882			(339	)
Cash at beginning of year		1,001			119			458
Cash at end of year	$	1,008		$	1,001		$	119
Noncash transactions:
Common stock issued in business combination	$	-		$	-		$	9,464
Unrealized gain (loss)  on securities available for sale		360			721			328

NOTE 18.  SUBSEQENT EVENTS

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

F-36

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18.  SUBSEQENT EVENTS (Continued)

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

 million from 2008 to 2009. The 20 basis point special assessment represents $1.0 million of this increase.

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

 The assessment rates, including the special assessment, are subject to change at the discretion of the Board of Directors of the FDIC.

F-37

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, 2008 and 2007, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2008. 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.

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 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, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

As discussed in note 1 to the consolidated financial statements, effective January 1, 2008, the Company has adopted EITF Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.

/s/ Dixon Hughes PLLC

Atlanta, Georgia

April 3, 2009

 F-38

EX-21.1

Exhibit 21.1

SUBSIDIARIES OF SOUTHCREST FINANCIAL GROUP, INC.

Bank of Upson

(Organized under the laws of the State of Georgia)

The First National Bank of Polk County

(Organized under the laws of the United States)

Peachtree Bank

(Organized under the laws of the State of Alabama)

Bank of Chickamauga

(Organized under the laws of the State of Georgia)

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

SouthCrest Financial Group, Inc.

Fayetteville, Georgia

We consent to the incorporation by reference in the registration statement No. 333-138733 on Form S-8, of SouthCrest Financial Group, Inc. of our report dated April 3, 2009, with respect to the consolidated financial statements of SouthCrest Financial Group, Inc. and subsidiaries, which report appears in SouthCrest Financial Group, Inc.’s 2008 Annual Report on Form 10-K.  As discussed in note 1 to the consolidated financial statements, effective January 1, 2008, the Company has adopted EITF Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.

/s/ Dixon Hughes PLLC

Atlanta, Georgia

April 3, 2009

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) OF THE EXCHANGE ACT

I, Larry T. Kuglar, certify that:

1. I have reviewed this report on Form 10-K of SouthCrest Financial Group, Inc. (the “Registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the Registrant and have:

a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)  designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;

c)  evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and

d)  disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date:  April 3, 2009
	/s/ Larry T. Kuglar
	Larry T. Kuglar
	Principal Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) OF THE EXCHANGE ACT

I, Douglas J. Hertha, certify that:

1. I have reviewed this report on Form 10-K of SouthCrest Financial Group, Inc. (the “Registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the Registrant and have:

a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)  designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;

c)  evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and

d)  disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date:  April 3, 2009
	/s/ Douglas J. Hertha
	Douglas J. Hertha
	Principal Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that this Annual Report on Form 10-K for the year ended December 31, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of SouthCrest Financial Group, Inc.

This 3rd day of April, 2009.

/s/ Larry T. Kuglar

Larry T. Kuglar

Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that this Annual Report on Form 10-K for the year ended December 31, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of SouthCrest Financial Group, Inc.

This 3rd day of April, 2009.

/s/ Douglas J. Hertha

Douglas J. Hertha

Chief Financial Officer