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SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549



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FORM 10-Q/A



AMENDMENT NO. 1



(Mark One)

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



For the quarterly period ended March 31, 2002



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 No. 0-20251



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Crescent Banking
Company

(Exact Name of Registrant as Specified in its Charter)



|Georgia                  |  | 58-1968323                          
|------------------------ |  | ------------------------------------
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)



|251 Highway 515, Jasper, GA              |  | 30143     
|---------------------------------------- |  | ----------
|(Address of principal executive offices) |  | (Zip code)



(706)
692-2424

(Registrants telephone number, including area code)



Not applicable

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



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 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  x  No ̈



Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest practicable date:



Common stock, $1 par value per share, 1,866,766 shares issued and outstanding as of May 14, 2002. 6,668 shares are held as treasury stock.



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##### Table of Contents



CRESCENT
BANKING COMPANY



INDEX



|        
|--------
|        
|        
|Part 1. 
|        
|Item 1. 
|        
|        
|        
|        
|        
|        
|        
|        
|        
|Item 2. 
|        
|Item 3. 
|        
|Part II.
|        
|Item 1. 
|        
|Item 2. 
|        
|Item 3. 
|        
|Item 4. 
|        
|Item 5. 
|        
|Item 6. 







i



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PART IFINANCIAL INFORMATION



CRESCENT BANKING COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Restated)



|                                                                                                          |  | March 31, 2002 |             |   | December 31, 2001 |  
|--------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | ----------------- | -
|Assets                                                                                                    |  |                |             |   |                   |  
|Cash and due from banks                                                                                   |  | $              | 12,972,097  |   |                   | $
|Interest bearing deposits in other banks                                                                  |  |                | 425,888     |   |                   |  
|Federal fund sold                                                                                         |  |                | 2,292,000   |   |                   |  
|Securities available-for-sale                                                                             |  |                | 9,107,161   |   |                   |  
|Securities held-to-maturity, at cost (fair value of $10,214,183 and $10,351,765,
respectively)            |  |                | 10,564,361  |   |                   |  
|Restricted equity securities                                                                              |  |                | 2,220,975   |   |                   |  
|Mortgage loans held for sale                                                                              |  |                | 194,869,715 |   |                   |  
|Loans                                                                                                     |  |                | 135,225,273 |   |                   |  
|Less allowance for loan losses                                                                            |  |                | (1,762,225  | ) |                   |  
|                                                                                                          |  |                |             |   |                   |  
|Loans, net                                                                                                |  |                | 133,463,048 |   |                   |  
|Premises and equipment, net                                                                               |  |                | 6,588,963   |   |                   |  
|Other real estate owned                                                                                   |  |                | 26,337      |   |                   |  
|Mortgage servicing rights                                                                                 |  |                | 3,717,692   |   |                   |  
|Cash surrender value of life insurance                                                                    |  |                | 4,636,038   |   |                   |  
|Premium on deposits purchased                                                                             |  |                | 537,424     |   |                   |  
|Derivative assets                                                                                         |  |                | 25,322      |   |                   |  
|Accounts receivable-brokers and escrow agents                                                             |  |                | 5,388,249   |   |                   |  
|Other assets                                                                                              |  |                | 8,548,637   |   |                   |  
|                                                                                                          |  |                |             |   |                   |  
|Total Assets                                                                                              |  | $              | 395,383,907 |   |                   | $
|                                                                                                          |  |                |             |   |                   |  
|Liabilities                                                                                               |  |                |             |   |                   |  
|Deposits                                                                                                  |  |                |             |   |                   |  
|Noninterest-bearing                                                                                       |  | $              | 54,741,636  |   |                   | $
|Interest-bearing                                                                                          |  |                | 179,862,995 |   |                   |  
|                                                                                                          |  |                |             |   |                   |  
|Total deposits                                                                                            |  |                | 234,604,631 |   |                   |  
|Drafts payable                                                                                            |  |                | 16,455,529  |   |                   |  
|Accrued interest and other liabilities                                                                    |  |                | 7,785,904   |   |                   |  
|Derivative liability                                                                                      |  |                |            |   |                   |  
|Other borrowings                                                                                          |  |                | 118,229,906 |   |                   |  
|                                                                                                          |  |                |             |   |                   |  
|Total liabilities                                                                                         |  |                | 377,075,970 |   |                   |  
|Shareholders equity                                                                                      |  |                |             |   |                   |  
|Common stock, par value $1.00; 10,000,000 shares authorized; 1,862,736 and 1,847,929
issued, respectively |  |                | 1,862,736   |   |                   |  
|Surplus                                                                                                   |  |                | 9,592,519   |   |                   |  
|Retained earnings                                                                                         |  |                | 7,220,719   |   |                   |  
|Less cost of 6,668 shares acquired for the treasury                                                       |  |                | (36,091     | ) |                   |  
|Accumulated other comprehensive loss                                                                      |  |                | (331,946    | ) |                   |  
|                                                                                                          |  |                |             |   |                   |  
|Total stockholders equity                                                                                |  |                | 18,307,937  |   |                   |  
|                                                                                                          |  |                |             |   |                   |  
|Total liabilities and stockholders equity                                                                |  | $              | 395,383,907 |   |                   | $
|                                                                                                          |  |                |             |   |                   |  



See notes
to Consolidated Financial Statements.



1



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CRESCENT BANKING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME



|                                                                                               |  | For the three months ended March 31, |           
|---------------------------------------------------------------------------------------------- |  | ------------------------------------ | ----------
|                                                                                               |  | 2002                                 |           
|                                                                                               |  |                                      |           
|Interest income                                                                                |  |                                      |           
|Interest and fees on loans                                                                     |  | $                                    | 2,328,273 
|Interest and fees on mortgage loans held for sale                                              |  |                                      | 2,898,496 
|Interest on securities:                                                                        |  |                                      |           
|Taxable                                                                                        |  |                                      | 360,374   
|Nontaxable                                                                                     |  |                                      | 3,838     
|Interest on deposits in other banks                                                            |  |                                      | 7,506     
|Interest on Federal funds sold                                                                 |  |                                      | 5,030     
|                                                                                               |  |                                      |           
|                                                                                               |  |                                      | 5,603,517 
|                                                                                               |  |                                      |           
|Interest expense                                                                               |  |                                      |           
|Interest on deposits                                                                           |  |                                      | 1,852,845 
|interest on other borrowings                                                                   |  |                                      | 1,122,018 
|                                                                                               |  |                                      |           
|                                                                                               |  |                                      | 2,974,863 
|                                                                                               |  |                                      |           
|Net interest income                                                                            |  |                                      | 2,628,654 
|Provision for loan losses                                                                      |  |                                      | 170,000   
|                                                                                               |  |                                      |           
|Net interest income after provision for loan losses                                            |  |                                      | 2,458,654 
|Other income                                                                                   |  |                                      |           
|Service charges on deposit accounts                                                            |  |                                      | 196,103   
|Mortgage servicing fee income                                                                  |  |                                      | 436,997   
|Gestation fee income                                                                           |  |                                      | 68,196    
|Gains on sale of mortgage servicing rights                                                     |  |                                      | 4,594,689 
|Gains on sale of mortgage loans held for sale                                                  |  |                                      | 369,750   
|Other                                                                                          |  |                                      | 143,542   
|                                                                                               |  |                                      |           
|                                                                                               |  |                                      | 5,809,277 
|Other expenses                                                                                 |  |                                      |           
|Salaries and employee benefits                                                                 |  |                                      | 4,130,691 
|Capitalized loan orignation costs                                                              |  |                                      | (2,321,257
|Occupancy and equipment expense                                                                |  |                                      | 387,855   
|Supplies, postage, and telephone                                                               |  |                                      | 460,421   
|Advertising                                                                                    |  |                                      | 138,947   
|Insurance expense                                                                              |  |                                      | 62,427    
|Depreciation and amortization                                                                  |  |                                      | 430,082   
|Legal and professional                                                                         |  |                                      | 363,852   
|Director fees                                                                                  |  |                                      | 61,575    
|Mortgage subservicing expense                                                                  |  |                                      | 433,071   
|Other                                                                                          |  |                                      | 592,927   
|                                                                                               |  |                                      |           
|                                                                                               |  |                                      | 4,740,591 
|Income before income taxes and cumulative effect of a change in accounting
principle           |  |                                      | 3,527,340 
|Applicable income taxes                                                                        |  |                                      | 1,333,222 
|Income before cumulative effect of a change in accounting principle                            |  | $                                    | 2,194,118 
|                                                                                               |  |                                      |           
|Cumulative effect of a change in accounting principle                                          |  |                                      |          
|                                                                                               |  |                                      |           
|Net income                                                                                     |  |                                      | 2,194,118 
|Other comprehensive income (loss), net of tax                                                  |  |                                      |           
|Unrealized gains (losses) on securities available for sale arising during
period               |  |                                      | (243,561  
|                                                                                               |  |                                      |           
|Comprehensive income                                                                           |  | $                                    | 1,950,557 
|                                                                                               |  |                                      |           
|Basis earnings per common share before cumulative effect of a change in accounting
principle   |  | $                                    | 1.19      
|Cumulative effect of a change in accounting principle                                          |  |                                      | 0.00      
|                                                                                               |  |                                      |           
|Basic earnings per common share                                                                |  | $                                    | 1.19      
|                                                                                               |  |                                      |           
|Diluted earnings per common share before cumulative effect of a change in accounting
principle |  | $                                    | 1.14      
|Cumulative effect of a change in accounting principle                                          |  |                                      | 0.00      
|                                                                                               |  |                                      |           
|Diluted earnings per common share                                                              |  | $                                    | 1.14      
|                                                                                               |  |                                      |           
|Cash dividends per share of common stock                                                       |  | $                                    | 0.0775    



See Notes
to Consolidated Financial Statements



2



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CRESCENT BANKING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW



|                                                                                                   |  | For the three months ended March 31, |             
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------------
|                                                                                                   |  | 2002                                 |             
|                                                                                                   |  |                                      |             
|Operating Activities                                                                               |  |                                      |             
|Net Income (loss)                                                                                  |  | $                                    | 2,194,118   
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities: |  |                                      |             
|Accretion of discount on securities                                                                |  |                                      | (309,487    
|Amortization of deposit intangible                                                                 |  |                                      | 18,532      
|Amortization of mortgage servicing rights                                                          |  |                                      | 210,000     
|Provision for loan loss                                                                            |  |                                      | 170,000     
|Depreciation                                                                                       |  |                                      | 430,082     
|Gains on sales of mortgage servicing rights                                                        |  |                                      | (4,594,689  
|(Increase) decrease in mortgage loans held for sale                                                |  |                                      | 105,916,127 
|Acquisition of mortgage servicing rights                                                           |  |                                      | (3,967,259  
|Proceeds from sales of mortgage servicing rights                                                   |  |                                      | 7,986,111   
|Income on life insurance policies                                                                  |  |                                      | (64,566     
|Increase in interest receivable                                                                    |  |                                      | (2,883      
|Increase (decrease) in accounts receivable                                                         |  |                                      | 636,646     
|Increase in drafts payable                                                                         |  |                                      | 7,030,807   
|Increase (decrease) in interest payable                                                            |  |                                      | (144,210    
|(Increase) decrease in other assets and liabilities, net                                           |  |                                      | (250,713    
|                                                                                                   |  |                                      |             
|Net cash provided by (used in) operating activities                                                |  |                                      | 115,258,616 
|Investing Activities                                                                               |  |                                      |             
|Net increase in interest-bearing deposits in other banks                                           |  |                                      | (190,228    
|Acquisition of securities held-to-maturity                                                         |  |                                      | (422,138    
|Proceeds from maturities of securities available-for-sale                                          |  |                                      |            
|Proceeds from maturities of securities held-to-maturity                                            |  |                                      |            
|Acquisition of restricted equity securities                                                        |  |                                      | (300,000    
|Purchase of life insurance policies                                                                |  |                                      | (937,000    
|Net increase in Federal funds sold                                                                 |  |                                      | (2,113,000  
|Net increase in loans                                                                              |  |                                      | (11,303,404 
|Purchase of premises and equipment                                                                 |  |                                      | (697,394    
|                                                                                                   |  |                                      |             
|Net cash used in investing activities                                                              |  |                                      | (15,963,164 
|Financing Activities                                                                               |  |                                      |             
|Net increase in deposits                                                                           |  |                                      | 12,639,832  
|Net increase (decrease) in other borrowings                                                        |  |                                      | (110,851,299
|Proceeds from the issuance of common stock                                                         |  |                                      | 50,069      
|Proceeds from the exercise of stock options                                                        |  |                                      | 44,120      
|Dividends paid                                                                                     |  |                                      | (143,062    
|Net cash provided (used in) by financing activities                                                |  |                                      | (98,260,340 
|Net increase (decrease) in cash and due from banks                                                 |  |                                      | 1,035,112   
|Cash and due from banks at beginning of year                                                       |  |                                      | 11,936,985  
|                                                                                                   |  |                                      |             
|Cash and due from banks at end of period                                                           |  | $                                    | 12,972,097  
|                                                                                                   |  |                                      |             
|Supplemental Disclosure of Cash Flow Information                                                   |  |                                      |             
|Cash paid during period for interest                                                               |  |                                      | 3,119,073   



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



March 31, 2002



NOTE 1GENERAL



The accompanying
unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and
results of operations of the interim periods have been made. All such adjustments are of a normal recurring nature. Results of operations for the three ended March 31, 2002 are not necessarily indicative of the results of operations for the full
year or any interim periods.



NOTE 2SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES



CASH FLOW INFORMATION



For purpose of the statements of cash flows, cash
equivalents include amounts due from banks.



DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES



On January 1, 2001, the
Company adopted Financial Accounting Standards Board (FASB) No. 133, Accounting For Certain Derivative Instruments And Hedging Activities,  and FASB No. 138, Accounting For Certain Derivative Instruments And Certain Hedging
Activities- An Amendment of FASB No. 133 (collectively, FAS 133). Under FAS 133, all derivative financial instruments are to be recognized on a companys balance sheet at fair value. On the date the Company enters into a
derivative contract, the Company designates the derivative instrument as either (i) a hedge of the fair value of a recognized asset, liability or an unrecognized firm commitment (a fair value hedge), (ii) a hedge of a forecasted
transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge) or (iii) a free-standing derivative instrument. For a fair value hedge, changes in the fair value of
the derivative instrument and changes in the fair value of the hedged asset or liability attributable to the hedged risk are recorded in the net income of the current period. For a cash flow hedge, changes in the fair value of the derivative to the
extent that it is effective are recorded in other comprehensive income within the stockholders equity section of the balance sheet and subsequently reclassified as income in the same period that the hedged transaction impacts net income. For
free-standing derivatives instruments, changes in the fair values are reported in the net income of the current period. The Company has three types of derivative financial instruments that meet the criteria of a derivative as outlined in FAS 133:
(i) interest rate lock commitments, (ii) mandatory sales commitments, and (iii) options to deliver mortgage-backed securities. All of these derivative financial instruments are considered to be free-standing derivative instruments.



The Company formally documents the relationship between hedging instruments
and hedged items, as well as the risk management objective and strategy for undertaking various hedging transactions.



The primary market risk facing the Company is interest rate risk related to its locked pipeline. The locked pipeline is comprised of interest rate lock
commitments issued on residential mortgage loans to be held for sale. In order to mitigate the risk that a change in interest rates will result in a decline in the value of the Companys locked pipeline, the Company enters into hedging
transactions. The locked pipeline is hedged with mandatory sales commitments or options to deliver mortgage-backed securities that generally correspond with the composition of the locked pipeline. Due to the variability of closings in the locked
pipeline, which is driven primarily by interest rates, the Companys hedging policies require that a percentage of the locked pipeline be hedged with these types of derivative instruments. The Company is generally not exposed to significant
losses, nor will it realize significant gains, related to it locked pipeline, due to changes in interest rates, net of gains or losses on associated hedge positions. However, the Company is exposed to the risk that the actual closings in the locked
pipeline may deviate from the estimated closings for a given change in interest rates. Although interest rates are the primary determinant, the actual loan closings from the locked pipeline are influenced by many factors, including the composition
of the locked pipeline and remaining commitment periods. The Companys estimated closings are based on historical data of loan closings as influenced by recent developments. The locked pipeline is considered a portfolio of derivative
instruments. The locked pipeline, and the associated free-standing derivative instruments used to hedge the locked pipeline, are marked to fair value and recorded as a component of gain on sale of loans in the income statement.



For the three months ended March 31, 2002 the impact on net income, net of tax
was $29,864, compared to the three months



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ended March 31, 2001 of
$103,937. The $29,864 FAS 133 effect on net income during the three-month period ended March 31, 2002 reflects the change in the fair value of the Companys freestanding derivatives of $48,168, net of the related tax effect of $18,304.



NOTE 3RESTATEMENT OF FINANCIAL STATEMENTS



After an investigation that began in Fall 2002, the Company
discovered two errors related to the calculation of costs and recognition of income on mortgage loans held for sale and mortgage servicing rights. These errors resulted in a misstatement of the costs recorded on the balance sheet for mortgage loans
held for sale. The nature of the adjustment recorded as a result of these errors, and the effects of these errors on the Companys net income, are discussed below.



Mortgage Servicing Rights Gains (Losses)



The Company discovered an error in the method of calculating the costs of mortgage loans held for sale and mortgage servicing
rights. This error resulted in the Companys mortgage servicing rights being understated, and the costs of mortgage loans held for sale being overstated. As a result, during the periods in which mortgage servicing rights were sold, the Company
recorded more gain on the sale of mortgage servicing rights than was actually realized.



Gestation Income



The Company
discovered a second error related to its recognition of gestation income, which is income derived during the holding, or gestation period, from the spread between the fee that the Company receives on mortgage loans that it originates and
the fee charged by the securities broker to whom the Company ultimately sells the loans. This error resulted from the Companys misinterpretation of certain data included on the monthly funding statements received from one of the Companys
major funding sources for its mortgage loans operations. As a result of this error, the Company overstated gestation income.



Compensation Adjustments



As a result of the two errors discussed above, the Companys income from its mortgage operations was misstated in prior periods. Two key executives
in the Companys mortgage operations have employment arrangements that involve incentives based on the net income of the mortgage operations and changes in the net appraised value of the Companys mortgage servicing portfolio. As a result
of the prior period adjustments, the incentives paid by the Company to these executives were adjusted downward pursuant to agreements.



The effect of the restatement for periods ended March 31, 2002 and December 31, 2001 is as follows:



|                             |  | For the period Ended March 31, 2002 |            
|---------------------------- |  | ----------------------------------- | -----------
|                             |  | As Previously Reported              |            
|Mortgage loans held for sale |  | $                                   | 207,551,693
|Other Assets                 |  | $                                   | 2,398,717  
|Retained Earnings            |  | $                                   | 24,839,995 



|                             |  | For the Year Ended December 31, 2001 |            
|---------------------------- |  | ------------------------------------ | -----------
|                             |  | As Previously Reported               |            
|Mortgage loans held for sale |  | $                                    | 313,467,820
|Other Assets                 |  | $                                    | 1,909,316  
|Retained Earnings            |  | $                                    | 22,839,887 



This restatement had no
effect on the Companys income before extraordinary items, net income or earnings per common share for the period ending March 31, 2002. The restatement had the effect of increasing net income and related earnings per share amounts for the
period ending March 31, 2001 as follows:



|                           |  | Three Months Ended March 31, 2001
|-------------------------- |  | ---------------------------------
|Net income                 |  | $174,562                         
|Basic earnings per share   |  | 0.10                             
|Diluted earnings per share |  | 0.10                             



NOTE 4SERVICING
PORTFOLIO



The Company services residential loans for
various investors under contract for a fee. As of March 31, 2002, the Company had purchased loans for which it provides servicing with principal balances totaling $840.9 million.



NOTE 5EARNINGS PER SHARE



The following is a reconciliation of net income (the numerator) and weighted average shares outstanding (the denominator)
used in determining basic and diluted earnings per common share (EPS):



|                         |  | Three Months Ended March 31, 2002
|------------------------ |  | ---------------------------------
|                         |  | Net Income (Numerator)           
|Basic earnings per share |  | $2,194,118                       



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|Effect of dilutive securities stock options |  |   |           |  | 78,950    |  |   |     
|------------------------------------------- |  | - | --------- |  | --------- |  | - | ----
|Diluted earnings per share                  |  | $ | 2,194,118 |  | 1,927,311 |  | $ | 1.14



|                                                                                        |  | Three Months Ended March 31, 2001 |          
|--------------------------------------------------------------------------------------- |  | --------------------------------- | ---------
|                                                                                        |  | Net Income (Numerator)            |          
|Basic earnings per share before cumulative effect of a change in accounting principle   |  | $                                 | 1,082,576
|Cumulative effect of a change in accounting principle                                   |  | $                                 | (69,770  
|Basic earnings per share                                                                |  | $                                 | 1,012,806
|Effect of dilutive securities stock options                                             |  |                                   |          
|Diluted earnings per share before cumulative effect of a change in accounting
principle |  | $                                 | 1,082,576
|Cumulative effect of a change in accounting principle                                   |  | $                                 | (69,770  
|Diluted earnings per share                                                              |  | $                                 | 1,012,806



NOTE
6SUPPLEMENTAL SEGMENT INFORMATION



Crescent Banking
Company (the Company) has two reportable segments: commercial banking and mortgages banking. The commercial banking segment provides traditional banking services offered through Crescent Bank & Trust Company (the Bank).
The mortgage banking segment provides mortgage loan origination and servicing offered through the Bank and Crescent Mortgage Services, Inc. (CMS).



The Company evaluates performances based on profit and loss from operations before income taxes not including nonrecurring gains and losses. The Company
accounts for intersegment revenues and expenses as if the revenue/expenses transactions were to third parties, that is, at current market prices.



The Companys reportable segments are strategic business units that each offers different products and services. They are managed separately because
each segment has different types and levels of credit and interest rate risk.



|                                      |  | For the three Months Ended March 31, 2002 |             |                  |  
|------------------------------------- |  | ----------------------------------------- | ----------- | ---------------- | -
|                                      |  | Commercial Banking                        |             | Mortgage Banking |  
|Interest Income                       |  | $                                         | 2,705,021   |                  | $
|Interest Expense                      |  | $                                         | 1,027,229   |                  | $
|                                      |  |                                           |             |                  |  
|Net Interest income                   |  | $                                         | 1,677,792   |                  | $
|Provision for loan loss               |  | $                                         | 170,000     |                  |  
|Other Revenue from external customers |  | $                                         | 311,400     |                  | $
|Other expenses                        |  | $                                         | 1,259,909   |                  | $
|Segment pre-tax earnings/(loss)       |  | $                                         | 559,283     |                  | $
|Segment assets                        |  | $                                         | 174,147,974 |                  | $



|                                      |  | For the three Months Ended March 31, 2001 |             |                  |  
|------------------------------------- |  | ----------------------------------------- | ----------- | ---------------- | -
|                                      |  | Commercial Banking                        |             | Mortgage Banking |  
|Interest Income                       |  | $                                         | 2,616,882   |                  | $
|Interest Expense                      |  | $                                         | 1,353,257   |                  | $
|                                      |  |                                           |             |                  |  
|Net Interest income                   |  | $                                         | 1,263,625   |                  | $
|Provision for loan loss               |  | $                                         | 115,000     |                  |  
|Other Revenue from external customers |  | $                                         | 298,832     |                  | $
|Other expenses                        |  | $                                         | 1,114,147   |                  | $
|Segment pre-tax earnings/(loss)       |  | $                                         | 333,310     |                  | $
|Segment assets                        |  | $                                         | 140,860,760 |                  | $



6



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##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS



For purposes
of the following discussion, the words the Company, we, us and our refer to the combined entities of Crescent Banking Company and its wholly owned subsidiaries, Crescent Bank & Trust Company and
Crescent Mortgage Services, Inc. The words Crescent, Crescent Bank and CMS refer to the individual entities of Crescent Banking Company, Crescent Bank & Trust Company and Crescent Mortgage Services, Inc.,
respectively.



Special Cautionary Notice Regarding Forward
Looking Statements



The following discussion
and analysis of the consolidated financial condition and results of operations of the Company should be read in conjunction with the Companys financial statements and related notes included elsewhere herein. Certain of the statements made
herein constitute forward-looking statements for purposes of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act),
and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or
implied by such forward-looking statements. Such forward looking statements include statements using the words such as may, will, anticipate, should, would, could,
believe, contemplate, expect, estimate, continue, intend, consider, possible or other similar words and expressions of the future. The Companys
actual results may differ significantly from the results that the Company discusses in these forward-looking statements.



These forward-looking statements involve risks and uncertainties and may not be realized due to a variety of factors, including, without
limitation, the following:



| |  |  | the effects of future economic conditions;
| | - |  | ------------------------------------------



| |  |  | governmental monetary and fiscal policies as well as legislative and regulatory changes;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | the risks of changes in interest rates on the level and composition of deposits, loan demand and the values of loan collateral, securities and other
interest-sensitive assets and liabilities;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | interest rate and credit risks;
| | - |  | -------------------------------



| |  |  | the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms,
insurance companies, money market and other mutual funds and other financial institutions operating in the Companys market area and elsewhere, including institutions operating, regionally, nationally and internationally, together with such
competitors offering banking products and services by mail, telephone, computer and the Internet;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effect of any mergers, acquisitions or other transactions to which the Company or its subsidiaries may from time to time be a party, including, without
limitation, the Companys ability to successfully integrate any businesses that it acquires;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the failure of assumptions underlying the establishment of reserves for loan losses; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | those factors and risks described in any subsequent filings that the Company makes with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All
written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by this cautionary notice. The Company undertakes no duty to update, revise or correct any of the forward-looking statements after the
date of this report, or after the respective dates on which they were otherwise made. The safe harbor for forward-looking statements contained in the Securities Litigation Reform Act of 1995, as amended (the Reform Act), protects
companies from liability for their forward-looking statements if they comply with the requirements of the Reform Act. With respect to any forward-looking statements, the Company hereby expressly claims protection under the Reform Act.



General



After an investigation that began in Fall 2002, we discovered two errors related to the calculation of costs
and recognition of income on mortgage loans held for sale and mortgage servicing rights. These errors resulted in a misstatement of the costs recorded on the balance sheet for mortgage loans held for sale.



We discovered an error in the method of calculating the costs
of mortgage loans held for sale and mortgage servicing rights. This error resulted in our mortgage servicing rights being understated, and the costs of our mortgage loans held for sale being overstated. As a result, during the periods when we sold
mortgage servicing rights, we recorded more gain on the sale of mortgage servicing rights than was actually realized.



We also discovered a second error related to our recognition of gestation income. Gestation income is income derived during the holding,
or gestation period, from the spread between the fee that we receive on mortgage loans that we originate and the fee charged by the securities broker to whom we ultimately sell the loans. This error resulted from our misinterpretation of
certain data included on the monthly funding statements received from one of our major funding sources for our mortgage loans operations. As a result of this error, we overstated gestation income.



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As a result of the two errors discussed above, our income from our mortgage operations was
misstated in prior periods. Two key executives in our mortgage operations have employment arrangements that involve incentives based on the net income of the mortgage operations and changes in the net appraised value of our mortgage servicing
portfolio. The incentives paid by us to these executives for 2002 were adjusted downward pursuant to agreements, to reflect, in part, these adjustments.



We have reduced our retained earnings by $6.5 million (net of tax effect) as a cumulative adjustment to correct these errors. This
adjustment is reflected in our financial statements and other information for the period ended December 31, 2001, as well as in the financial and other information from affected prior periods.



Results of Operations



General Discussion of Our Results



A principal source of our revenue comes from net interest
income, which is the difference between:



| |  |  | income we receive on our interest-earning assets, such as investment securities and loans; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | our interest-bearing sources of funds, such as deposits and borrowings.
| | - |  | -----------------------------------------------------------------------



The level of net interest income is determined primarily by the average balances, or volume, of interest-earning assets and
the various rate spreads between the interest-earning assets and our funding sources, primarily through Crescent Bank. Changes in our net interest income from period to period result from, among other things:



| |  |  | increases or decreases in the volumes of interest-earning assets and interest-bearing liabilities;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | increases or decreases in the average rates earned and paid on those assets and liabilities;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | our ability to manage the interest-earning asset portfolio, which includes loans; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | the availability and costs of particular sources of funds, such as non-interest bearing deposits, and our ability to match our assets and liabilities.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



Our other principal source of
revenue is the fees and income we earn from the origination, holding, servicing and sale of residential first mortgage loans. Revenues from our mortgage banking operations vary significantly due to, among other things:



| |  |  | changes in the economy, generally, but particularly changes in interest rates on mortgage loans;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | decreases in interest rates which generally increase our mortgage banking revenues as a result of increased volumes of mortgage loans;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increases in interest rates which generally result in lower mortgage banking revenues due to decreased volumes of mortgage loans; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the spread we earn on the sale of mortgage servicing rights which fluctuates with the level of interest rates and anticipated changes in rates.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



We experienced significant changes
in interest rates, that caused corresponding significant changes in our mortgage production and revenues, during the first three months of 2002 and 2001, as described below under Results of OperationsResults of Our Mortgage Banking
Business.



Interest Income



We had total interest income of $5.6 million for
the three months ended March 31, 2002, compared to $4.7 million for the three months ended March 31, 2001. This 19% increase in interest income is attributable to an increase in interest-earning assets, which is the result of growth in our
commercial bank loan portfolio, as well as a higher volume of mortgage loan production.



Interest Expense



Our total interest expense for the three months ended March 31, 2002 amounted to $3.0 million, compared to $3.3 million for the three months ended March 31, 2001. This 9% decrease resulted from the declining rate environment
that occurred during 2001 partially offset by the growth of our deposits as well as a higher level of other borrowings used to support our growth and mortgage banking business, as described under Results of OperationsResults of Our
Mortgage Banking Business. In the first three-month periods of 2002 and 2001, interest expense accounted for 38% and 48% of total expenses. The decrease in the percentage of interest expense resulted from the growth of other operating
expenses, principally incurred to



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support our mortgage banking growth.



Net Interest Income



Our net interest income for the first three months of 2002 was $2.6 million. The key performance measure for
net interest income is the net interest margin, which is equal to net interest income divided by average interest-earning assets. Our net interest margin during the first three months of 2002 was 2.82%. Interest spread, which represents
the difference between our average yields on interest-earning assets and our average rates paid on interest-bearing liabilities, was 2.48%. Net interest income, net interest margin and interest spread for the first three months of 2001 were $1.4
million, 2.12%, and 2.03%, respectively. The increase in net interest income resulted primarily from the growth of earning assets. The decrease in net interest margin and interest spread is indicative of our balance sheet being asset sensitive in
the short term during a period when rates were decreasing. See Item 3) Quantitative and Qualitative Disclosures About Our Market Risk.



Loan Loss Provisions



We made a provision to the allowance for loan losses of $170,000 in the first three months of 2002. During the first three months of 2002,
Crescent Bank charged-off, net of recoveries, $4,062 of loans to the allowance for loan losses. In the first three months of 2001, we made provisions to the allowance for loan losses in the amount of $115,000 and Crescent Bank charged-off, net of
recoveries, $12,406 of loans to the allowance for loan losses. Crescent Banks determination of the allowance for loan losses is affected by various factors, including changes in loan concentrations, trends in non performing loans, the
comparison of the allowance to the historical net charge off experience and economic conditions and risks that affect Crescent Bank. The amount of the provision for loan losses increased, in part, between the provisions for the three month period
ended March 31, 2002 and the provisions for the three month period ended March 31, 2001 because our growth in our commercial banking loan portfolio in the first three months of 2002 of $11.6 million was stronger than our commercial banking loan
growth in the first three months of 2001 of $3.6 million. As a result of the increase in commercial banking loan growth, we adjusted our allowance for loan losses to account for our historical experience with various borrowers.



The allowance for loan losses as a percentage of total
non-mortgage loans was 1.30% at March 31, 2002, 1.29% at December 31, 2001 and 1.42% at March 31, 2001. From December 31, 2001 to March 31, 2002, however, net charge-offs to non mortgage loans outstanding decreased from 0.27% at December 31, 2001 to
0.003% at March, 2002. The trend in allowance for loan losses as a percentage of total loans may be affected by the trend in the ratios of the number of potential problem loans to total non-mortgage loans, which represented 2.06% as of March 31,
2002 and 1.80% as of March 31, 2001.



Net
charge-offs as a percentage of average commercial outstanding loans was .0003% at March 31, 2002, 0.27% for the twelve months ending December 31, 2001 and 0.10% at March 31, 2001. While net charge-offs to average commercial banking loans trended
downward in the first quarter of 2002, commercial banking loans past due 90 days or more was 1.66% at March 31, 2002, 0.68% at December 31, 2001 and 0.49% at March 31, 2001. The trend reflected in the increase in commercial banking loans past 90
days or more is also apparent in the potential problem loan to total loan ratio of 2.06% at March 31, 2002 compared to 1.80% at March 31, 2001. The increase in commercial banking loans past due 90 days or more and potential problem loans relates to
one borrower with a relationship of $959,274. The Bank is not anticipating a loss with this relationship.



Other Income



Our other income was $5.8 million in the first three months of 2002 compared to $3.9 million in the first three months of 2001. The
increase in other income was related to the increase of gains on the sale of mortgage servicing rights we realized in 2002, as described below under Results of OperationsResults of Our Mortgage Banking Business.



Other Operating Expenses



Other operating expenses increased to $4.7 million in the
first three months of 2002 from $3.5 million in the first three months of 2001. The increase in other operating expenses was related to the increase in volume of our mortgage operation, as described below under Results of
OperationsResults of Our Mortgage Banking Business.



Net Income



We had net
income of $2.2 million for the three months ending March 31, 2002, compared to net income of $1.0 million for the three months ending March 31, 2001. The increases in net income primarily resulted from the increase in mortgage production and
resulting gains on the sale of mortgage servicing rights. See below under Results of OperationsResults of Our Mortgage Banking Business. Income tax as a percentage of pretax net income was 38% and 36% for the first three months of
2002 and 2001, respectively.





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Results of
Our Commercial Banking Business



Interest
Income



We had interest income of $2.7
million for the three months ended March 31, 2002 compared to $2.6 million for the three months ended March 31, 2001. This increase in interest income is attributable to the increase in interest-earning assets resulting from the growth of our
commercial bank loan portfolio, partially offset by lower interest rates.



Interest Expense



Our interest expense related to the commercial banking business for the three months ended March 31, 2002 amounted to $1.0 million compared to $1.4 million for the three months ended March 31, 2001. This decrease was result of lower
interest rates partially offset by a 6% increase in our deposits during the first three months of 2002. In the first three months 2002 and 2001, interest expense accounted for 42% and 52% of our total commercial banking business expenses,
respectively.



Net Interest Income



Our net interest income for the commercial
banking segment for the first three months of 2002 was $1.7 million. The related net interest margin during the first three months of 2002 was 2.89%, while interest spread was 2.38%. Net interest income, net interest margin and interest spread for
commercial banking for the first three months of 2001 were $1.3 million, 3.12%, and 2.64%, respectively. The increase in net interest income is related to the higher volume of commercial banking loans. The decrease in each of net interest margin and
interest spread was due partially to the declining interest rate environment in 2001.



Other Income



Our other income related to the commercial banking segment was $311,400 in the first three months of 2002 compared to $298,832 in the first three months of 2001. The increase in other income for the three-month period 2002
was primarily due to an increase in fee income from deposit accounts.



Other Operating Expenses



Other operating expenses related to our commercial banking business increased to $1.3 million in the first three months of 2002 from $1.1 million in the first three months of 2001. This increase in other operating expenses was caused
by an increase in staff and overhead expenses related to Crescent Banks commercial banking growth in its various markets.



Loan origination fees and certain direct costs of loans are accounted for in accordance with SFAS No. 91, Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Indirect Costs of Leases. The costs are netted against the fees and recognized in income over the life of the loans or when the loans are sold. The costs that are
netted against the fees are reported as a reduction of other operating expenses in the statement of income. At March 31, 2002, the amount of commercial banking costs netted against commercial banking loan origination fees totaled $505,557, as
compared to $329,671 at March 31, 2001. This increase in loan fees was the result of the growth in the Banks commercial banking loan portfolio.



Pretax Net Income



Our commercial banking business had pre-tax net income of $559,283 million for the three months ending March 31, 2002, compared to pre-tax
income of $333,310 for the three months ending March 31, 2001. Pre-tax income has been favorably affected by the higher volume of commercial banking loans, partially offset by the declining rate environment in 2001.



Results of Our Mortgage Banking Business



We experienced significant changes in mortgage loan production
in 2001 and the first three months of 2002 that were directly related to changes in interest rates. During 2001, the Federal Reserve Open Market Committee reduced interest rates on eleven occasions for a total reduction of 475 basis points. We
closed $856.7 million of mortgage loans during the first three months of 2002 compared to $672.1 million during the first three months of 2001.



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Interest
Income



We had mortgage banking interest
income of $2.9 million for the three months ended March 31, 2002 compared to $2.1 million for the three months ended March 31, 2001. This 38% increase in interest income is attributable to the higher volume of mortgage production.



Interest Expense



We had mortgage banking interest expense of $1.9 million for
the three months ended March 31, 2002 and $2.0 million for the three months ended March 31, 2001. The decrease resulted from lower interest rates, partially offset by a higher level of our borrowings. All of our mortgage production through CMS is
funded with a warehouse line of credit; therefore, the higher volume in the Northeast and Midwest mortgage operations of CMS resulted in a higher average balance of other borrowings. In the first quarter of 2002 and 2001, mortgage banking interest
expense accounted for 37% and 48% of total expenses, respectively. The decrease in the percentage of interest expense resulted from the growth of other operating expenses, principally incurred to support our mortgage banking growth.



Net Interest Income



Our net interest income from our mortgage banking operations
for the first three months of 2002 was $950,862. The net interest margin during the first three months of 2002 was 1.65%. The interest spread for the same period was 0.89%. Comparatively, interest income, net interest margin and interest spread from
mortgage banking for the first three months of 2001 were $101,461, 0.62%, and 0.33%, respectively. The increase in net interest income is the result of our higher volume of mortgage loan production. The improvement in the net interest margin and
interest spread was a result of the improved spread between the long-term interest rates and the short-term interest rates in the first three months of 2002.



Other Income



Other income from our mortgage banking business was $5.5 million in the first three months of 2002 compared to $3.6 million in the first
three months of 2001. The increase in other income was related to the increase of gains on the sale of mortgage servicing rights. During the first three months of 2002, we sold servicing rights with respect to $638.3 million of mortgage loans for a
gain of $4.6 million, or a spread on the sale of servicing of 0.72%. This compares to the first three months of 2001 in which we sold servicing rights with respect to $610.9 million of mortgage loans for a gain of $2.9 million, or a spread on the
sale of servicing of 0.48%. The increase in the sale of mortgage rights resulted primarily from our increased mortgage loan production. We currently plan to sell a portion of the servicing rights retained during 2002, although there can be no
assurance as to the volume of the Crescent Banks loan acquisition or that a premium will be recognized on the sales.



Origination fee income is generated from our sale of mortgage loans to securities brokers who are gestation lenders pursuant to a
repurchase agreement. Under the agreement, we sell mortgage loans and simultaneously assign the related forward sale commitments to a securities broker. We continue to receive fee income from the securities broker until the loan is delivered into
the forward commitment. Alternatively, we sell loans on an individual basis in the cash market and subsequently pair off the forward sale commitment. In this case, we do not receive any gestation fee income, which is income derived from the spread
between the fee we received on the mortgage loan and the fee charged by the security broker during the holding or gestation period, prior to our sale of the loan.



Other Operating Expenses



Other mortgage banking business operating expenses increased to $3.3 million in the first three months of
2002 from $2.1 million in the first three months of 2001. This increase in other operating expenses was related to the increase in volume of the mortgage operation, which required increases in salaries and benefits and third party mortgage
outsourcing expense. Our salaries and benefits totaled $3.2 million for the first three months of 2002 compared to $2.3 million in the first three months of 2001.



Loan origination fees and certain direct costs of loans are accounted for in accordance with SFAS No. 91,
Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Indirect Costs of Leases. The costs are netted against the fees and recognized in income over the life of the loans or when the loans are
sold. The costs that are netted against the fees are reported as a reduction of other operating expenses in the statement of income. At March 31, 2002, the amount of mortgage banking costs netted against mortgage banking loan origination fees
totaled $1,815,700, as compared to $1,495,522 at March 31, 2001. This increase in loan fees was the result of the growth in CMS mortgage loan origination.



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Pretax Net
Income



The mortgage banking segment had
pre-tax net income of $3.2 million for the three months ending March 31, 2002, compared to a pre-tax income of $1.6 million for the three months ending March 31, 2001. The favorable increase in net income was primarily the result of an increase in
mortgage production and the resulting gain on the sale of mortgage servicing rights.



Financial Condition



General Discussion of Our Financial Condition



Total Assets



During the first
three months of 2002, our total assets decreased 18% from $484.4 million as of December 31, 2001 to $395.4 million as of March 31, 2002. This decrease in total assets in the first three months of 2002 was primarily the result of a 35% decrease in
mortgage loans held for resale, or a decrease of $105.9 million. The decrease in mortgage loans held for sale is the result of the decline in mortgage production for the month of December 2001 of $419.8 compared to $296.2 million for the month of
March 2002. Our decrease in total assets in the first three months of 2002 corresponded with a $110.8 million, or 48%, decrease in other borrowings. At March 31, 2001, we had total assets of $312.1 million.



Interest-Earning Assets



Our interest-earning assets are comprised of:



| |  |  | commercial banking loans;
| | - |  | -------------------------



| |  |  | mortgage loans held for sale;
| | - |  | -----------------------------



| |  |  | investment securities;
| | - |  | ----------------------



| |  |  | interest-bearing balances in other banks; and
| | - |  | ---------------------------------------------



| |  |  | temporary investments.
| | - |  | ----------------------



At March 31, 2002, interest-earning assets totaled $354.7 million and represented 90% of total assets. This represents a 20% decrease from
December 31, 2001 when earning assets totaled $446.1 million, or 92%, of total assets. The decrease in earning assets resulted primarily from the $105.9 million decrease of residential mortgage loans held for sale. The absolute volume of both our
commercial banking loans and our residential mortgage loans held for sale, as well as the volume of each as a percentage of total interest-earning assets, serve as important determinants of our net interest margin. For detail with respect to each of
our business segments, see Financial ConditionFinancial Condition of Our Commercial Banking Business and Financial ConditionFinancial Condition of Our Mortgage Banking Business below. At March 31, 2001, our
interest-earning assets totaled $279.8 million and represented 91% of our total assets.



Allowance for Loan Losses



Our assessment of the risk associated with extending credit and our evaluation of the quality of our loan portfolio is reflected in the allowance for loan losses. We maintain an allowance for our
commercial banking loan portfolio only, as detailed below under Financial ConditionFinancial Condition of Our Commercial Banking Business. We have no allowance for the portfolio of mortgage loans held for sale.



Fixed Assets



At March 31, 2002, our fixed assets, consisting of land,
building and improvements, and furniture and equipment, totaled $6.6 million, compared to fixed assets of $6.3 million at December 31, 2001. At March 31, 2001, we had $6.2 million of fixed assets.



In 1999, Crescent Bank provided a supplemental retirement plan
to its Banking officers funded with life insurance. In the first quarter 2000, we added our directors to the supplemental retirement plan. At March 31, 2002, the total cash value of the life insurance was $4.6 million.



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At March 31,
2002, our accounts receivable-broker and escrow agents decreased to $5.4 million from $6.0 million at December 31, 2001. This account receivable relates to our flow mortgage servicing rights sales and, therefore, the decrease in the accounts
receivable is directly related to the decrease from December 31, 2001 to March 31, 2002 in our mortgage production and related sale of servicing rights.



Financial Condition of Our Commercial Banking Business



Total Commercial Banking Loans



During the first three months of 2002, our average commercial banking loans were $130.1 million. These loans
constituted 34% of our average consolidated earning assets, and 31% of our average consolidated total assets. For the three month period ended March 31, 2001, we had average commercial banking loans of $94.8 million, or 36%, of our average
consolidated earning assets, and 32% of our average consolidated total assets. For the twelve month period ended December 31, 2001, we had average commercial banking loans of $104.3 million, or 34%, of our average consolidated earning assets, and
30% of our average consolidated total assets. The 25% increase in average commercial banking loans experienced by Crescent Bank during the three month period ending March 31, 2002 was the result of higher loan demand in its service area, as well as
the expansion of Crescent Banks operations in each of Bartow, Cherokee, and Forsyth Counties, Georgia. Our commercial banking loans are expected to produce higher yields than securities and other interest-earning assets.



Loan Loss Allowance



The allowance for loan losses represents managements
assessment of the risk associated with extending credit and its evaluation of the quality of the loan portfolio. Crescent Bank maintains its allowance for loan losses at a level that it believes is adequate to absorb risk of loss in the loan
portfolio. In determining the appropriate level of the allowance for loan losses, management applies a methodology that has both a specific component and a general component. Under the specific component of the methodology, each loan is graded:



| | (1) |  | at the time of the loans origination;
| | --- |  | --------------------------------------



| | (2) |  | at each of Crescent Banks loan review meetings; and
| | --- |  | ----------------------------------------------------



| | (3) |  | at any point in time when payments due under the loan are delinquent.
| | --- |  | ---------------------------------------------------------------------



Crescent Banks grading system is similar to the grading systems used by bank regulators in analyzing
loans. To grade a loan, Crescent Bank considers:



| | (1) |  | the value of collateral;
| | --- |  | ------------------------



| | (2) |  | the relative risk of the loan, based upon the financial strength and creditworthiness of the borrower;
| | --- |  | ------------------------------------------------------------------------------------------------------



| | (3) |  | prevailing and forecasted economic conditions; and
| | --- |  | --------------------------------------------------



| | (4) |  | Crescent Banks historical experience with similar loans.
| | --- |  | ---------------------------------------------------------



The actual grading is performed by loan officers and reviewed and approved by the loan committee. After
grading each of the loans, management reviews the overall grades assigned to the portfolio as a whole and attempts to identify, and determine the effect of, potential problem loans.



The general component of the methodology involves an analysis of actual loan loss experience, a comparison of
the actual loss experience of banks in Crescent Banks peer group, and assumptions about the economy generally. Management also considers the regulatory guidance provided by the Federal Financial Institution Examination Councils
Interagency Policy Statement on Allowance for Loan Losses Methodologies, as well as other widely accepted guidance for banks and savings institutions generally.



Crescent Banks management applies both the specific and general components of the methodology, together
with regulatory guidance, to determine an appropriate level for the allowance for loan losses. Crescent Bank also hires independent loan review consultants on a semi-annual basis to review the quality of the loan portfolio and the adequacy of the
allowance for loan losses. The provision for loan losses during a particular period is a charge to earnings in that period in order to maintain the allowance for loan losses at a level that is estimated to be adequate to cover the risk of loss in
the loan portfolio based upon the methodology.



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Crescent
Banks allowance for loan losses is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance for loan losses and the size of the
allowance for loan losses compared to a group of peer banks identified by the regulators. During their routine examinations of banks, the Federal Deposit Insurance Corporation and the Georgia Department of Banking and Finance may require a bank to
make additional provisions to its allowance for loan losses when, in the opinion of the regulators, their credit evaluations and allowance for loan loss methodology differ materially from Crescent Banks.



While it is Crescent Banks policy to charge-off in the
current period loans for which a loss is considered probable, there are additional risks of future losses, which cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the
economy, managements judgment as to the adequacy of the allowance is necessarily approximate and imprecise.



The allowance for loan losses totaled $1.8 million, or 1.30% of total commercial banking loans, at March 31, 2002, $1.4 million, or 1.42%
of total commercial banking loans, at March 31, 2001, and $1.6 million, or 1.29% of total loans, at December 31, 2001. The increase in the allowance for loan losses during the first three months of 2002 was primarily the result of the provision for
loan loss of $170,000. The increase in the allowance for loan losses corresponds to the $11.6 million increase we experienced in commercial banking loans in the first three months of 2002. The determination of the reserve level rests upon our
judgment about factors affecting loan quality, assumptions about the economy and historical experience. Our judgment as to the adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans, with a
particular focus on loans that are past due and other loans that we believe require attention. We believed that the allowance at March 31, 2002 was adequate at that time to cover risk of losses in our commercial banking loan portfolio; however, our
judgment is based upon a number of assumptions about future events which we believe to be reasonable but which may or may not be realized. There is no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that
additional increases in the allowance for loan loss will not be required. As a result of a weaker economy generally, and the slowdown in the economy and uncertainties created by the September 11, 2001 terrorist attacks and the war against terrorism,
additions to the allowances and charge-offs may become necessary.



Crescent Banks policy is to discontinue the accrual of interest on loans which are 90 days past due unless they are well secured and in the process of collection. We recognize interest on these non-accrual loans only
when we receive the interest. As of March 31, 2002, Crescent Bank had $2.6 million of commercial banking loans contractually past due more than 90 days, $32,949 of commercial banking loans accounted for on a non-accrual basis, and no commercial
banking loans considered to be troubled debt restructurings. As of March 31, 2001 and December 31, 2001, Crescent Bank had $337,427 and $509,526 of commercial banking loans contractually past due more than 90 days, respectively. One borrower with a
relationship of $959,274 attributed to increase in loans past due 90 days or more loans.



As of March 31, 2001, Crescent Bank had $14,142 of commercial banking loans accounted for on a non-accrual basis, and no commercial banking loans considered to be troubled debt restructurings. As of
December 31, 2001, Crescent Bank had no commercial banking loans accounted for on a non-accrual basis, and no commercial banking loans considered to be troubled debt restructurings



Total Non-Performing Commercial Banking Loans



We define non-performing commercial banking loans as
non-accrual and renegotiated commercial banking loans. Our non-performing commercial banking loans at March 31, 2002 amounted to $32,949 compared to $14,142 at March 31, 2001. If we add real estate acquired by foreclosure and held for sale of
$26,337 to our non-performing commercial banking loans, it results in total non-performing commercial assets of $59,286 at March 31, 2002. This compares to total non-performing commercial assets of $126,786 at March 31, 2001 and $332,743 at December
31, 2001. Crescent Bank is currently holding the foreclosed properties for sale.



The chart below represents Crescent Banks commercial banking assets that we believe warrant special attention due to the potential for loss, in addition to the non-performing commercial banking
loans and foreclosed properties related to the commercial banking loans. Potential problem loans represent commercial banking loans that are presently performing, but where management has doubts concerning the ability of the respective borrowers to
meet contractual repayment terms.



|                                                                                                                                                                  |  | March 31, 2002 |           |   | March 31, 2001 |   |           | December 31, 2001 | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | -------------- | - | --------- | ----------------- | 
|Non-performing commercial banking loans (1)                                                                                                                       |  | $              | 32,949    |   |                | $ | 14,142    |                   | 
|Foreclosed properties related to commercial banking loans                                                                                                         |  |                | 26,337    |   |                |   | 112,644   |                   | 
|                                                                                                                                                                  |  |                |           |   |                |   |           |                   | 
|Total non-performing commercial assets                                                                                                                            |  |                | 59,286    |   |                |   | 126,786   |                   | 
|                                                                                                                                                                  |  |                |           |   |                |   |           |                   | 
|Commercial banking loans 90 days or more past due on accrual status                                                                                               |  | $              | 2,621,526 |   |                | $ | 337,427   |                   | 
|Potential problem commercial banking loans (2)                                                                                                                    |  | $              | 2,790,492 |   |                | $ | 1,739,654 |                   | 
|Potential problem commercial loans/total commercial banking loans                                                                                                 |  |                | 2.06      | % |                |   | 1.80      | %                 | 
|Non-performing commercial assets/total commercial banking loans and foreclosed
properties                                                                         |  |                | 0.04      | % |                |   | 0.13      | %                 | 
|Non-performing commercial assets and commercial banking loans 90 days or more past due
on accrual status/total commercial banking loans and foreclosed properties |  |                | 1.98      | % |                |   | 0.49      | %                 | 

---

|(1) |  | Defined as non-accrual commercial banking loans and renegotiated commercial banking loans.
|--- |  | ------------------------------------------------------------------------------------------

|(2) |  | Loans identified by management as potential problem loans (classified and criticized loans), but that are still accounted for on an accrual basis.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------



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Total
Investment Securities



Crescent Bank invests
in U.S. Government and government agency obligations, corporate securities, federal funds sold, and interest-bearing deposits with other banks. Crescent Banks investments are managed in relation to loan demand and deposit growth, and are
generally used to provide for the investment of funds not needed to make loans, while providing liquidity to fund increases in loan demand or to offset fluctuations in deposits. Investment securities and interest-bearing deposits with other banks
totaled $22.3 million at March 31, 2002, compared to $19.1 million at March 31, 2001 and $21.5 million at December 31, 2001. Unrealized gains/(losses) on securities amounted to ($553,243) at March 31, 2002, and $43,149 and ($147,308) at March 31,
2001 and December 31, 2001, respectively. We have not specifically identified any securities for sale in future periods, which, if so designated, would require a charge to operations if the market value would not be reasonably expected to recover
prior to the time of sale. At March 31, 2002, Crescent Bank had federal funds sold of $2.3 million, compared to $11.6 million at March 31, 2001 and $179,000 at December 31, 2001.



Total Commercial Deposits



Crescent Banks commercial deposits totaled $234.6 million, $201.6 million and $222.0 million at March
31, 2002, March 31, 2001 and December 31, 2001, respectively, representing an increase of 16% over the three- month period ended March 31, 2002. Commercial deposits averaged $231.7 million during the three-month period ended March 31, 2002, $181.5
million during the three-month period ended March 31, 2001 and $177.3 million during the twelve-month period ended December 31, 2001. Interest-bearing deposits represented 77% of total deposits at March 31, 2002, compared to 77% at March 31, 2001
and 79% at December 31, 2001. Certificates of deposit comprised 69% of total interest-bearing deposits for March 31, 2002, compared to 75% at March 31, 2001 and 72% at December 31, 2001. The composition of these deposits is indicative of the
interest rate-conscious market in which Crescent Bank operates and increases in interest rates, generally. We cannot provide any assurance that Crescent Bank can maintain or increase its market share of deposits in its highly competitive service
area. Crescent Bank had no brokered deposits as of March 31, 2002 compared to $6.8 million and $496,000 at March 31, 2001 and December 31, 2001, respectively.



Financial Condition of Our Mortgage Banking Business



Average Mortgage Loans Held for Sale



During the first three months of 2002, average mortgage loans held for sale amounted to $224.5 million and
constituted 59% of average consolidated earning assets, and 54% of average consolidated total assets. Average mortgage loans held for sale during the first three months of 2001 of $145.1 million constituted 56% of average consolidated
interest-earning assets and 50% of average consolidated total assets. Average mortgage loans held for sale during the twelve months ended December 31, 2001 of $174.0 million constituted 57% of average consolidated interest-earning assets and 51% of
average consolidated total assets. Our residential mortgage loans held for sale generally generate net interest income as the rates of interest paid to us on the longer term mortgage loans are generally greater than those rates of interest that we
pay on our shorter term warehouse line of credit, brokered deposits, and core deposits.



We carry our mortgage loans held for sale at the lower of aggregate cost or market price and therefore we do not maintain a reserve for mortgage loans. We do have default and foreclosure risk during
the short-term holding period of the mortgages held for sale, which is inherent to the residential mortgage industry. We are at risk for mortgage loan defaults from the time we fund a loan until the time that loan is sold or securitized into a
mortgage-backed security, which is generally 15 days after funding. When we sell a loan, we typically make representations and warranties to the purchasers and insurers that we have properly originated and serviced the loans under state laws,
investor guidelines and program eligibility standards. We rely on our underwriting department to ensure compliance with individual investor standards prior to the sale of loans, and we rely on our quality control department to randomly test loans
that we have sold. Purchasers of our loans typically conduct their



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own review of the loans, and
we may be liable for unpaid principal and interest on defaulted loans if we have breached our representations and warranties.



In some instances, we may even be required to repurchase the loan or indemnify the purchaser of the loan for those loans in which we
breached our representations and warranties. We regularly make representations and warranties to purchasers of our mortgage loans that, if breached, would require us to indemnify the purchaser for losses or to repurchase the loans, and we consider
this practice to be customary and routine. At March 31, 2002, we had $2.5 million of mortgage loans for which we had potential indemnification or repurchase obligations resulting from breaches or our representations and warranties. These loans
represent approximately 0.29% percent of our total loan production and, of these loans, $1.2 million were past due 90 days or more. In the event that the purchaser of these loans experiences any losses with respect to the loans, we would be required
to indemnify the purchaser for its losses or to repurchase the loans from the purchaser. Although we regularly face potential indemnification and repurchase obligations with respect to mortgage loans that we have sold, we have not historically
incurred any indemnification losses or been required to repurchase any loans. As a result, we do not maintain a reserve for this purpose.



Our mortgage banking segment acquires residential mortgage loans from small retail-oriented originators through CMS and the mortgage
division of Crescent Bank. Crescent Bank acquires conventional loans in the Southeast United States while CMS acquires conventional and FHA/VA loans in the Northeast, Midatlantic and Midwest United States and FHA/VA loans in the Southeast United
States.



Crescent Bank acquires residential
mortgage loans from approximately 514 small retail-oriented originators in the Southeast United States through various funding sources, including Crescent Banks regular funding sources, a $55 million warehouse line of credit from the Federal
Home Loan Bank of Atlanta and a $45 million repurchase agreement with UBS/Paine Webber. CMS acquires residential mortgage loans from approximately 591small retail-oriented originators in the Southeast, Northeast, Midatlantic and Midwest United
States through various funding sources, including a $250 million line of credit from UBS/Paine Webber, a $50 million line of credit from Colonial Bank, and a $75 million repurchase agreement from UBS/Paine Webber. Under the repurchase agreements, we
sell our mortgage loans and simultaneously assign the related forward sale commitments to UBS/Paine Webber. The majority of our mortgage loans are currently being resold in the secondary market to Freddie Mac, Fannie Mae and private investors after
being warehoused for 10 to 30 days. We purchase loans that we believe will meet secondary market criteria, such as loans providing for amount limitations and loan-to-value ratios that would qualify for resales to Freddie Mac, Fannie Mae
and Ginnie Mae. To the extent that we retain the servicing rights on the mortgage loans that we resell, we collect annual servicing fees while the loan is outstanding. We sell a portion of our retained servicing rights in bulk form or on a monthly
flow basis. The annual servicing fees and gains on the sale of servicing rights is an integral part of our mortgage banking business and its contribution to net income. We currently pay a third party subcontractor to perform servicing functions with
respect to loans we sell, but where we retain the servicing.



Total Mortgage Loan Acquisitions and Resales



During the first three months of 2002, we acquired $856.7 million of mortgage loans, and we sold $962.8 million of these mortgage loans in the secondary market. At March 31, 2002, we carried $194.9 million of mortgage loans
as mortgage loans held for sale on our balance sheet pending sale of such loans. During the first three months of 2001, we acquired $672.5 million of mortgage loans while we sold in the secondary market $614.9 million of mortgage loans. At March 31,
2001, we carried $152.5 million of mortgage loans as mortgage loans held for sale on our balance sheet pending sale of such loans.



Servicing Rights



At March 31, 2002, we carried $3.7 million of mortgage servicing rights on our balance sheet, compared to $3.4 million at March 31, 2001
and $3.1 million at December 31, 2001. We are amortizing the mortgage servicing rights over an accelerated period. We held servicing rights with respect to loans with unpaid principal balances totaling $840.9 million at March 31, 2002, $351.6
million at March 31, 2001 and $693.8 million at December 31, 2001. During the first three months of 2002, we sold servicing rights with respect to $638.3 million of mortgage loans carried on our balance sheet at a cost of $2.9 million for a gain of
$4.6 million. During the first three months of 2001, we sold servicing rights with respect to $610.9 million of mortgage loans carried on our balance sheet at a cost of $7.3 million for a gain of $2.9 million.



The market value of our servicing portfolio is contingent upon
many factors, including, without limitation, the interest rate environment, the estimated life of the servicing portfolio, the loan quality of the servicing portfolio and the coupon rate of the loan portfolio. We cannot provide assurance that we
will continue to experience a market value of our servicing portfolio in excess of the cost to acquire the servicing rights, nor can we provide assurance as to the expected life of our servicing portfolio, or as to the timing or amount of any sales
of our retained servicing rights.







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Other
Borrowings



Crescent Banks other
borrowings consist of borrowings from the Federal Home Loan Bank of Atlanta, which is priced at the Federal Home Loan Bank of Atlanta daily rate plus 25 basis points. At March 31, 2002, this rate was 2.44%. All mortgage production generated by CMS
is funded through warehouse lines of credit from Colonial Bank, priced at one-month LIBOR plus 115 to 155 basis points with a floor of 250 basis points, and UBS/Paine Webber, priced at one-month LIBOR plus 100 to 130 basis points. At March 31, 2002,
these rates were 3.75% and 3.14%, respectively.



Capital and
Liquidity



Our capital adequacy is measured
by risk-based and leverage capital guidelines. Developed by regulatory authorities to establish capital requirements, the risk-based capital guidelines assign weighted levels of risk to various asset categories. Among other things, these guidelines
currently require us to maintain a minimum ratio of 8.0% of total capital to risk-adjusted assets. Under the guidelines, one-half of our required capital must consist of Tier 1 Capital, which would include such things as our tangible common
shareholders equity and any qualifying perpetual preferred stock. The leverage guidelines provide for a minimum ratio of Tier 1 Capital to total assets of 3.0% if we meet certain requirements, including having the highest regulatory rating,
and cushion the ratio by an additional 1.0% to 2.0% otherwise. The guidelines also specify that bank holding companies that are experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve will continue to consider a Tangible Tier 1 Leverage Ratio, calculated without the
inclusion of intangible assets, in evaluating proposals for expansion or new activity. The Federal Reserve has not advised us, and the FDIC has not advised Crescent Bank, of any specific minimum leverage ratio or Tangible Tier 1 Leverage Ratio that
we are required to meet. Crescent Bank has agreed with the Georgia Department to maintain a leverage ratio of 8.0%.



At March 31, 2002, Crescent Banks leverage ratio was 4.64%. To address the leverage ratio shortcoming, we have enhanced our dividend
reinvestment plan and obtained a 46% participation rate, and are pursuing alternative means of raising capital. On November 9, 2001, we completed a $3.5 million offering and sale of trust preferred securities. We also commenced a public offering of
$7.5 million of its common stock on May 8, 2002. We are offering 555,555 shares of our common stock at a price of $13.50 per share. The offering is schedule to expire on July 7, 2002, unless we decide to extend it.



At March 31, 2002, our total consolidated shareholders
equity was $18.3 million, or 4.63% of total consolidated assets, compared to $10.6 million, or 3.38% of total consolidated assets at March 31, 2001, and $16.3 million, or 3.36% of total consolidated assets, at December 31, 2001. The increase in
shareholders equity to total asset ratio in the first three months of 2002 was the result of decrease in total consolidated assets.



At March 31, 2002, our ratio of total consolidated capital to risk-adjusted assets was 8.75%, 8.09% of which consisted of tangible common
shareholders equity. We paid $143,062, or $.0775 per share, of dividends to our shareholders during the first three months of 2002. A quarterly dividend of $.0775 was declared in April and was paid on May 10, 2002. As of March 31, 2001, our
ratio of total consolidated capital to risk-adjusted assets was 5.51%, 4.85% of which consisted of tangible common shareholders equity, and, as of December 31, 2001, total consolidated capital to risk-adjusted assets was 6.85%, 6.32% of which
consisted of tangible common shareholders equity.



In connection with the completion of our offering and sale of $3.5 million of trust preferred securities on November 9, 2001, we repaid a portion of our then outstanding loan from The Bankers Bank and replaced the remaining $2.6
million that we had outstanding under that loan with a new $2.6 million line of credit with The Bankers Bank. Our borrowing under this new line of credit will accrue interest at the prime rate, as reported in the Money Rates section of The Wall
Street Journal, minus 0.50%. Under the terms of the line of credit, we are required to pay 12 months of interest only, due on a quarterly basis, followed by ten equal principal payments over 10 years, with interest due quarterly. We presently expect
to use a portion of the net proceeds of our common stock offering to fully repay this line of credit.



Liquidity involves our ability to raise funds to support asset growth, meet deposit withdrawals and other borrowing needs, maintain
reserve requirements, and otherwise sustain our operations. This is accomplished through maturities and repayments of our loans and investments, our deposit growth, and our access to sources of funds other than deposits, such as the federal funds
market and borrowings from the Federal Home Loan Bank and other lenders.



As of March 31, 2002, we had various sources of liquidity, distinct from our internal equity and operational financing, that were available to us to support our growth and operations. We have access to $55.0 million in
borrowing through our line of credit with the Federal Home Loan Bank of Atlanta, for which we had an average drawn balance of $9.5 million for the three months ended March 31, 2002. We also maintain warehouse lines of credit from UBS PaineWebber
Inc. and Colonial Bank totaling $300 million, available to fund the origination and holding of our mortgage loan business. In connection with the establishment of our line of credit with



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UBS PaineWebber, Crescent Bank agreed to support the obligations of CMS under the line of credit. Because we presently believe that this
support arrangement may have been made in violation of federal banking laws, and as a result of our recent restatements of our financial reports for prior periods on April 8, 2003, CMS terminated this support arrangement and entered into First
Amendments to an Amended and Restated Mortgage Loan Purchase Agreement and to a Mortgage Loan Repurchase Agreement, as well as a Second Amended and Restated Support Agreement, Cash Collateral and Control Agreement, with UBS PaineWebber. These
amended agreements include, among other things, provisions related to CMS capital and collateral, and the potential imposition of minimum fees. Certain of these provisions are summarized below:



| |  |  | CMS must maintain a tangible net worth (as defined) on a quarterly basis (as at the end of each month) that has been increased to the greater of $18
million or 85% of the tangible net worth of CMS at the end of the previous fiscal year plus 90% of capital contributions made during the fiscal year plus 50% of positive year to date net income.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | CMS is required to establish and maintain an account with UBS PaineWebber in the amount of $5 million in cash and other permitted investments (as
defined), which CMS manages, but in which UBS PaineWebber has a security interest and right of setoff to satisfy obligations of CMS to UBS PaineWebber.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | CMS is required to pay an annual set-up and structuring fee of $2.5 million to be paid at the earliest of (i) the termination of the Amended and Restated Mortgage
Loan Purchase Agreement, (ii) a fundamental change such as a change in control, and (iii) other material change in its method of conducting its business on each anniversary date of the Agreement. The amount of this fee will be reduced by
a rebate calculated based on product of LIBOR plus 2.00% per annum and the weighted daily average of mortgage loans sold to UBS PaineWebber.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | CMS is not allowed to pay any dividends or distributions, other than for its pro rata share of taxes, to the Company, without the prior consent of the UBS
PaineWebber.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



These new
restrictions will adversely affect our liquidity.



In addition, we have $11.6 million of federal funds lines that we may access.



Our average liquid assets consist of cash and amounts due from banks, interest-bearing deposits in other banks, federal funds sold, mortgage loans held for sale net of borrowings, investment securities
and securities held for sale. These average liquid assets totaled $90.4 million, $63.2 million and $91.4 million during the three month period ending March 31, 2002, the three month period ending March 31, 2001, and the twelve month period ending
December 31, 2001, representing 39%, 35% and 52% of average deposits for those periods, respectively. Average net non-mortgage loans were 56%, 52% and 59% of average deposits during the three month periods ending March 31, 2002 and March 31, 2001,
and the twelve month period ending December 31, 2001, respectively. Average deposits were 65%, 65% and 40% of average interest-earning assets during the three month periods ending March 31, 2002 and March 31, 2001, and the twelve month period ended
December 31, 2001, respectively.



Crescent Bank
actively manages the levels, types and maturities of interest-earning assets in relation to the sources available to fund current and future needs. In addition to the borrowing sources related to the mortgage operations, Crescent Bank also maintains
federal funds lines of credit totaling $6.1 million. Crescent Banks liquidity position has also been enhanced by the operations of their mortgage division due to the investment of funds in short-term assets in the form of mortgages held for
sale. Once funded, mortgages will generally be held by Crescent Bank for a period of 10 to 30 days. We believe Crescent Banks liquidity sources are adequate to meet its operating needs in the foreseeable future. Similarly, CMS liquidity
is adequate for its operations due to its investment in the short-term mortgage loans it holds for resale.



Item 3. Quantitative and Qualitative Disclosures about Our Market Risk



Market risk is the risk of loss arising from adverse changes in fair value of financial instruments due to a change in economic
conditions, interest rates, regulations and laws. We are inherently affected by different market risks. Our primary risk is interest rate risk. We do not conduct foreign exchange transactions or trading activities, which would produce price risk.



Interest Rate Risk



Interest rate risk is the risk to earnings or market value of
equity from the potential movement in interest rates. The primary purpose of managing interest rate risk is to reduce interest rate volatility and achieve reasonable stability to earnings from changes in interest rates and preserve the value of our
equity. Changes in interest rates affects our volume of mortgage production, value and retention of mortgage servicing rights and value and effectiveness of mortgage interest rate hedges.



We manage interest rate risk by maintaining what we believe to be the proper balance of rate sensitive
assets, rate sensitive liabilities and off-balance sheet interest rate hedges. The relationship between rate sensitive assets and rate sensitive liabilities is a key factor in projecting the effect of interest rate changes on net interest income.
Rate sensitive assets and rate sensitive liabilities are those that can be repriced to current rates within a relatively short time period. We monitor the rate sensitivity of earning assets and interest-bearing liabilities over the entire life of
these instruments, but place particular emphasis on the twelve-month interval.



As of December 31, 2001



The following table shows our rate sensitive position at December 31, 2001. Approximately 85% of earning assets and 96% of funding for these earning assets is scheduled to reprice at least once during
the next twelve months. The total excess of interest-bearing liabilities over interest-bearing assets, based on a one-year time period, was $11.4 million, or 2.4% of total assets.



Interest Rate Sensitivity Gaps



As of December 31, 2001



|                             |  |                       |       | Amounts Repricing In |   |      
|---------------------------- |  | --------------------- | ----- | -------------------- | - | -----
|                             |  | 0-90 Days             |       | 91-365 Days          |   |      
|                             |  | (millions of dollars)
|Interest-earning assets      |  | $                     | 352.4 |                      | $ | 24.7 
|Interest-bearing liabilities |  |                       | 313.1 |                      |   | 75.4 
|                             |  |                       |       |                      |   |      
|Interest sensitivity gap     |  | $                     | 39.3  |                      | $ | (50.7
|                             |  |                       |       |                      |   |      



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As noted
above, we are in a liability-sensitive position for the cumulative one year period. This means that during the one year period, if interest rates decline, the net interest margin will increase and conversely, if interest rates increase, the net
interest margin will decline. For the cumulative five year period, we are in an asset-sensitive position in that interest-bearing assets exceed interest-bearing liabilities that are repricing over the next five years by $21.3 million. This means
that during the five-year period, if interest rates decline, the net interest margin will decline. Conversely, if interest rates increase over this period, the net interest margin will increase. At December 31, 2001, we were within our policy
guidelines of rate-sensitive assets to rate-sensitive liabilities of 80-140% at the one-year interval. Since all interest rates and yields do not adjust at the same time or rate, this is only a general indicator of rate sensitivity.



We also use mandatory commitments to deliver mortgage loans
held for sale, reducing the interest rate risk. At December 31, 2001, our commitments to purchase mortgage loans, referred to as the mortgage pipeline, totaled approximately $759 million. Of the mortgage pipeline, we had, as of December 31, 2001,
approximately $265 million had interest rate risk. The remaining $494 million of mortgage loans are not subject to interest rate risk. The mortgages not subject to interest rate risk are comprised of:



| |  |  | loans under contract to be placed with a private investor through a best efforts agreement, where the investor purchases the loans from us at the contractual loan
rate;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | loans with floating interest rates which close at the current market rate; and
| | - |  | ------------------------------------------------------------------------------



| |  |  | loans where the original fixed interest rate commitment has expired and which will be repriced at the current market rate.
| | - |  | --------------------------------------------------------------------------------------------------------------------------



As of March 31, 2002



The following table shows our rate sensitive position at March
31, 2002. Approximately 80% of earning assets and 92% of funding for these earning assets is scheduled to reprice at least once during the next twelve months. The total excess of interest-bearing assets over interest-bearing liabilities, based on a
one-year time period, was $9.7 million, or 2.5% of total assets.



|                         |  | Interest Rate Sensitivity Gaps as of March 31, 2002
|------------------------ |  | ---------------------------------------------------
|                         |  | Amounts Repricing In:                              
|                         |  | 0-90 Days                                          
|                         |  | (dollars in millions)                              
|Interest-earning assets  |  | $                                                  
|Interest-bearing         |  |                                                    
|                         |  |                                                    
|Liabilities              |  |                                                    
|Interest sensitivity gap |  | $                                                  



We were
in an asset-sensitive position for the cumulative three-month, one- to-five year and over five-year intervals. This means that during the five-year period, if interest rates decline, the net interest margin will decline. During the 0-90 day period,
which has the greatest sensitivity to interest rate changes, if rates rise, the net interest margin will improve. Conversely, if interest rates decrease over this period, the net interest margin will decline. At March 31, 2002, we were within our
policy guidelines of rate-sensitive assets to rate-sensitive liabilities of 80-140% at the one-year interval. Since all interest rates and yields do not adjust at the same time or rate, this is only a general indicator of rate sensitivity.



We also use mandatory commitments to deliver
mortgage loans held for sale, reducing the interest rate risk. At March 31, 2002, our commitments to purchase mortgage loans, referred to as the mortgage pipeline, totaled approximately $688.7 million. Of the mortgage pipeline, we had, as of March
31, 2002, approximately $310.2 million for which we had interest rate risk. The remaining $378.5 million of mortgage loans are not subject to interest rate risk.



Our mortgage division has adopted a policy intended to reduce interest rate risk incurred as a result of
market movements that occur between the time commitments to purchase mortgage loans are made and the time the loans are closed. Accordingly, commitments to purchase loans will be covered either by a mandatory sale of such loans into the secondary
market or by the purchase of an option to deliver to the secondary market a mortgage-backed security. The mandatory sale commitment is fulfilled with loans closed by us through pairing off the commitment by purchasing loans through the secondary
market. In some circumstances, we seek best execution by pairing off the commitment to sell closed loans and fulfilling that commitment with loans we purchase through the secondary market. We cover mortgage loans held for sale either by a mandatory
sale of the loans or by the purchase of an option to deliver the loans to the secondary market.



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On January 1,
2001, we adopted Financial Accounting Standards Board (FASB) No. 133, Accounting For Certain Derivative Instruments And Hedging Activities, and FASB No. 138, Accounting For Certain Derivative Instruments And Certain Hedging
Activities-An Amendment of FASB No. 133 (collectively, FAS 133). Under FAS 133, all derivative financial instruments are to be recognized on a companys balance sheet at fair value. On the date we enter into a derivative
contract, we designate the derivative instrument as either (i) a hedge of the fair value of a recognized asset, liability or an unrecognized firm commitment (a fair value hedge), (ii) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge) or (iii) a free-standing derivative instrument. For a fair value hedge, changes in the fair value of the derivative
instrument and changes in the fair value of the hedged asset or liability attributable to the hedged risk are recorded in the net income of the current period. For a cash flow hedge, changes in the fair value of the derivative to the extent that it
is effective are recorded in other comprehensive income within the stockholders equity section of the balance sheet and subsequently reclassified as income in the same period that the hedged transaction impacts net income. For free-standing
derivative instruments, changes in the fair values are reported in the net income of the current period. We have three types of derivative financial instruments that meet the criteria of a derivative as outlined in FAS 133: (i) interest rate lock
commitments, (ii) mandatory sales commitments, and (iii) options to deliver mortgage-backed securities. All of these derivative financial instruments are considered to be free-standing derivative instruments.



We formally document the relationship between hedging
instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedging transactions.



The primary market risk facing us is interest rate risk related to our locked pipeline. The locked pipeline is comprised of interest rate
lock commitments issued on residential mortgage loans to be held for sale. In order to mitigate the risk that a change in interest rates will result in a decline in the value of our locked pipeline, we enter into hedging transactions. The locked
pipeline is hedged with mandatory sales commitments or options to deliver mortgage-backed securities that generally correspond with the composition of the locked pipeline. Due to the variability of closings in the locked pipeline, which is driven
primarily by interest rates, our hedging policies require that a percentage of the locked pipeline be hedged with these types of derivative instruments. We are generally not exposed to significant losses, nor will we realize significant gains,
related to our locked pipeline, due to changes in interest rates, net of gains or losses on associated hedge positions. However we are exposed to the risk that the actual closings in the locked pipeline may deviate from the estimated closings for a
given change in interest rates. Although interest rates are the primary determinant, the actual loan closings from the locked pipeline are influenced by many factors, including the composition of the locked pipeline and remaining commitment periods.
Our estimated closings are based on historical data of loan closings as influenced by recent developments. The locked pipeline is considered a portfolio of derivative instruments. The locked pipeline, and the associated free-standing derivative
instruments used to hedge the locked pipeline, are marked to fair value and recorded as a component of gain on sale of loans in the income statement.



Through March 31, 2002 the impact on net income, net of tax, was $29,864. The $29,864 FAS 133 effect on net income during the three month
period ended March 31, 2002 reflects the change in the fair value of our free standing derivatives of $48,168, net of the related tax effect of $18,304.



In hedging our mortgage pipeline, we must use a best estimation of the percentage of the pipeline that will not close, which we refer to
as the fallout. Fallout is caused by, among other things, the borrowers failures to qualify for the loan, construction delays, inadequate appraisal values and changes in interest rates, which are substantial enough for the borrower
to seek another financing source. An increasing interest rate environment provides greater motivation for the consumer to lock rates and close loans. Conversely, in a decreasing interest rate environment, the consumer has a tendency to delay locking
rates and closing loans in order to obtain the lowest rate. As a result, an increasing interest rate environment generally results in our fallout ratio to be less than in an average market. In a decreasing rate environment, our fallout ratio tends
to be greater than in an average market. If our fallout ratio is greater than anticipated, we will have more mandatory commitments to deliver loans than we have loans for which we have closed. In this circumstance, we must purchase the loans to meet
the mandatory commitment on the secondary market and therefore will have interest rate risk in these loans. If our fallout ratio is less than anticipated, we will have fewer mandatory commitments to deliver loans than we have loans for which we have
closed. In this circumstance, we must sell the loans on the secondary market without a mandatory commitment and therefore will have interest rate risk in these loans.



Our success in reducing our interest rate risk is directly related to our ability to monitor and estimate the
fallout. While we may use other hedging techniques other than mandatory and optional delivery, our mortgage divisions secondary marketing policy does not allow speculation. As of March 31, 2002, we had purchase commitment agreements in place,
terminating between April and June of 2002, with respect to an aggregate of approximately $294.5 million to hedge our locked pipeline and mortgage loans held for sale.



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We use
additional tools to monitor and manage interest rate sensitivity. One of our tools is the shock test. The shock test projects the effect of an interest rate increase and decrease for 100 and 200 basis points movements. The test projects the effect
on our rate sensitive assets and liabilities, mortgage pipeline, mortgage servicing rights and mortgage production.



We continually try to manage our interest rate sensitivity gap. Attempting to reduce the gap is a constant challenge in a changing
interest rate environment and one of the objectives of our asset/liability management strategy.



Effects of Inflation



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 our assets and liabilities, as a financial institution, are monetary in nature. As a result, interest rates generally have a more significant impact on our performance than the effects of general levels of inflation have. 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, and the Federal Reserve increased the interest rate
three times in 1999 for a total of 75 basis points in an attempt to control inflation. However, the Federal Reserve also has reduced interest rates on eleven occasions for a total of 475 basis points in 2001.



In addition, inflation results in an increased cost of goods
and services purchased, cost of salaries and benefits, occupancy expense and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect the liquidity
and earnings of our commercial banking and mortgage banking businesses, and our shareholders equity. With respect to our mortgage banking business, mortgage originations and refinancings tend to slow as interest rates increase, and increased
interest rates would likely reduce our earnings from such activities and the income from the sale of residential mortgage loans in the secondary market.



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PART IIOTHER INFORMATION



|Item |  | 1. Legal ProceedingsNot Applicable
|---- |  | -----------------------------------



|Item |  | 2. Changes in Securities and Use of ProceedsNone
|---- |  | -------------------------------------------------



|Item |  | 3. Defaults Upon Senior SecuritiesNot Applicable
|---- |  | -------------------------------------------------



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



The annual meeting of Shareholders of the Company was held on April 18, 2002 at which time the following matters were brought before and
voted upon by the shareholders:



| | 1) |  | The election of the following persons to the Board of Directors to serve for a term expiring on the date indicated below of the Annual Meeting of Shareholders:
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



|Name                  |  | Term expiring |  | For       |  | Withhold Authority
|--------------------- |  | ------------- |  | --------- |  | ------------------
|Charles Gehrmann      |  | 2005          |  | 1,054,677 |  | 0                 
|J. Donald Boggus, Jr. |  | 2005          |  | 1,054,677 |  | 0                 
|Janie Whitfield       |  | 2003          |  | 1,054,677 |  | 0                 



There
were no broker non-votes with respect to the election of directors.



|Item |  | 5. Other InformationNone
|---- |  | -------------------------



|Item |  | 6. Exhibits and Reports on Form 8-K
|---- |  | -----------------------------------



|(a) |   |  | Exhibits                   |  |                                                                                                                                                                                                      
|--- | - |  | -------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |   |  | 3.1                        |  | Articles of Incorporation of the Company (incorporated by reference from Exhibit 3.1 to the Companys
Registration Statement on Form S-4 dated January 27, 1992, File No. 33-45254 (the Form S-4)).
|   
|    |   |  | 3.2                        |  | Bylaws of the Company (incorporated by reference from Exhibit 3.2 to the Form S-4).                                                                                                                  
|   
|    |   |  | 10.4                       |  | Employment Agreement between the Bank and Mr. Robert C. KenKnight dated as of May 1, 1997 (Incorporated by reference
to Exhibit 10.4 to the December 31, 1997 Form 10K-SB).                          
|   
|    |   |  | 99.1                       |  | Section 1350 Certifications.                                                                                                                                                                         
|   
|(b  | ) |  | Reports on Form 8-K - None

|
|



|
|

|
|

|
|

|
|









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SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|      |  |                |  | CRESCENT BANKING COMPANY (Registrant)
|----- |  | -------------- |  | -------------------------------------
|     
|Date: |  | April 15, 2003 |  |                                      
|      |  |                |  |                                      
|     
|Date: |  | April 15, 2003 |  |                                      
|      |  |                |  |                                      



CERTIFICATIONS



I, J. Donald Boggus, Jr.,
certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q/A of Crescent Banking Company;
|-- |  | ---------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly 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 quarterly report; and
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                    
|--------------------
|Date: April 15, 2003
|                    



I, Leland W. Brantley,
Jr., certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q/A of Crescent Banking Company;
|-- |  | ---------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly 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 quarterly report; and
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                    
|--------------------
|Date: April 15, 2003
|                    



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EXHIBIT
INDEX



|Exhibit Number |  | Description                 
|-------------- |  | ----------------------------
|              
|99.1           |  | Section 1350 Certifications.