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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 September 30, 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, Georgia         |  | 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:



|Class of Common Stock                   |  | Number of Shares Outstanding                                                                                                               
|--------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|Common Stock, par value $1.00 per share |  | As of November 14, 2002, there were 2,430,601 shares outstanding, including 6,668 shares held by Crescent Banking
Company as treasury stock

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##### Table of Contents



CRESCENT BANKING COMPANY

INDEX



|         |  |                       |  | Page No.                                                                             
|-------- |  | --------------------- |  | -------------------------------------------------------------------------------------
|        
|Part 1.  |  | Financial Information |  |                                                                                      
|        
|         |  | Item 1.               |  | Consolidated Financial Statements                                                    
|        
|         |  |                       |  | Consolidated Balance Sheets                                                          
|        
|         |  |                       |  | Consolidated Statements of Operations and Comprehensive Income (Loss)                
|        
|         |  |                       |  | Consolidated Statements of Cash Flows                                                
|        
|         |  |                       |  | Notes to Consolidated Financial Statements                                           
|        
|         |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
|        
|         |  | Item 3.               |  | Quantitative and Qualitative Disclosures about Market Risk                           
|        
|         |  | Item 4.               |  | Controls and Procedures                                                              
|        
|Part II. |  | Other Information     |  | 26                                                                                   
|        
|         |  | Item 1.               |  | Legal Proceedings                                                                    
|        
|         |  | Item 2.               |  | Changes in Securities                                                                
|        
|         |  | Item 3.               |  | Defaults Upon Senior Securities                                                      
|        
|         |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                  
|        
|         |  | Item 5.               |  | Other Information                                                                    
|        
|         |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                     



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##### Table of Contents

PART IFINANCIAL INFORMATION



CRESCENT BANKING COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Restated)



|                                                                                                          |  | September 30, 2002 |             |   | December 31, 2001 |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ----------------- | -
|Assets                                                                                                    |  |                    |             |   |                   |  
|Cash and due from banks                                                                                   |  | $                  | 13,590,344  |   |                   | $
|Interest bearing deposits in other banks                                                                  |  |                    | 9,549,693   |   |                   |  
|Federal fund sold                                                                                         |  |                    | 6,365,000   |   |                   |  
|Securities available-for-sale                                                                             |  |                    | 9,653,093   |   |                   |  
|Securities held-to-maturity, at cost (fair value of $11,508,132 and $10,351,765,
respectively)            |  |                    | 11,080,786  |   |                   |  
|Restricted equity securities                                                                              |  |                    | 2,220,975   |   |                   |  
|Mortgage loans held for sale                                                                              |  |                    | 203,826,283 |   |                   |  
|Loans                                                                                                     |  |                    | 169,380,974 |   |                   |  
|Less allowance for loan losses                                                                            |  |                    | (2,205,908  | ) |                   |  
|                                                                                                          |  |                    |             |   |                   |  
|Loans, net                                                                                                |  |                    | 167,175,066 |   |                   |  
|Premises and equipment, net                                                                               |  |                    | 7,008,571   |   |                   |  
|Other real estate owned                                                                                   |  |                    | 1,051,033   |   |                   |  
|Mortgage servicing rights                                                                                 |  |                    | 5,756,310   |   |                   |  
|Cash surrender value of life insurance                                                                    |  |                    | 5,056,556   |   |                   |  
|Premium on deposits purchased                                                                             |  |                    | 500,360     |   |                   |  
|Derivative assets                                                                                         |  |                    |            |   |                   |  
|Accounts receivable-brokers and escrow agents                                                             |  |                    | 11,516,683  |   |                   |  
|Other assets                                                                                              |  |                    | 9,064,993   |   |                   |  
|                                                                                                          |  |                    |             |   |                   |  
|Total Assets                                                                                              |  |                    | 463,415,746 |   |                   | $
|                                                                                                          |  |                    |             |   |                   |  
|Liabilities                                                                                               |  |                    |             |   |                   |  
|Deposits                                                                                                  |  |                    |             |   |                   |  
|Noninterest-bearing                                                                                       |  | $                  | 26,017,030  |   |                   | $
|Interest-bearing                                                                                          |  |                    | 223,242,855 |   |                   |  
|                                                                                                          |  |                    |             |   |                   |  
|Total deposits                                                                                            |  |                    | 249,259,885 |   |                   |  
|Drafts payable                                                                                            |  |                    | 4,421,573   |   |                   |  
|Accrued interest and other liabilities                                                                    |  |                    | 7,894,739   |   |                   |  
|Derivative liability                                                                                      |  |                    | 460,537     |   |                   |  
|Other borrowings                                                                                          |  |                    | 170,957,040 |   |                   |  
|                                                                                                          |  |                    |             |   |                   |  
|Total liabilities                                                                                         |  |                    | 432,993,774 |   |                   |  
|Shareholders equity                                                                                      |  |                    |             |   |                   |  
|Common stock, par value $1.00; 10,000,000 shares authorized; 2,429,038 and 1,847,929
issued, respectively |  |                    | 2,430,601   |   |                   |  
|Surplus                                                                                                   |  |                    | 16,230,104  |   |                   |  
|Retained earnings                                                                                         |  |                    | 11,559,430  |   |                   |  
|Less cost of 6,668 shares acquired for the treasury                                                       |  |                    | (36,091     | ) |                   |  
|Accumulated other comprehensive loss                                                                      |  |                    | 237,928     |   |                   |  
|                                                                                                          |  |                    |             |   |                   |  
|Total stockholders equity                                                                                |  |                    | 30,421,972  |   |                   |  
|                                                                                                          |  |                    |             |   |                   |  
|Total liabilities and stockholders equity                                                                |  | $                  | 463,415,746 |   |                   | $
|                                                                                                          |  |                    |             |   |                   |  



See
notes to Consolidated Financial Statements.



1



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##### Table of Contents

CRESCENT BANKING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME



|                                                                                               |  | For the three months ended September 30, |   |  | For the nine months ended September 30, |  
|---------------------------------------------------------------------------------------------- |  | ---------------------------------------- | - |  | --------------------------------------- | -
|                                                                                               |  | 2002                                     |   |  | 2001                                    |  
|                                                                                               |  |                                          |   |  | (Restated)                              |  
|Interest income                                                                                |  |                                          |   |  |                                         |  
|Interest and fees on loans                                                                     |  | 3,067,388                                |   |  | 2,288,247                               |  
|Interest and fees on mortgage loans held for sale                                              |  | 2,897,477                                |   |  | 2,440,097                               |  
|Interest on securities:                                                                        |  |                                          |   |  |                                         |  
|Taxable                                                                                        |  | 333,825                                  |   |  | 324,068                                 |  
|Nontaxable                                                                                     |  | 3,838                                    |   |  | 3,838                                   |  
|Interest on deposits in other banks                                                            |  | 27,037                                   |   |  | 72,299                                  |  
|Interest on Federal funds sold                                                                 |  | 28,489                                   |   |  | 84,785                                  |  
|                                                                                               |  |                                          |   |  |                                         |  
|                                                                                               |  | 6,358,054                                |   |  | 5,213,334                               |  
|Interest on deposits                                                                           |  | 1,939,670                                |   |  | 2,354,416                               |  
|interest on other borrowings                                                                   |  | 1,159,408                                |   |  | 1,099,728                               |  
|                                                                                               |  |                                          |   |  |                                         |  
|                                                                                               |  | 3,099,078                                |   |  | 3,454,144                               |  
|Net interest income                                                                            |  | 3,258,976                                |   |  | 1,759,190                               |  
|Provision for loan losses                                                                      |  | 305,000                                  |   |  | 105,000                                 |  
|                                                                                               |  |                                          |   |  |                                         |  
|Net interest income after provision for loan losses                                            |  | 2,953,976                                |   |  | 1,654,190                               |  
|Other income                                                                                   |  |                                          |   |  |                                         |  
|Service charges on deposit accounts                                                            |  | 221,840                                  |   |  | 223,542                                 |  
|Mortgage servicing fee income                                                                  |  | 600,677                                  |   |  | 218,535                                 |  
|Gestation fee income                                                                           |  | 237,811                                  |   |  | 35,078                                  |  
|Gains on sale of mortgage servicing rights                                                     |  | 4,160,224                                |   |  | 4,815,146                               |  
|Gains on sale of mortgage loans held for sale                                                  |  | 284,701                                  |   |  | (443,129                                | )
|Gains on sale of SBA loans held for sale                                                       |  | 112,252                                  |   |  |                                        |  
|Other                                                                                          |  | 180,915                                  |   |  | 386,277                                 |  
|                                                                                               |  |                                          |   |  |                                         |  
|                                                                                               |  | 5,798,420                                |   |  | 5,235,449                               |  
|Other expenses                                                                                 |  |                                          |   |  |                                         |  
|Salaries and employee benefits                                                                 |  | 4,450,941                                |   |  | 4,302,134                               |  
|Capitalized loan origination costs                                                             |  | (2,816,840                               | ) |  | (2,137,007                              | )
|Net occupancy and equipment expense                                                            |  | 369,252                                  |   |  | 388,727                                 |  
|Supplies, postage, and telephone                                                               |  | 508,827                                  |   |  | 386,411                                 |  
|Advertising                                                                                    |  | 203,244                                  |   |  | 119,341                                 |  
|Insurance expense                                                                              |  | 66,787                                   |   |  | 64,627                                  |  
|Depreciation and amortization                                                                  |  | 569,522                                  |   |  | 339,107                                 |  
|Legal, professional, outside services                                                          |  | 123,284                                  |   |  | 215,446                                 |  
|Director fees                                                                                  |  | 79,125                                   |   |  | 44,550                                  |  
|Mortgage subservicing expense                                                                  |  | 306,179                                  |   |  | 147,456                                 |  
|Other                                                                                          |  | 999,107                                  |   |  | 1,038,311                               |  
|                                                                                               |  |                                          |   |  |                                         |  
|                                                                                               |  | 4,859,428                                |   |  | 4,909,103                               |  
|Income before income taxes and cumulative effect of a change in accounting
principle           |  | 3,892,968                                |   |  | 1,980,536                               |  
|Applicable income taxes                                                                        |  | 1,220,431                                |   |  | 784,344                                 |  
|                                                                                               |  |                                          |   |  |                                         |  
|Income before cumulative effect of a change in accounting principle                            |  | 2,672,537                                |   |  | 1,196,192                               |  
|                                                                                               |  |                                          |   |  |                                         |  
|Cumulative effect of a change in accounting principle                                          |  | 0                                        |   |  | 0                                       |  
|                                                                                               |  |                                          |   |  |                                         |  
|Net income                                                                                     |  | 2,672,537                                |   |  | 1,196,192                               |  
|Other comprehensive income (loss), net of tax                                                  |  |                                          |   |  |                                         |  
|Unrealized gains (losses) on securities available for sale arising during
period               |  | (376,430                                 | ) |  | (45,585                                 | )
|                                                                                               |  |                                          |   |  |                                         |  
|Comprehensive income                                                                           |  | 2,296,107                                |   |  | 1,150,607                               |  
|                                                                                               |  |                                          |   |  |                                         |  
|Basis earnings per common share before cumulative effect of a change in accounting
principle   |  | 1.10                                     |   |  | 0.65                                    |  
|Cumulative effect of a change in accounting principle                                          |  | 0.00                                     |   |  | 0.00                                    |  
|                                                                                               |  |                                          |   |  |                                         |  
|Basic earnings per common share                                                                |  | 1.10                                     |   |  | 0.65                                    |  
|                                                                                               |  |                                          |   |  |                                         |  
|Diluted earnings per common share before cumulative effect of a change in accounting
principle |  | 1.05                                     |   |  | 0.63                                    |  
|Cumulative effect of a change in accounting principle                                          |  | 0.00                                     |   |  | 0.00                                    |  
|                                                                                               |  |                                          |   |  |                                         |  
|Diluted earnings per common share                                                              |  | 1.05                                     |   |  | 0.63                                    |  
|                                                                                               |  |                                          |   |  |                                         |  
|Cash dividends per share of common stock                                                       |  | 0.0775                                   |   |  | 0.0775                                  |  





See Notes to Consolidated Financial Statements



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CRESCENT BANKING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW



|                                                                                            |  | For the nine months ended September 30, |  
|------------------------------------------------------------------------------------------- |  | --------------------------------------- | -
|                                                                                            |  | 2002                                    |  
|                                                                                            |  |                                         |  
|Operating Activities                                                                        |  |                                         |  
|Net Income                                                                                  |  | 6,864,880                               |  
|Adjustments to reconcile net income to net cash provided by (used in) operating
activities: |  |                                         |  
|Accretion of discount on securities                                                         |  | (1,243,287                              | )
|Amortization of deposit intangible                                                          |  | 55,596                                  |  
|Amortization of mortgage servicing rights                                                   |  | 770,300                                 |  
|Provision for loan loss                                                                     |  | 740,000                                 |  
|Depreciation                                                                                |  | 674,446                                 |  
|Gains on sales of mortgage servicing rights                                                 |  | (12,963,450                             | )
|(Increase) decrease in mortgage loans held for sale                                         |  | 96,959,559                              |  
|Acquisition of mortgage servicing rights                                                    |  | (16,344,104                             | )
|Proceeds from sales of mortgage servicing rights                                            |  | 25,879,523                              |  
|Restricted Stock awards                                                                     |  | 98,424                                  |  
|Income on life insurance policies                                                           |  | (183,084                                | )
|Increase in interest receivable                                                             |  | (382,231                                | )
|Increase in accounts receivable                                                             |  | (5,491,788                              | )
|Increase (decrease) in drafts payable                                                       |  | (5,003,149                              | )
|Increase (decrease) in interest payable                                                     |  | (62,493                                 | )
|Decrease in other assets and liabilities, net                                               |  | 125,256                                 |  
|                                                                                            |  |                                         |  
|Net cash provided by (used in) operating activities                                         |  | 90,494,398                              |  
|Investing Activities                                                                        |  |                                         |  
|Net increase in interest-bearing deposits in other banks                                    |  | (9,314,033                              | )
|Acquisition of securities held-to-maturity                                                  |  | (641,248                                | )
|Proceeds from maturities of securities available-for-sale                                   |  | 823,403                                 |  
|Proceeds from maturities of securities held-to-maturity                                     |  |                                        |  
|Acquisition of restricted equity securities/available for sale                              |  | (300,000                                | )
|Purchase of life insurance policies                                                         |  | (1,239,000                              | )
|Increase in Federal funds sold, net                                                         |  | (6,186,000                              | )
|Net increase in loans                                                                       |  | (46,618,242                             | )
|Purchase of premises and equipment                                                          |  | (1,361,366                              | )
|                                                                                            |  |                                         |  
|Net cash used in investing activities                                                       |  | (64,836,486                             | )
|Financing Activities                                                                        |  |                                         |  
|Net increase in deposits                                                                    |  | 27,295,086                              |  
|Net increase (decrease) in other borrowings                                                 |  | (58,124,165                             | )
|Issue of common stockdividend reinvestment plan                                            |  | 149,208                                 |  
|Proceeds from exercise of stock options                                                     |  | 104,220                                 |  
|Proceeds from the issuance of common stock                                                  |  | 7,046,211                               |  
|Dividends paid                                                                              |  | (475,113                                | )
|                                                                                            |  |                                         |  
|Net cash provided by (used in) financing activities                                         |  | (24,004,553                             | )
|Net increase (decrease) in cash and cash equivalents                                        |  | 1,653,359                               |  
|Cash and cash equivalents at beginning of year                                              |  | 11,936,985                              |  
|                                                                                            |  |                                         |  
|Cash and cash equivalents at end of year                                                    |  | 13,590,344                              |  
|                                                                                            |  |                                         |  
|Supplemental Disclosure of Cash Flow Information Cash paid during period for
interest       |  | 8,611,506                               |  



See
Notes to Consolidated Financial Statements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



September 30, 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 nine months ended September 30, 2002 are not necessarily indicative of the results of operations for
the full year or any interim periods. The shareholders equity and mortgage loans held for sale at each date shown has been reduced, net of estimated tax effects to reflect adjustments or gains recorded in sales of mortgage servicing rights of
approximately $3.9 million, and an overstatement prior to 2001 of mortgage loans held for sale of approximately $6.7 million, which net of estimated tax effects reduced shareholders equity by approximately $5.2 million.



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, Crescent Banking Company (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.



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For the nine months ended
September 30, 2002 the impact on net income, net of tax was $(271,368), compared to the nine months ended September 30, 2001 of $(160,281). The $(271,368) FAS 133 effect on net income during the nine-month period ended September 30, 2002 reflects
the change in the fair value of the Companys freestanding derivatives of $(437,691), net of the related tax effect of $166,323.



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 September 30, 2002 and December 31, 2001 is as follows:



|                             |  | For the Quarter Ended September 30, 2002 |            
|---------------------------- |  | ---------------------------------------- | -----------
|                             |  | As Previously Reported                   |            
|Mortgage loans held for sale |  | $                                        | 205,492,372
|Other Assets                 |  | $                                        | 5,488,678  
|Other Liabilities            |  | $                                        | 4,686,671  
|Retained Earnings            |  | $                                        | 31,719,814 



|                             |  | For the Year Ended December 31, 2001 |            
|---------------------------- |  | ------------------------------------ | -----------
|                             |  | As Previously Reported               |            
|Mortgage loans held for sale |  | $                                    | 302,451,931
|Other Assets                 |  | $                                    | 4,488,073  
|Other Liabilities            |  | $                                    | 4,440,031  
|Retained Earnings            |  | $                                    | 17,608,865 



The effect of this
restatement had no effect on the Companys income before extraordinary items, net income or earnings per common share for the three and nine month periods ending September 30, 2002. The restatement had the effect of increasing net income and
related earnings per share amounts for the three and nine month period ending September 30, 2001 as follows:



|                                                 |  | Three Months Ended September 30, 2001 |         | Nine Months Ended September 30, 2001
|------------------------------------------------ |  | ------------------------------------- | ------- | ------------------------------------
|                                                 |  |                                      
|Income before extraordinary items and net income |  | $                                     | 146,553 |                                     
|Basic earnings per share                         |  |                                       | 0.08    |                                     
|Diluted earnings per share                       |  |                                       | 0.07    |                                     



NOTE 4SERVICING
PORTFOLIO



The Company services residential loans for
various investors under contract for a fee. As of September 30, 2002, the Company had purchased loans for which it provides servicing with principal balances totaling $896.7 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):



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|                                            |  | Nine Months Ended September 30, 2002 |           |                                      
|------------------------------------------- |  | ------------------------------------ | --------- | -------------------------------------
|                                            |  | Net Income (Numerator)               |           | Weighted-Average Shares (Denominator)
|Basic earnings per share                    |  | $                                    | 6,864,880 |                                      
|Effect of dilutive securities stock options |  |                                      |           |                                      
|Diluted earnings per share                  |  | $                                    | 6,864,880 |                                      



|                                                                                        |  | Nine Months Ended September 30, 2001 |           |   |                                      
|--------------------------------------------------------------------------------------- |  | ------------------------------------ | --------- | - | -------------------------------------
|                                                                                        |  | Net Income (Numerator)               |           |   | Weighted-Average Shares (Denominator)
|Basic earnings per share before cumulative effect of a change in accounting
principle   |  | $                                    | 4,734,629 |   |                                      
|Cumulative effect of a change in accounting principle                                   |  | $                                    | (69,770   | ) |                                      
|Basic earnings per share                                                                |  | $                                    | 4,664,859 |   |                                      
|Effect of dilutive securities stock options                                             |  |                                      |           |   |                                      
|Diluted earnings per share before cumulative effect of a change in accounting
principle |  | $                                    | 4,734,629 |   |                                      
|Cumulative effect of a change in accounting principle                                   |  | $                                    | (69,770   | ) |                                      
|Diluted earnings per share                                                              |  | $                                    | 4,664,859 |   |                                      



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|                                            |  | Three Months Ended September 30, 2002 |           |                                      
|------------------------------------------- |  | ------------------------------------- | --------- | -------------------------------------
|                                            |  | Net Income (Numerator)                |           | Weighted-Average Shares (Denominator)
|Basic EPS                                   |  | $                                     | 2,672,537 |                                      
|Effect of dilutive securities stock options |  |                                       |           |                                      
|Diluted EPS                                 |  | $                                     | 2,672,537 |                                      



|                                                                                        |  | Three Months Ended September 30, 2001 |           |                                      
|--------------------------------------------------------------------------------------- |  | ------------------------------------- | --------- | -------------------------------------
|                                                                                        |  | Net Income (Numerator)                |           | Weighted-Average Shares (Denominator)
|Basic earnings per share before cumulative effect of a change in accounting
principle   |  | $                                     | 1,196,192 |                                      
|Cumulative effect of a change in accounting principle                                   |  | $                                     |          |                                      
|Basic earnings per share                                                                |  | $                                     | 1,196,192 |                                      
|Effect of dilutive securities stock options                                             |  |                                       |           |                                      
|Diluted earnings per share before cumulative effect of a change in accounting
principle |  | $                                     | 1,196,192 |                                      
|Cumulative effect of a change in accounting principle                                   |  | $                                     |          |                                      
|Diluted earnings per share                                                              |  | $                                     | 1,196,192 |                                      



NOTE
6SUPPLEMENTAL SEGMENT INFORMATION



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 a division of 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 Nine Months Ended September 30, 2002
|------------------------------------- |  | --------------------------------------------
|                                      |  | Commercial Banking                          
|Interest income                       |  | $                                           
|Interest expense                      |  | $                                           
|                                      |  |                                             
|Net interest income                   |  | $                                           
|Provision for loan loss               |  | $                                           
|Other revenue from external customers |  | $                                           
|Other expenses                        |  | $                                           
|Segment pre-tax earnings/(loss)       |  | $                                           
|Segment assets                        |  | $                                           



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|                                      |  | For the Nine Months Ended September 30, 2001
|------------------------------------- |  | --------------------------------------------
|                                      |  | Commercial Banking                          
|Interest income                       |  | $                                           
|Interest expense                      |  | $                                           
|                                      |  |                                             
|Net interest income                   |  | $                                           
|Provision for loan loss               |  | $                                           
|Other revenue from external customers |  | $                                           
|Other expenses                        |  | $                                           
|Segment pre-tax earnings/(loss)       |  | $                                           
|Segment assets                        |  | $                                           



|                                      |  | For the Three Months Ended September 30, 2002
|------------------------------------- |  | ---------------------------------------------
|                                      |  | Commercial Banking                           
|Interest income                       |  | $                                            
|Interest expense                      |  | $                                            
|                                      |  |                                              
|Net interest income                   |  | $                                            
|Provision for loan loss               |  | $                                            
|Other revenue from external customers |  | $                                            
|Other expenses                        |  | $                                            
|Segment pre-tax earnings/(loss)       |  | $                                            



|                                      |  | For the Three Months Ended September 30, 2001
|------------------------------------- |  | ---------------------------------------------
|                                      |  | Commercial Banking                           
|Interest income                       |  | $                                            
|Interest expense                      |  | $                                            
|                                      |  |                                              
|Net interest income                   |  | $                                            
|Provision for loan loss               |  | $                                            
|Other revenue from external customers |  | $                                            
|Other expenses                        |  | $                                            
|Segment pre-tax earnings/(loss)       |  | $                                            



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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 the maturities 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



Interest Income



We had total interest income of $16.7 million
for the nine months ended September 30, 2002, compared to $15.0 million for the nine months ended September 30, 2001. This 11% increase in interest income is primarily attributable to an increase in our commercial bank loan portfolio of $45.8
million, which was partially offset by a lower yield on interest earning assets.



We had total interest income of $6.4 million for the quarter ended September 30, 2002, compared to $5.2 million for the quarter ended September 30, 2001. This 23% increase in interest income is
primarily attributable to a higher volume of commercial bank loans, which was offset, and was partially by a lower yield on interest earning assets resulting from the declining interest rate environment during 2001. For the three months ending
September 30, 2002, interest-earning assets had an average yield of 5.62%, compared to 6.62% for the three months ending September 30, 2001.



Interest Expense



Our total interest expense for the nine months ended September 30, 2002 amounted to $8.5 million, compared to $10.5 million for the nine
months ended September 30, 2001. This 19% decrease resulted from the declining rate environment that occurred during 2001, and was partially offset by the growth of our deposits. In the first nine months of 2002 and 2001, interest



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expense accounted for 36% and
44% of total expenses, respectively. The decrease in the percentage of interest expense to total expense resulted from the of the decline in interest expense during 2002.



Our total interest expense for the quarter ended September 30, 2002 amounted to $3.1 million, compared to
$3.5 million for the quarter ended September 30, 2001. This 11% decrease primarily resulted from the declining rate environment that occurred during 2001, and was partially offset by the growth of our deposits. In the third quarters of each of 2002
and 2001, interest expense accounted for 38% and 41% of total expenses, respectively. The decrease in the percentage of interest expense to total expense resulted from the decline in interest expense during 2002.



Net Interest Income



Our net interest income for the first nine months of 2002 was
$8.1 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 nine months of 2002
was 2.74%. Interest spread, which represents the difference between our average yields on interest-earning assets and our average rates paid on interest-bearing liabilities, was 2.72%. Net interest income, net interest margin and interest spread for
the first nine months of 2001 were $4.5 million, 2.03%, and 1.87%, respectively. The increase in net interest income resulted primarily from the growth of our commercial bank loan portfolio. The improvement in net interest margin is indicative of
our balance sheet being asset sensitive in the short term during 2001 when rates were decreasing. See Item 3) Quantitative and Qualitative Disclosures About Our Market Risk. Our net interest income for the quarter ended September 30,
2002 was $3.3 million, compared to $1.8 million for the quarter ended September 30, 2001. The increase in net interest income resulted primarily from the growth of earning assets.



Loan Loss Provisions



We made a provision to the allowance for loan losses of $740,000 in the first nine months of 2002. During the
first nine months of 2002, Crescent Bank charged-off, net of recoveries, $130,379 of loans to the allowance for loan losses. In the first nine months of 2001, we made provisions to the allowance for loan losses in the amount of $335,000 and Crescent
Bank charged-off, net of recoveries, $160,465 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 nine month period ended September 30, 2002 and the provisions for the nine month period ended September 30, 2001 because the growth in our commercial banking loan portfolio in the first nine months of 2002 of $45.8 million was stronger than our
commercial banking loan growth in the first nine months of 2001 of $18.3 million. As a result of the increase in commercial banking loan growth, we adjusted our allowance for loan losses to reflect for our historical experience with various
borrowers.



The allowance for loan losses as a
percentage of total non-mortgage loans was 1.30% at September 30, 2002, 1.29% at December 31, 2001 and 1.37% at September 30, 2001. Net charge-offs as a percentage of average commercial outstanding loans was .09% at September 30, 2002, 0.27% for the
twelve months ending December 31, 2001 and 0.10% at September 30, 2001. While net charge-offs declined from December 31, 2001 to September 30, 2002, the allowance was increased during 2002 to reflect potential problem loans and loans 90 days or more
past due. Potential problem loans totaled $1.9 million at September 30, 2002 and $1.5 million at September 30, 2001. Loans 90 days or more past due totaled $1.5 million at September 30, 2002, compared to $370,708 at September 30, 2001. Additionally,
non-performing commercial banking loans increased from $30,801 at September 30, 2001 to $1.1 million at September 30, 2002. The increase in 2002 in commercial banking loans past due 90 days or more and non-performing loans relates to two credit
relationships totaling $959,274 and $1,069,772, respectively. The Bank presently is not anticipating a loss with these relationships.



Other Income



Our other income was $17.9 million in the first nine months of 2002, compared to $16.8 million in the first nine months of 2001. The
increase in other income was primarily related to the increase of mortgage servicing fee income, gain on the sale of mortgage loans held for sale and gestation fees we realized in 2002, as described below under Results of
OperationsResults of Our Mortgage Banking Business.



Our other income was $5.8 million in the third quarter of 2002, compared to $5.2 million in the third quarter of 2001. The increase in other income was related to the increase of gains on the sale of mortgage loans held for sale we
realized in 2002, as described below under Results of OperationsResults of Our Mortgage Banking Business.



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Other
Operating Expenses



Other operating expenses
increased to $14.6 million in the first nine months of 2002 from $13.2 million in the first nine 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 and under Results of OperationsResults of Our Commercial Banking Business.



Other operating expenses were $4.9 million in the third quarter of 2002.



Net Income



We had net income of $6.9 million for the nine months ended
September 30, 2002, compared to net income of $4.7 million for the nine months ending September 30, 2001. The increase in net income primarily resulted from the increase in mortgage fee income as well as the growth of our commercial banking
operations and corresponding improvement in net interest income. See below under Results of OperationsResults of Our Mortgage Banking Business and under Results of OperationsResults of Our Commercial Banking
Business. Income tax as a percentage of pretax net income was 36% and 38% for the first nine months of 2002 and 2001, respectively.



We had net income of $2.7 million for the quarter ending September 30, 2002, compared to net income of $1.2 million for the quarter ending
September 30, 2001. The increases in net income primarily resulted from the increase in mortgage production and resulting gains on the sale of mortgage servicing rights and was also partially due to the growth of our commercial banking operation.
See below under Results of OperationsResults of Our Mortgage Banking Business and under Results of OperationsResults of Our Commercial Banking Business. Income tax as a percentage of pretax net income was 31% and
40% for the third quarter of 2002 and 2001, respectively.



Results of Our Commercial Banking Business



Interest Income



We had interest income of $9.1 million for the nine months ended September 30, 2002, compared to $8.1 million for the nine months ended September 30, 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 on such loans.



We had interest income of $3.5 million for the quarter ended September 30, 2002, compared to $2.8 million for the quarter ended September
30, 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 nine months ended September 30, 2002 amounted to $2.9 million, compared to $4.3 million for the nine months ended September 30, 2001. This decrease was the result of lower interest rates, partially offset by a 12% increase in our
deposits during the first nine months of 2002. In the first nine months of 2002 and 2001, interest expense accounted for 36% and 54% of our total commercial banking business expenses, respectively. The decline of interest expense as a percentage of
total business expenses was the result of the decline in interest expense during 2002.



Our interest expense related to the commercial banking business for the quarter ended September 30, 2002 amounted to $875,513, compared to $1.4 million for the quarter ended September 30, 2001. This
decrease was result of lower interest rates, partially offset by the increase in our deposits during the third quarter 2002. In the third quarter of 2002 and 2001, interest expense accounted for 28% and 52% of our total commercial banking business
expenses, respectively. The decline of interest expense as a percentage of total business expenses was the result of the decline in interest expense during 2002.



Net Interest Income



Our net interest income for the commercial banking segment for the first nine months of 2002 was $6.2
million. The related net interest margin during the first nine months of 2002 was 2.88%, while interest spread was 2.55%. Net interest income, net interest margin and interest spread for commercial banking for the first nine months of 2001 were $3.8
million, 2.55%, and





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2.23%, respectively. The increase in net interest income is related to the decline in interest expense as
well as the higher volume of commercial banking loans. The improvement in net interest margin is indicative of our balance sheet being asset sensitive in the short term during 2001 when rates were decreasing. Our net interest income for the
commercial banking segment for the third quarter of 2002 was $2.6 million, compared to the third quarter of 2001 of $1.4 million.



Other Income



Our other income related to the commercial banking segment was $1.2 million in the first nine months of 2002 compared to $799,267 in the
first nine months of 2001. The increase in other income for the nine-month period ended September 30, 2002 was primarily due to an increase in fee income from deposit accounts as well as gains on the sale of SBA loans.



Our other income related to the commercial banking segment was
$493,585 in the third quarter of 2002, compared to $272,501 in the third quarter of 2001. The increase in other income for the third quarter 2002 was primarily due to an increase in fee income from deposit accounts as well as gains on the sale of
SBA loans.



Other Operating Expenses



Other operating expenses related to our
commercial banking business increased to $4.5 million in the first nine months of 2002 from $3.3 million in the first nine 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.



Other operating expenses related to our commercial banking business increased to $1.9 million in the third quarter of 2002 from $1.2 million in the third quarter 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 September 30, 2002 and September 30, 2001, the amount of commercial banking costs netted against commercial banking loan origination fees
totaled $1.3 million in each period.



Pretax
Net Income



Our commercial banking business
had pre-tax net income of $2.2 million for the nine month period ended September 30, 2002, compared to pre-tax income of $938,545 for the nine month period ended September 30, 2001. Pre-tax income has been favorably affected by the higher volume of
commercial banking loans as well as the improvement in the net interest income.



Our commercial banking business had pre-tax net income of $863,346 for the three month period ended September 30, 2002, compared to pre-tax income of $351,790 for the three month period ended September
30, 2001. Pre-tax income has been favorably affected by the higher volume of commercial banking loans as well as the improvement in the net interest income.



Results of Our Mortgage Banking Business



We experienced significant changes in mortgage loan production during 2001 and the first nine months of 2002
that were directly related to significant 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 $2.7 billion of mortgage
loans during the first nine months of 2002, compared to $2.3 billion during the first nine months of 2001.



Interest Income



We had mortgage banking interest income of $7.6 million for the first nine months of September 30, 2002, compared to $6.9 million for the
first nine months of September 30, 2001. We had mortgage banking interest income of $2.9 million for the three month period ended September 30, 2002, compared to $2.4 million for the three month period ended September 30, 2001. This 21% increase in
interest income is attributable to the higher volume of mortgage production in the third quarter of 2002, partially offset by the lower interest rate environment in 2002. We had mortgage production of $1.2 billion for the third quarter of 2002,
compared to $731.1 million in the third quarter of 2001.



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Interest
Expense



We had mortgage banking interest
expense of $5.6 million for the nine month period ended September 30, 2002 and $6.2 million for the nine month period ended September 30, 2001. The decrease resulted from lower interest rates, partially offset by a higher volume of mortgage loans.
In the first nine months of 2002 and 2001, mortgage banking interest expense accounted for 36% and 39% of total mortgage expenses, respectively. The decrease in the percentage of interest expense resulted from the lower interest rates and our growth
of other operating expenses, principally incurred to support our mortgage banking growth.



We had mortgage banking interest expense of $2.2 million for the three month period ended September 30, 2002 and $2.1 million for the three month period ended September 30, 2001. The increase resulted
from a higher volume of mortgage production. In the third quarter of 2002 and 2001, mortgage banking interest expense accounted for 44% and 36% of total mortgage expenses, respectively. The increase in the percentage of interest expense resulted
from the third quarter decrease of other operating expenses.



Net Interest Income



Our
net interest income from our mortgage banking operations for the first nine months of 2002 was $1.9 million. The net interest margin during the first three months of 2002 was 1.38%. The interest spread for the same period was 1.12%. Comparatively,
interest income, net interest margin and interest spread from mortgage banking for the first nine months of 2001 were $690,797, 1.32%, and 1.15%, respectively. The improvement in net interest income, the net interest margin and interest spread was a
result of the improved spread between the long-term interest rates received on mortgage loans held for sale and the short-term interest rates relative to our funding cost in the first nine months of 2002. Our net interest income from our mortgage
banking operations for the third quarter of 2002 was $673,912, compared to $375,447 for the third quarter of 2001.



Other Income



Other income from our mortgage banking business was $16.7 million in the first nine months of 2002 compared to $16.0 million in the first
nine months of 2001. The increase in other income was related to the increase of mortgage servicing fees and gestation fee income, and was partially offset by a decrease in the gains on the sale of mortgage servicing rights. During the first nine
months of 2002, we sold servicing rights with respect to $2.2 billion of mortgage loans for a gain of $13.0 million, or a spread on the sale of servicing of 0.58%. This compares to the first nine months of 2001 in which we sold servicing rights with
respect to $2.1 billion of mortgage loans for a gain of $14.5 million, or a spread on the sale of servicing of 0.69%. We held servicing rights with respect to loans with unpaid principal balances totaling $910.1 million at September 30, 2002,
compared to $434.2 million at September 30, 2001. We currently plan to sell a portion of the servicing rights retained during 2002, although there can be no assurance as to the volume our loan acquisition or that a premium will be recognized on the
sales.



Other income from our mortgage banking
business was $5.3 million in the third quarter of 2002, compared to $5.0 million in the third quarter of 2001. The increase in other income was related to the increase of mortgage servicing fees and gestation fee income.



Gestation 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 operating expenses increased to $9.7
million in the first nine months of 2002 from $9.5 million in the first nine months of 2001. This increase in other operating expenses was related to the increase in volume of our mortgage production. Other mortgage banking operating expenses
decreased to $2.8 million in the third quarter of 2002 from $3.6 million in the third quarter of 2001. This decrease in other operating expenses was related a reduction in contract labor in the third quarter of 2002.



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





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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 September 30, 2002, the amount of mortgage banking costs netted against mortgage banking loan origination fees totaled
$5.7 million, compared to $5.1 million at September 30, 2001.



Pretax Net Income



Our
mortgage banking segment had pre-tax net income of $8.9 million for the nine month period ended September 30, 2002, compared to a pre-tax income of $7.1 million for the nine month period ended September 30, 2001. The favorable increase in net income
was primarily the result of the improvement in the net interest income.



Our mortgage banking segment had pre-tax net income of $3.1 million for the three month period ended September 30, 2002, compared to a pre-tax income of $1.7 million for the three month period ended September 30, 2001. The
increase in net income was primarily the result of the improvement in the net interest income.



Financial Condition



General Discussion of Our Financial Condition



Total Assets



During the first nine months of 2002, our total assets decreased 4%, from $484.4 million as of December 31, 2001 to $463.4 million as of
September 30, 2002. This decrease in total assets in the first nine months of 2002 was primarily the result of a 32% decrease in mortgage loans held for sale, partially offset by an increase in commercial bank loans of 37%. Our decrease in total
assets in the first nine months of 2002 corresponded with a 25% decrease in other borrowings. At September 30, 2001, we had total assets of $317.5 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 September 30, 2002, interest-earning assets totaled $412.1 million and represented 89% of total assets. This represents a 8% 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 $97.0 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 September 30,
2001, our interest-earning assets totaled $273.8 million and represented 86% 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



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At September
30, 2002, our fixed assets, consisting of land, building and improvements, and furniture and equipment, totaled $7.0 million, compared to fixed assets of $6.3 million at December 31, 2001. At September 30, 2001, we had $6.3 million of fixed assets.
The Bank completed a new office in Cartersville, Georgia during the second quarter of 2002.



In 1999, Crescent Bank provided a supplemental retirement plan to its Banking officers funded with life insurance. In the first quarter of 2000, we added our directors to the supplemental retirement
plan. At September 30, 2002, the total cash value of the life insurance was $5.1 million.



At September 30, 2002, our accounts receivable-broker and escrow agents increased to $11.5 million from $6.0 million at December 31, 2001. This account receivable relates to our flow mortgage servicing
rights sales and, therefore, the increase in the accounts receivable is directly related to the increase from December 31, 2001 to September 30, 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 nine months of 2002, our
average commercial banking loans were $146.5 million. These loans constituted 40% of our average consolidated earning assets, and 35% of our average consolidated total assets. For the nine month period ended September 30, 2001, we had average
commercial banking loans of $101.0 million, or 32% of our average consolidated earning assets, and 29% 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 41% increase in average commercial banking loans experienced by Crescent Bank during the nine month period ending September 30, 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 risks 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 risks 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.



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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.



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 $2.2 million, or 1.30%
of total commercial banking loans, at September 30, 2002, $1.5 million, or 1.37% of total commercial banking loans, at September 30, 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 nine months of 2002 was primarily the result of the provision for loan loss of $740,000. The increase in the allowance for loan losses corresponds to the $45.7 million increase we experienced in commercial banking loans in the first
nine 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 September 30, 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 that we believe to be reasonable but that 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, as well as adverse trends in potential problem loans and non-accrual loans, additions to the allowances and charge-offs may become necessary.



Crescent Banks policy is to discontinue
the accrual of interest on loans that 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 September 30, 2002, Crescent Bank had
$1.5 million of commercial banking loans contractually past due more than 90 days, $1.1 million of commercial banking loans accounted for on a non-accrual basis, and no commercial banking loans considered to be troubled debt restructurings. One
borrower with a relationship of $959,274 attributed to the increase in non-accrual loans. As of September 30, 2001 and December 31, 2001, Crescent Bank had $307,708 and $509,526 of commercial banking loans contractually past due more than 90 days,
respectively. One borrower with a relationship of $1,069,772 attributed to the increase in loans past due 90 days or more loans as of September 30, 2002.



As of September 30, 2001, Crescent Bank had $30,801 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 September 30, 2002 amounted to $1.1 million, compared to $30,801 at September 30,



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2001. If we add real estate acquired by foreclosure and held for sale of $1.1 million to our
non-performing commercial banking loans, it results in total non-performing commercial assets of $2.1 million at September 30, 2002. This compares to total non-performing commercial assets of $417,154 at September 30, 2001 and $332,743 at December
31, 2001. Crescent Bank is currently holding the foreclosed properties for sale.



The table below presents 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.



|                                                                                                                                                                  |  | September 30, 2002 |           |   | September 30, 2001 |   |           | December 31, 2001 | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ------------------ | - | --------- | ----------------- | 
|Non-performing commercial banking loans (1)                                                                                                                       |  | $                  | 1,080,279 |   |                    | $ | 30,801    |                   | 
|Foreclosed properties related to commercial banking loans                                                                                                         |  |                    | 1,051,033 |   |                    |   | 386,353   |                   | 
|                                                                                                                                                                  |  |                    |           |   |                    |   |           |                   | 
|Total non-performing commercial                                                                                                                                   |  |                    |           |   |                    |   |           |                   | 
|Assets                                                                                                                                                            |  |                    | 2,131,312 |   |                    |   | 417,154   |                   | 
|                                                                                                                                                                  |  |                    |           |   |                    |   |           |                   | 
|Commercial banking loans 90 days or more past due on accrual status                                                                                               |  | $                  | 1,535,026 |   |                    | $ | 370,708   |                   | 
|Potential problem commercial banking loans (2)                                                                                                                    |  | $                  | 1,926,364 |   |                    | $ | 1,570,059 |                   | 
|Potential problem commercial loans/total commercial banking loans                                                                                                 |  |                    | 1.14      | % |                    |   | 1.41      | %                 | 
|Non-performing commercial assets/total commercial banking loans and foreclosed
properties                                                                         |  |                    | 1.25      | % |                    |   | 0.37      | %                 | 
|Non-performing commercial assets and commercial banking loans 90 days or more past due
on accrual status/total commercial banking loans and foreclosed properties |  |                    | 2.15      | % |                    |   | 0.71      | %                 | 

---

|(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.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------



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 $32.5 million at
September 30, 2002, compared to $27.6 million at September 30, 2001 and $21.5 million at December 31, 2001. Unrealized gains/(losses) on securities amounted to 823,892 at September 30, 2002, and $24,729 and ($147,308) at September 30, 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 September 30, 2002, Crescent Bank had federal funds sold of $9.5 million, compared to $4.7 million at September 30, 2001 and $179,000 at December 31, 2001.



Total Commercial Deposits



Crescent Banks commercial deposits totaled $249.3 million, $202.3 million and $222.0 million at
September 30, 2002, September 30, 2001 and December 31, 2001, respectively, representing an increase of 12% over the nine-month period ended September 30, 2002. Commercial deposits averaged $222.1 million during the nine-month period ended September
30, 2002, $194.0 million during the nine-month period ended September 30, 2001 and $177.3 million during the twelve-month period ended December 31, 2001. Interest-bearing deposits represented 90% of total deposits at September 30, 2002, compared to
82% at September 30, 2001 and 79% at December 31, 2001. Certificates of deposit comprised 74% of total interest-bearing deposits for September 30, 2002, compared to 74% at September 30, 2001 and 72% at December 31, 2001. The composition of these



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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 $7.3 million of brokered deposits as of September 30,
2002, compared to $1.1 million and $496,000 million at September 30, 2001 and December 31, 2001, respectively.



Financial Condition of Our Mortgage Banking Business



Average Mortgage Loans Held for Sale



During the first nine months of 2002, average mortgage loans held for sale amounted to $197.9 million and
constituted 53% of average consolidated earning assets, and 47% of average consolidated total assets. Average mortgage loans held for sale during the first nine months of 2001 of $171.3 million constituted 57% of average consolidated
interest-earning assets and 53% 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 we therefore 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 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 September 30, 2002, we had $3.5 million of mortgage loans for which we had potential
indemnification or repurchase obligations resulting from breaches of our representations and warranties. 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 significant
indemnification losses. 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 524 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 627 small 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 $40 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.



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Total
Mortgage Loan Acquisitions and Sales



During
the first nine months of 2002, we acquired $2.7 billion of mortgage loans, and we sold $2.8 billion of these mortgage loans in the secondary market. At September 30, 2002, we carried $203.8 million of mortgage loans as mortgage loans held for sale
on our balance sheet pending sale of such loans. During the first nine months of 2001, we acquired $2.3 billion of mortgage loans while we sold in the secondary market $2.2 billion of mortgage loans. At September 30, 2001, we carried $130.4 million
of mortgage loans as mortgage loans held for sale on our balance sheet pending sale of such loans.



Servicing Rights



At September 30, 2002, we carried $5.7 million of mortgage servicing rights on our balance sheet, compared to $2.8 million at September
30, 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 $910.1 million at September 30, 2002,
$434.2 million at September 30, 2001 and $693.8 million at December 31, 2001. During the first nine months of 2002, we sold servicing rights with respect to $2.2 billion of mortgage loans carried on our balance sheet at a cost of $12.9 million for a
gain of $13.0 million. During the first nine months of 2001, we sold servicing rights with respect to $2.1 billion of mortgage loans carried on our balance sheet at a cost of $17.9 million for a gain of $14.5 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.



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 September 30, 2002, this rate was 2.67%. 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 September
30, 2002, these rates were 3.75% and 3.12%, 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 September 30, 2002, Crescent Banks leverage ratio was 6.14%.



On November 9, 2001, we completed a $3.5 million offering and
sale of trust preferred securities. We also completed a public offering of 555,555 of our common stock on September 19, 2002. The Company received net proceeds from the offering of common stock of approximately $7.1 million



At September 30, 2002, our total consolidated
shareholders equity was $30.4 million, or 6.56% of total consolidated assets, compared to $14.1 million, or 4.4% of total consolidated assets at September 30, 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 nine months of 2002 was the result of the two capital offerings, as well as the decrease in total consolidated assets.



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At September
30, 2002, our ratio of total consolidated capital to risk-adjusted assets was 11.65%, 10.93% of which consisted of tangible common shareholders equity. We paid $475,113, or $0.2325 per share, of dividends to our shareholders during the first
nine months of 2002. A quarterly dividend of $.0775 was declared in October, payable on November 30, 2002 to shareholders of record as of November 25, 2002. As of September 30, 2001, our ratio of total consolidated capital to risk-adjusted assets
was 7.22%, 6.49% 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 accrues 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.



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 September 30, 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 $5.4 million for the nine months
ended September 30, 2002. We also maintain warehouse lines of credit from UBS PaineWebber Inc. and Colonial Bank totaling $290 million, available to fund the origination and holding of our mortgage loan business. In connection with the establishment
of our line of credit with 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 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 $89.1 million, $92.7 million and $91.4 million during the nine month period ending September 30, 2002, the nine month period ending September 30, 2001, and the twelve month period ending December 31, 2001,
representing 41%, 49% and 52% of average deposits for those periods, respectively. Average net non-mortgage loans were 66%, 52% and 59% of average deposits during the nine month periods ending September 30, 2002 and September 30, 2001, and the
twelve month period ending December 31, 2001, respectively. Average deposits were 54%, 74% and 40% of average interest-earning assets during the nine month periods ending September 30, 2002 and September 30, 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s
liquidity position has also been enhanced by the operations of its 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 presently believe that Crescent Banks liquidity sources are adequate to meet its operating needs in the foreseeable future. Similarly, we presently believe that CMS liquidity sources are adequate for its
operations in the foreseeable future due to its investment in the short-term mortgage loans it holds for sale.



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.



21



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##### Table of Contents



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 affect our volume of mortgage production, the value and retention of mortgage servicing rights and the 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 first year.



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



|                             |  | Interest Rate Sensitivity Gaps as of December 31, 2001 Amounts Repricing In:
|---------------------------- |  | ----------------------------------------------------------------------------
|                             |  | 0-90 Days                                                                   
|                             |  | (dollars in millions)                                                       
|Interest-earning assets      |  | $                                                                           
|Interest-bearing liabilities |  |                                                                             
|                             |  |                                                                             
|Interest sensitivity gap     |  | $                                                                           
|                             |  |                                                                             



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 of mortgage loans that were subject to 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 September 30, 2002



The following table shows our rate sensitive position at
September 30, 2002. Approximately 77% of earning assets and 87% 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 $26.5 million, or 5.7% of total assets.



22



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|                             |  | Interest Rate Sensitivity Gaps as of September 30, 2002 Amounts Repricing In:
|---------------------------- |  | -----------------------------------------------------------------------------
|                             |  | 0-90 Days                                                                    
|                             |  | (dollars in millions)                                                        
|Interest-earning assets      |  | $                                                                            
|Interest-bearing liabilities |  |                                                                              
|                             |  |                                                                              
|Interest sensitivity gap     |  | $                                                                            
|                             |  |                                                                              



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 also in a liability-sensitive position in that interest-bearing liabilities exceed interest-bearing assets that are repricing over the next five years by $12.1 million. During
the 0-90 day period, which has the greatest sensitivity to interest rate changes, we are in an asset-sensitive position. This means if rates rise, the net interest margin will improve. Conversely, if interest rates decrease over this period, the net
interest margin will decline. At September 30, 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 September 30, 2002, our commitments to purchase mortgage loans, referred to as the mortgage pipeline, totaled
approximately $1.3 billion. Of the mortgage pipeline, we had, as of September 30, 2002, approximately $847.3 million for which we had interest rate risk. The remaining $465.7 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.



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 nine 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



23



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##### Table of Contents

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 September 30, 2002 the
impact on net income, net of tax, was $(271,368). The $(271,368) FAS 133 effect on net income during the nine month period ended September 30, 2002 reflects the change in the fair value of our free standing derivatives of $(437,691), net of the
related tax effect of $166,323.



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 September 30, 2002, we had purchase commitment agreements in place, terminating between October and December of 2002, with respect to an aggregate of approximately $613.1 million to hedge
our locked pipeline and mortgage loans held for sale.



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
nine 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.



24



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Item 4) Controls and Procedures



Within the 90-day period prior to the original filing date of this report, we commenced an evaluation under the supervision, and with the participation of, the Companys management, including the Chief Executive Officer (CEO)
and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures. During the course of this evaluation that began in Fall 2002, we discovered calculation errors with respect to our
mortgage loans held for sale and our mortgage servicing rights. These errors resulted in our overstatement of gains on sales of mortgage servicing rights in prior periods. We also determined that we had miscalculated gestation income on mortgage
loans for the period from the time of delivery of the loans to our third party funding source to the time of the ultimate sale of such loans. These errors were discovered in connection with our review of our controls. Our mortgage software system
used to reconcile our mortgage loans held for sale does not provide accounting and other internal control functions. We decided to improve the reporting and disclosure controls and procedures of the mortgage operations of the Bank and CMS, and we
decided to acquire additional software.



Since
the date of our original evaluation, we have worked to develop and implement changes to our controls and procedures to avoid these errors in the future. As of the date of this filing, we have:



| |  |  | hired a Certified Public Accountant as our Chief Financial Officer;
| | - |  | -------------------------------------------------------------------



| |  |  | hired a separate Chief Financial Officer for our mortgage operations;
| | - |  | ---------------------------------------------------------------------



| |  |  | expanded our in-house internal audit department to include the internal audit of our mortgage operations, which is overseen by our former Chief Financial Officer;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | begun reconciling mortgage loans held for sale to funding source data on a daily basis for the Bank and on a monthly basis for CMS; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | begun making entries on a loan level basis, not through batch entries.
| | - |  | ----------------------------------------------------------------------



In addition, we presently are working to implement the following changes to our controls and procedures:



| |  |  | creating a mortgage subsidiary ledger independent of our mortgage software; and
| | - |  | -------------------------------------------------------------------------------



| |  |  | consolidating the Banks mortgage operations into those of CMS, subject to obtaining funding at CMS, which to date has been unavailable.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



The error in calculating the costs
of mortgage loans held for sale and mortgage servicing rights 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 gains 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. Gestation income accordingly was overstated in prior periods.



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.



We are manually reconciling all of our loans in an effort to
properly record these and to avoid the inconsistencies and errors that previously were discovered. We presently are seeking improved accounting software for our mortgage operations to automate this process.



We are working on improving the reporting and disclosure
controls and procedures of our mortgage operations of the Bank and CMS, and believe that, when implemented, our changes will result in a system of disclosure controls and procedures that we expect will be effective to provide reasonable assurance
that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commissions rules and forms,
and that such information will be accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding disclosure.



| | 
| | 



25



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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  Not Applicable



Item 5. Other Information  None



Item 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits
|--- |  | --------



|    
|----
|3.1 
|    
|3.2 
|    
|99.1



|(b) |  | Reports on Form 8-K  None
|--- |  | --------------------------



26



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##### Table of Contents



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 |  | 
|      |  |                |  | 



---

##### Table of Contents



CERTIFICATIONS



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



|1. |  | I have reviewed this quarterly report on Form 10-Q 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;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: April 15, 2003



|/s/    J. DONALD BOGGUS,
JR.                               
|-----------------------------------------------------------
|J. Donald Boggus, Jr. President and Chief Executive Officer



---

##### Table of Contents



CERTIFICATIONS



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



|1. |  | I have reviewed this quarterly report on Form 10-Q 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;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: April 15, 2003



|/s/    LELAND W. BRANTLEY,
JR.                 
|-----------------------------------------------
|Leland W. Brantley, Jr. Chief Financial Officer



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##### Table of Contents



EXHIBIT
INDEX



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