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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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



For the Quarterly Period Ended March 31, 2005



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------



FOR THE TRANSITION PERIOD FROM  TO



Commission File Number 000-32951



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CRESCENT FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|NORTH CAROLINA                                                |  | 56-2259050                         
|(State or other jurisdiction ofIncorporation or organization) |  | (IRS EmployerIdentification Number)



1005 HIGH HOUSE
ROAD, CARY, NORTH CAROLINA

27513

(Address of principal executive offices)

(Zip Code)



(919) 460-7770

(Registrants telephone number, including area code)



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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 by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



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



Common Stock, $1.00 par value

4,117,364 shares outstanding as of May 5, 2005



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|                                                                     |  |                                                                                                    |  |       
|-------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | ------
|                                                                     |  | Page No.                                                                                          
|Part I.                                                              |  | FINANCIAL INFORMATION                                                                              |  |       
|                                                                     |  |                                                                                                   
|Item 1 -                                                             |  | Financial Statements (Unaudited)                                                                   |  |       
|                                                                     |  |                                                                                                   
|                                                                     |  | Consolidated Balance SheetsMarch 31, 2005 (unaudited) and December 31, 2004                        |  | 3     
|                                                                     |  |                                                                                                   
|                                                                     |  | Consolidated Statements of OperationsThree Month Periods Ended March 31, 2005 and 2004 (unaudited) |  | 4     
|                                                                     |  |                                                                                                   
|                                                                     |  | Consolidated Statements of Cash FlowsThree Months Ended March 31, 2005 and 2004 (unaudited)        |  | 5     
|                                                                     |  |                                                                                                   
|                                                                     |  | Notes to Consolidated Financial Statements                                                         |  | 6 - 8 
|                                                                     |  |                                                                                                   
|Item 2 -                                                             |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 9  22
|                                                                     |  |                                                                                                   
|Item 3 -                                                             |  | Quantitative and Qualitative Disclosures about Market Risk                                         |  | 23    
|                                                                     |  |                                                                                                   
|Item 4 -                                                             |  | Controls and Procedures                                                                            |  | 23    
|                                                                     |  |                                                                                                   
|Part II.                                                             |  | Other Information                                                                                  |  |       
|                                                                     | 
|Item 1 
Legal Proceedings                                           |  | 24                                                                                                
|                                                                     | 
|Item 2 
Unregistered Sales of Equity Securities and Use of Proceeds |  | 24                                                                                                
|                                                                     | 
|Item 3 
Defaults Upon Senior Debt                                   |  | 24                                                                                                
|                                                                     | 
|Item 4 
Submission of Matters to a Vote of Security Holders         |  | 24                                                                                                
|                                                                     | 
|Item 5 
Other Information                                           |  | 24                                                                                                
|                                                                     | 
|Item 6 -
Exhibits                                                    |  | 24                                                                                                



- 2 -



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Part I. FINANCIAL INFORMATION



Item 1 - Financial Statements



CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                      |  |                           |             |   |                   |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                                                      |  | March 31, 2005(Unaudited) |             |   | December 31,2004* |  
|ASSETS                                                                                                                                                |  |                           |             |   |                   |   |             |  
|                                                                                                                                                      |  |                          
|Cash and due from banks                                                                                                                               |  | $                         | 7,562,986   |   |                   | $ | 5,633,865   |  
|Interest-earning deposits with banks                                                                                                                  |  |                           | 328,555     |   |                   |   | 43,353      |  
|Federal funds sold                                                                                                                                    |  |                           | 482,000     |   |                   |   |            |  
|Investment securities available for sale at fair value                                                                                                |  |                           | 51,711,222  |   |                   |   | 53,444,322  |  
|Loans                                                                                                                                                 |  |                           | 278,279,211 |   |                   |   | 257,461,327 |  
|Allowance for loan losses                                                                                                                             |  |                           | (3,875,650  | ) |                   |   | (3,668,000  | )
|                                                                                                                                                      |  |                           |             |   |                   |   |             |  
|NET LOANS                                                                                                                                             |  |                           | 274,403,561 |   |                   |   | 253,793,327 |  
|Accrued interest receivable                                                                                                                           |  |                           | 1,357,806   |   |                   |   | 1,218,572   |  
|Federal Home Loan Bank stock                                                                                                                          |  |                           | 2,101,900   |   |                   |   | 1,447,200   |  
|Bank premises and equipment                                                                                                                           |  |                           | 3,248,686   |   |                   |   | 3,030,184   |  
|Investment in life insurance                                                                                                                          |  |                           | 5,333,461   |   |                   |   | 5,283,263   |  
|Goodwill                                                                                                                                              |  |                           | 3,600,298   |   |                   |   | 3,600,298   |  
|Other assets                                                                                                                                          |  |                           | 3,784,004   |   |                   |   | 3,732,814   |  
|                                                                                                                                                      |  |                           |             |   |                   |   |             |  
|TOTAL ASSETS                                                                                                                                          |  | $                         | 353,914,479 |   |                   | $ | 331,227,198 |  
|                                                                                                                                                      |  |                           |             |   |                   |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                  |  |                           |             |   |                   |   |             |  
|                                                                                                                                                      |  |                          
|LIABILITIES                                                                                                                                           |  |                           |             |   |                   |   |             |  
|Deposits                                                                                                                                              |  |                           |             |   |                   |   |             |  
|Demand                                                                                                                                                |  | $                         | 43,411,214  |   |                   | $ | 42,818,455  |  
|Savings                                                                                                                                               |  |                           | 3,305,804   |   |                   |   | 3,036,774   |  
|Money market and NOW                                                                                                                                  |  |                           | 76,442,221  |   |                   |   | 74,113,646  |  
|Time                                                                                                                                                  |  |                           | 161,963,917 |   |                   |   | 153,679,946 |  
|                                                                                                                                                      |  |                           |             |   |                   |   |             |  
|TOTAL DEPOSITS                                                                                                                                        |  |                           | 285,123,156 |   |                   |   | 273,648,821 |  
|                                                                                                                                                      |  |                          
|Short-term borrowings                                                                                                                                 |  |                           | 221,020     |   |                   |   | 1,307,105   |  
|Long-term borrowings                                                                                                                                  |  |                           | 40,248,000  |   |                   |   | 28,248,000  |  
|Accrued expenses and other liabilities                                                                                                                |  |                           | 1,388,201   |   |                   |   | 1,245,858   |  
|                                                                                                                                                      |  |                           |             |   |                   |   |             |  
|TOTAL LIABILITIES                                                                                                                                     |  |                           | 326,980,377 |   |                   |   | 304,449,784 |  
|                                                                                                                                                      |  |                           |             |   |                   |   |             |  
|STOCKHOLDERS EQUITY                                                                                                                                  |  |                           |             |   |                   |   |             |  
|Preferred stock, no par value, 5,000,000 shares authorized, none outstanding;                                                                         |  |                           |            |   |                   |   |            |  
|Common stock, $1 par value, 20,000,000 shares authorized; 3,572,989 shares outstanding March 31, 2005; 3,566,889 shares outstanding December
31, 2004 |  |                           | 3,572,989   |   |                   |   | 3,566,889   |  
|Additional paid-in capital                                                                                                                            |  |                           | 18,708,444  |   |                   |   | 18,654,492  |  
|Retained earnings                                                                                                                                     |  |                           | 5,203,667   |   |                   |   | 4,562,681   |  
|Accumulated other comprehensive loss (Note D)                                                                                                         |  |                           | (550,998    | ) |                   |   | (6,648      | )
|                                                                                                                                                      |  |                           |             |   |                   |   |             |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                                            |  |                           | 26,934,102  |   |                   |   | 26,777,414  |  
|                                                                                                                                                      |  |                           |             |   |                   |   |             |  
|COMMITMENTS (Note B)                                                                                                                                  |  |                           |             |   |                   |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                            |  | $                         | 353,914,479 |   |                   | $ | 331,227,198 |  
|                                                                                                                                                      |  |                           |             |   |                   |   |             |  

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|* | Derived from audited consolidated financial statements.
|- | -------------------------------------------------------



See accompanying notes.



- 3 -



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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Three Months Ended March 31, 2005 and 2004



|                                                    |  |      |           |   |      |   |          
|--------------------------------------------------- |  | ---- | --------- | - | ---- | - | ---------
|                                                    |  | 2005 |           |   | 2004
|INTEREST INCOME                                     |  |      |           |   |      |   |          
|Loans                                               |  | $    | 4,185,878 |   |      | $ | 3,202,803
|Investment securities available for sale            |  |      | 569,305   |   |      |   | 402,417  
|Federal funds sold and interest-earning deposits    |  |      | 8,951     |   |      |   | 10,764   
|                                                    |  |      |           |   |      |   |          
|TOTAL INTEREST INCOME                               |  |      | 4,764,134 |   |      |   | 3,615,984
|                                                    |  |      |           |   |      |   |          
|INTEREST EXPENSE                                    |  |      |           |   |      |   |          
|Deposits                                            |  |      | 1,346,847 |   |      |   | 997,635  
|Short-term borrowings                               |  |      | 17,459    |   |      |   | 12,061   
|Long-term debt                                      |  |      | 356,181   |   |      |   | 221,171  
|                                                    |  |      |           |   |      |   |          
|TOTAL INTEREST EXPENSE                              |  |      | 1,720,487 |   |      |   | 1,230,867
|                                                    |  |      |           |   |      |   |          
|NET INTEREST INCOME                                 |  |      | 3,043,647 |   |      |   | 2,385,117
|PROVISION FOR LOAN LOSSES                           |  |      | 203,951   |   |      |   | 255,577  
|                                                    |  |      |           |   |      |   |          
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |  |      | 2,839,696 |   |      |   | 2,129,540
|                                                    |  |      |           |   |      |   |          
|NON-INTEREST INCOME                                 |  |      |           |   |      |   |          
|Mortgage origination revenue and other loan fees    |  |      | 202,585   |   |      |   | 135,459  
|Fees on deposit accounts                            |  |      | 237,262   |   |      |   | 212,729  
|Earnings on life insurance                          |  |      | 56,508    |   |      |   | 59,826   
|Gain (loss) on sale of assets                       |  |      | (8,897    | ) |      |   |         
|Other                                               |  |      | 56,867    |   |      |   | 83,673   
|                                                    |  |      |           |   |      |   |          
|TOTAL NON-INTEREST INCOME                           |  |      | 544,325   |   |      |   | 491,687  
|NON-INTEREST EXPENSE                                |  |      |           |   |      |   |          
|Salaries and employee benefits                      |  |      | 1,302,553 |   |      |   | 1,009,758
|Occupancy and equipment                             |  |      | 391,566   |   |      |   | 343,925  
|Data processing                                     |  |      | 153,918   |   |      |   | 124,657  
|Other                                               |  |      | 575,198   |   |      |   | 453,741  
|                                                    |  |      |           |   |      |   |          
|TOTAL NON-INTEREST EXPENSE                          |  |      | 2,423,235 |   |      |   | 1,932,081
|                                                    |  |      |           |   |      |   |          
|INCOME BEFORE INCOME TAXES                          |  |      | 960,786   |   |      |   | 689,146  
|INCOME TAX EXPENSE                                  |  |      | 319,800   |   |      |   | 225,500  
|                                                    |  |      |           |   |      |   |          
|NET INCOME                                          |  | $    | 640,986   |   |      | $ | 463,646  
|                                                    |  |      |           |   |      |   |          
|NET INCOME PER COMMON SHARE (Note C)                |  |      |           |   |      |   |          
|Basic                                               |  | $    | .16       |   |      | $ | .11      
|                                                    |  |      |           |   |      |   |          
|Diluted                                             |  | $    | .15       |   |      | $ | .11      
|                                                    |  |      |           |   |      |   |          
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note C) |  |      |           |   |      |   |          
|Basic                                               |  |      | 4,105,337 |   |      |   | 4,036,591
|                                                    |  |      |           |   |      |   |          
|Diluted                                             |  |      | 4,339,019 |   |      |   | 4,260,910
|                                                    |  |      |           |   |      |   |          



See accompanying notes.



- 4 -



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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Three Months Ended March 31, 2005 and 2004



|                                                                                  |  |      |             |   |      |   |             |  
|--------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                  |  | 2005 |             |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |      |             |   |      |   |             |  
|Net income                                                                        |  | $    | 640,986     |   |      | $ | 463,646     |  
|                                                                                  |  |      |             |   |      |   |             |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |             |   |      |   |             |  
|Depreciation                                                                      |  |      | 149,586     |   |      |   | 130,801     |  
|Provision for loan losses                                                         |  |      | 203,951     |   |      |   | 255,577     |  
|Loss on sale of assets                                                            |  |      | 8,897       |   |      |   |            |  
|Net amortization of premiums on securities                                        |  |      | 22,887      |   |      |   | 25,180      |  
|Increase in cash value of life insurance                                          |  |      | (50,198     | ) |      |   | (54,516     | )
|Change in assets and liabilities:                                                 |  |      |             |   |      |   |             |  
|(Increase) in accrued interest receivable                                         |  |      | (139,234    | ) |      |   | (61,982     | )
|(Increase) decrease in other assets                                               |  |      | 291,048     |   |      |   | (369,120    | )
|Increase (decrease) in accrued interest payable                                   |  |      | 97,175      |   |      |   | (28,185     | )
|Increase (decrease) in other liabilities                                          |  |      | 52,167      |   |      |   | (179,326    | )
|Payment of income taxes                                                           |  |      | (7,000      | ) |      |   | (25,000     | )
|                                                                                  |  |      |             |   |      |   |             |  
|TOTAL ADJUSTMENTS                                                                 |  |      | 629,278     |   |      |   | (306,571    | )
|                                                                                  |  |      |             |   |      |   |             |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                         |  |      | 1,270,265   |   |      |   | 157,075     |  
|                                                                                  |  |      |             |   |      |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |      |             |   |      |   |             |  
|Purchases of securities available for sale                                        |  |      | (1,162,512  | ) |      |   | (4,866,208  | )
|Maturities of securities available for sale                                       |  |      |            |   |      |   | 250,000     |  
|Principal repayments of securities available for sale                             |  |      | 1,331,437   |   |      |   | 1,715,951   |  
|Net increase in loans                                                             |  |      | (20,814,186 | ) |      |   | (17,880,761 | )
|Purchases of bank premises and equipment                                          |  |      | (376,983    | ) |      |   | (446,237    | )
|                                                                                  |  |      |             |   |      |   |             |  
|NET CASH USED BY INVESTING ACTIVITIES                                             |  |      | (21,022,244 | ) |      |   | (21,227,255 | )
|                                                                                  |  |      |             |   |      |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |      |             |   |      |   |             |  
|Net increase in deposits:                                                         |  |      |             |   |      |   |             |  
|Noninterest-bearing demand                                                        |  |      | 592,758     |   |      |   | 21,869,211  |  
|Savings                                                                           |  |      | 269,030     |   |      |   | 218,700     |  
|Money market and NOW                                                              |  |      | 2,328,575   |   |      |   | 9,340,777   |  
|Time deposits                                                                     |  |      | 8,283,972   |   |      |   | 26,122,900  |  
|Net increase (decrease) in borrowed funds                                         |  |      | 10,913,915  |   |      |   | (8,783,236  | )
|Proceeds from stock options exercised                                             |  |      | 60,052      |   |      |   | 9,870       |  
|                                                                                  |  |      |             |   |      |   |             |  
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                         |  |      | 22,448,302  |   |      |   | 48,778,222  |  
|                                                                                  |  |      |             |   |      |   |             |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                         |  |      | 2,696,323   |   |      |   | 27,708,042  |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                    |  |      | 5,677,218   |   |      |   | 7,051,157   |  
|                                                                                  |  |      |             |   |      |   |             |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                          |  | $    | 8,373,541   |   |      | $ | 34,759,199  |  
|                                                                                  |  |      |             |   |      |   |             |  



See accompanying notes.



- 5 -



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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements



NOTE A - BASIS OF PRESENTATION



In managements opinion, the financial information, which is unaudited, reflects all
adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three-month periods ended March 31, 2005 and 2004, in conformity with accounting principles generally
accepted in the United States of America. The financial statements include the accounts of Crescent Financial Corporation (the Company) and its wholly owned subsidiary, Crescent State Bank (the Bank). All significant
inter-company transactions and balances are eliminated in consolidation. Operating results for the three-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31,
2005.



The organization and business of Crescent Financial Corporation and
subsidiary (the Company), accounting policies followed by the Company and other information are contained in the notes to the consolidated financial statements filed as part of the Companys 2004 annual report on Form 10-KSB. This
quarterly report should be read in conjunction with such annual report.



NOTE B  COMMITMENTS



At March 31, 2005, loan commitments
are as follows



|                                                                                                  |  |   |           
|------------------------------------------------------------------------------------------------- |  | - | ----------
|Undisbursed lines of credit                                                                       |  | $ | 96,172,000
|Stand-by letters of credit                                                                        |  |   | 2,094,000 
|Undisbursed commitment to purchase additional Investment in Small Business Investment Corporation |  |   | 250,000   



NOTE C  PER SHARE RESULTS



The Company effected a stock split in the form of a 15% stock dividend
paid on April 27, 2005 to stockholders of record April 14, 2005. Share and per share data for the periods presented have been adjusted to reflect the effects of the stock split. Basic and diluted net income (loss) per common share have been computed
by dividing net income for each period by the weighted average number of shares of common stock outstanding during each period after retroactively adjusting for these stock splits.



Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the company relate solely to outstanding stock options and are determined using the treasury stock method.



- 6 -



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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements



|                                                                                 |  |                              |  |          
|-------------------------------------------------------------------------------- |  | ---------------------------- |  | ---------
|                                                                                 |  | Three months ended March 31,
|                                                                                 |  | 2005                         |  | 2004     
|Weighted average number of shares used in computing basic net income per share   |  | 4,105,337                    |  | 4,036,591
|Effect of dilutive stock options                                                 |  | 233,681                      |  | 224,319  
|                                                                                 |  |                              |  |          
|Weighted average number of shares used in computing diluted net income per share |  | 4,339,019                    |  | 4,260,910
|                                                                                 |  |                              |  |          



For the three month periods ended
March 31, 2005 and 2004, there were no options that were anti-dilutive.



NOTE D - COMPREHENSIVE INCOME



For the three months ended
March 31, 2005 and 2004, total comprehensive income, consisting of net income and unrealized securities gains and losses, net of taxes, was $97,000 and $790,000, respectively.



NOTE E  STOCK COMPENSATION PLANS



In December 2004, the FASB issued SFAS No. 123(R), Accounting for Stock-Based Compensation (SFAS No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R)
requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. For the
Company the provisions of this Statement are effective for the first interim reporting period that begins after December 15, 2005. Accordingly, we will adopt SFAS No. 123(R) commencing with the quarter ending March 31, 2006.



- 7 -



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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements



Presented below are the pro forma disclosures of net income and earnings per share and other disclosures as if the fair value based method of accounting had been applied.



|                                                                                                                                      |  |                                               |     |      |   |    
|------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | --- | ---- | - | ---
|                                                                                                                                      |  | Three Months Ended March 31,                 
|                                                                                                                                      |  | 2005                                          |     | 2004
|                                                                                                                                      |  | (Amounts in thousands, except per share data)
|Net income:                                                                                                                           |  |                                               |     |      |   |    
|As reported                                                                                                                           |  | $                                             | 641 |      | $ | 464
|Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax
effects |  |                                               | 32  |      |   | 30 
|                                                                                                                                      |  |                                               |     |      |   |    
|Pro forma                                                                                                                             |  | $                                             | 609 |      | $ | 434
|                                                                                                                                      |  |                                               |     |      |   |    
|Basic earnings per share:                                                                                                             |  |                                               |     |      |   |    
|As reported                                                                                                                           |  | $                                             | .16 |      | $ | .11
|Pro forma                                                                                                                             |  |                                               | .15 |      |   | .10
|                                                                                                                                      |  |                                              
|Diluted earnings per share:                                                                                                           |  |                                               |     |      |   |    
|As reported                                                                                                                           |  | $                                             | .15 |      | $ | .11
|Pro forma                                                                                                                             |  |                                               | .14 |      |   | .10



- 8 -



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Managements discussion and analysis is intended to assist readers in the understanding and evaluation of the financial condition and consolidated results of
operations of Crescent Financial Corporation (the Company). The analysis includes detailed discussions for each of the factors affecting Crescent Financial Corporations operating results and financial condition for the periods
ended March 31, 2005 and 2004. It should be read in conjunction with the audited consolidated financial statements and accompanying notes included in this report and the supplemental financial data appearing throughout this discussion and analysis.
Because the Company has no operations and conducts no business on its own other than owning Crescent State Bank, the discussion contained in this Managements Discussion and Analysis concerns primarily the business of the Bank. However, for
ease of reading and because the financial statements are presented on a consolidated basis, the Company and the Bank are collectively referred to herein as the Company unless otherwise noted. All significant intercompany transactions and balances
are eliminated in consolidation.



COMPARISON OF FINANCIAL
CONDITION AT MARCH 31, 2005 AND DECEMBER 31, 2004



Total assets at March
31, 2005 were $353.9 million compared with $331.2 million at December 31, 2004. Earning assets represented 94% of total assets as of both dates and totaled $332.9 million at March 31, 2005 compared with $312.4 million at December 31, 2004.
Components of earning assets at March 31, 2005 are $278.3 million in gross loans, $53.8 million in investment securities and Federal Home Loan Bank (FHLB) stock, $482,000 in overnight investments and $329,000 in interest bearing deposits with
correspondent banks. Earning assets at December 31, 2004 included $257.5 million in gross loans, $54.9 million in investment securities and FHLB stock and $43,000 in overnight investments. Total deposits and stockholders equity at March 31,
2005 were $285.1 million and $26.9 million, respectively, compared to $273.6 million and $26.8 million at December 31, 2004.



Gross loans outstanding at March 31, 2005 increased by $20.8 million or 8% to $278.3 million compared to $257.5 million reported at December 31, 2004. The composition of
the loan portfolio, by category, as of March 31, 2005 is 48% commercial mortgage loans, 19% commercial loans, 15% construction loans, 12% home equity loans and lines, 4% residential mortgage loans and 2% consumer loans. The commercial mortgage
category showed the most growth increasing $10.9 million from $121.5 million at December 31, 2004 to $132.4 million at March 31, 2005. The commercial loan portfolio increased by $4.3 million from $48.7 million at December 31, 2004 to $53.0 million
at March 31, 2005. Construction and development loans experienced a net increase of $4.2 million, growing from $38.8 million at year end to $43.0 million at March 31, 2005. Home equity loans and lines increased by $1.7 million during the first
quarter of 2005 from $31.0 million at December 31, 2004 to $32.7 million at March 31, 2005. Residential mortgage loans grew $234,000 from $11.6 million to $11.8 million. The consumer loan portfolio experienced a net decline during the first quarter
of $518,000. The composition of the loan portfolio, by category, as of December 31, 2004 was 47% commercial mortgage loans, 19% commercial loans, 15% construction loans, 12% home equity loans and lines, 5% residential real estate mortgage loans and
2% consumer loans.



The Company had an allowance for loan losses at March 31,
2005 of $3.9 million or 1.39% of total outstanding loans compared to $3.7 million or 1.42% of total outstanding loans at December 31, 2004. At March 31, 2005, there were three loans totaling $84,000 in non-accrual status and no loans 90 days or more
past due and still accruing interest. Non-performing loans



- 9 -



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as a percentage of total loans at March 31, 2005 were 0.03%. Non-accrual loans at December 31, 2004 were comprised of two
loans totaling $5,000. Non-performing loans as a percentage of total loans at December 31, 2004 were less than 0.01%. The $79,000 loan added to non-accrual during the first quarter of 2005 will be charged-off and a loss of $70,000 is anticipated.



The Company has investment securities with an amortized cost of $52.6 million
at March 31, 2005. All investments are accounted for as available for sale under Financial Accounting Standards Board (FASB) No. 115 and are presented at their fair market value of $51.7 million. The Companys investment in debt securities at
March 31, 2005, consists of U.S. Government agency securities, collateralized mortgage obligations, mortgage-backed securities, municipal bonds and a trust preferred stock issue. The portfolio increased by $508,000 due to new purchases made during
the quarter. Activities resulting in decreases to the portfolio include $1.3 million of principal re-payments, an $886,000 decline in the fair value of the portfolio and $23,000 in net premium amortization. The Company also owned $2.1 million of
Federal Home Loan Bank stock at March 31, 2005 compared to $1.4 million at December 31, 2004.



Federal funds sold at March 31, 2005 are $482,000 compared with no Federal funds sold at December 31, 2004. The Company holds funds in overnight investments to provide liquidity for future loan demand and to satisfy
fluctuations in deposit levels. Overnight funds tend to increase at month-end due to several real estate settlement deposit accounts maintained by attorney customers.



Interest-earning deposits held at correspondent banks increased by approximately $285,000 from $43,000 at December 31, 2004 to $328,000 at
March 31, 2005. The increase represents principal and interest payments from the investment portfolio waiting to be re-invested.



Non-earning and other assets increased by approximately $2.4 million between December 31, 2004 and March 31, 2005. Non-interest bearing cash due from banks increased by
$1.9 million during the three months ended March 31, 2005. Cash and due from banks includes amounts represented by checks in the process of being collected through the Federal Reserve payment system. Funds represented by these checks were not yet
collected and therefore could not be invested overnight. For more details regarding the increase in cash and cash equivalents, see the Consolidated Statement of Cash Flows. Categories of other assets experiencing increases between December 31, 2004
and March 31, 2005 include interest receivable, bank premises and equipment, deferred tax asset and cash surrender value on bank owned life insurance.



Total deposits increased by $11.5 million between December 31, 2004 and March 31, 2005 from $273.6 million to $285.1 million. The largest increase occurred in the time
deposit category, which grew by $8.3 million to $162.0 million at March 31, 2005 from $153.7 million at year end. Increases to other deposit categories were as follows: money market account balances increased by $4.7 million from $33.3 million to
$38.0 million, non-interest bearing demand deposits increased by $593,000 from $42.8 million to $43.4 million and savings increased by $269,000 from $3.0 million to $3.3 million. The interest bearing demand category experienced a $2.4 million
decline during the first quarter of 2005. Prior to the increase in interest rates, the rate on the Companys premium relationship interest bearing checking account exceeded the rates paid on our money market accounts. As rates began to
increase, rates on the premium checking account have remained constant and the money market rates have risen sharply. As a result, we have experienced movement of funds between the interest bearing checking product and money market.



- 10 -



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The composition of the deposit base, by category, at March 31, 2005 is as follows: 58% time deposits, 15%
non-interest-bearing demand deposits, 13% interest-bearing demand deposits, 13% money market and 1% statement savings. The composition of the deposit base, by category, at December 31, 2004 was 56% time deposits, 16% non-interest-bearing demand
deposits, 15% interest-bearing demand deposits, 12% money market and 1% statement savings. Time deposits of $100,000 or more totaled $103.1 million at March 31, 2005 compared to $97.5 million at December 31, 2004. The Company uses brokered
certificates of deposit as an alternative funding source. Brokered deposits represent a source of fixed rate funds priced competitively with Federal Home Loan Bank borrowing, but do not require collateralization like Federal Home Loan Bank
borrowings. Brokered deposits were $53.5 million at March 31, 2005 compared with $49.5 million at December 31, 2004.



The Company had $40.2 million of long-term debt outstanding at March 31, 2005 compared to $28.2 million at December 31, 2004. The long-term debt is comprised of $32.0
million in FHLB term advances and $8.2 million in junior subordinated debt. Short-term borrowings declined by $1.1 million during the first quarter to $221,000 from $1.3 million. Short-term borrowings consist of Federal funds purchased from
correspondent banks and securities sold under a repurchase agreement. Securities sold under repurchase agreements generally mature within one to four days from the transaction date.



Accrued interest payable and other liabilities increased by $142,000 to $1.4 million at March 31, 2005 compared with $1.2 million at
December 31, 2004. The increase is primarily the result of higher accrued interest due to rising interest rates.



Between December 31, 2004 and March 31, 2005, total stockholders equity rose by $157,000. The increase resulted from net income for the quarter of $641,000,
unrealized losses on available for sale securities of $544,000 and $60,000 in new stock issuance pursuant to the exercise of stock options.



COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2005 AND 2004



Net Income.Net income for the three-month period ended March 31, 2005 was $641,000 or
$.16 per basic ($.15 diluted) share compared with $464,000 or $.11 per basic ($.11 diluted) share for the three-month period ended March 31, 2004. Annualized return on average assets was .76% and .65% for the two periods ended March 31, 2005 and
2004, respectively. The improvement in return on assets was primarily attributed to a higher net interest margin resulting from a rising interest rate environment and strong growth in earning assets. Return on average equity for the current period
was 9.50% compared to 7.51% for the prior period. Return on average equity improved as a result of increased net income and a more efficient leveraging of capital.



Results of operations for the three-month period ended March 31, 2005, when compared with the period ended March 31, 2004, were positively
impacted by strong earning asset growth over the past twelve months, a rising interest rate environment and an increase in non-interest income. Non interest expense increased during the current period as the Company continues to expand its branch
network into new markets.



Net Interest Income. Net interest income
increased by $659,000 or 28% from $2.4 million for the three-month period ended March 31, 2004 to $3.0 million for the three-month period ended March 31, 2005. Growth in both earning assets and interest bearing liabilities, coupled with the rising
interest rate environment, resulted in increases in both total interest income and total interest expenses in the current period compared with the prior year period.



- 11 -



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Total interest income was $4.7 million for the three-month period ended March 31, 2005 compared to $3.6 million for the
prior year period, an increase of $1.1 million or 32%. The total increase was the result of a $756,000 increase due to growth in average earning assets and a $392,000 increase due to the rising average yield earned on those assets. Total interest
expense increased by $489,000 from $1.2 million for the prior year period to $1.7 million for the current period. The increase was the result of a $406,000 increase due to growth in interest-bearing liabilities and a $83,000 increase due to the
rising cost of funds.



Total average earning assets increased $54.0 million or
20% from an average of $267.8 million as of March 31, 2004 to an average of $321.8 million for the quarter ended March 31, 2005. The average of loans outstanding during the three-month period ended March 31, 2005 was $265.3 million reflecting a
$41.5 million or 19% increase over the $223.8 million for the quarter ended March 31, 2004. The average balance of the investment securities portfolio for the current period was $54.9 million, increasing by $16.1 million or 42% compared to an
average of $38.8 million at March 31, 2004. The average balance of federal funds sold and other earning assets decreased to $1.5 million for the three-month period ended March 31, 2005 compared to $5.2 million for the prior period.



Total average interest-bearing liabilities increased by $51.7 million or 23% from an average
of $223.5 million for the period ended March 31, 2004 to $275.2 million for the current period. Average interest-bearing deposits increased by $35.8 million or 18% growing from $199.8 million at March 31, 2004 to $235.6 million at March 31, 2005.
Total average borrowings increased by $15.9 million or 67% to $39.6 million at the end of the current quarter from $23.7 million at March 31, 2004.



Net interest margin is interest income earned on loans, securities and other earning assets, less interest expense paid on deposits and borrowings, expressed as a
percentage of total average earning assets. The net interest margin for the three-month period ended March 31, 2005 was 3.84% compared to 3.58% for the three-month period ended March 31, 2004. The average yield on earning assets for the current
three-month period increased by 57 basis points to 6.00% compared with 5.43% for the prior year period, while the average cost of interest-bearing funds increased by 31 basis points to 2.53% from 2.22%. The spread between the rates paid on earning
assets and the cost of interest-bearing funds increased by 26 basis points from 3.21% to 3.47%. The Companys reliance on interest-bearing liabilities to fund earning asset growth continued to increase as the percentage of interest earning
assets to interest bearing liabilities fell from 119.85% to 116.93%.



The two
comparative three-month periods were impacted by two very different interest rate environments. The Federal Open Market Committee (FOMC) last reduced short-term interest rates on June 30, 2003 ending a thirty-month period of falling interest rates.
For the twelve month-period from July 1, 2003 through June 30, 2004, short-term interest rates were held steady. The FOMC shifted monetary policy on July 1, 2004 and began a series of measured interest rate increases. Between July 2004 and March 31,
2005, there were six 25 basis point increases in short-term rates. The Companys balance sheet is currently asset sensitive over a twelve-month period, meaning that a higher volume of earning assets is subject to repricing than that of interest
bearing liabilities. Other outside influences being equal, an asset sensitive balance sheet should enhance net interest income in a rising rate environment. The asset sensitivity of the balance sheet is largely due to the composition of the loan
portfolio. The loan



- 12 -



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portfolio is split between 67% of floating rates loans and 33% fixed rate loans. While the investment portfolio is
predominately comprised of fixed income securities, it has very stable principal re-payment characteristics designed to allow those cash flows to be reinvested at higher rates or deployed to fund loan growth. The risk of an asset sensitive balance
sheet is a falling rate environment, therefore the balance sheet will need to be repositioned in the future to reduce the inherent risks of the next falling rate environment. The timing and execution of that repositioning is subject to the judgment
of management and the Asset Liability Committee.



Provision for Loan Losses.The Companys provision for loan losses for the three-month period ended March 31, 2005 was $204,000 compared to $256,000 recorded for the same period in 2004. Provision for loan losses is charged to income to bring the allowance for loan
losses to a level deemed appropriate by management based on factors discussed under Analysis of Allowance for Loan Losses. Despite net loan growth being $3.1 million higher during the first quarter of 2005 compared with 2004, the loan
loss provision for the current period was less due to improvement in asset quality. See the section entitled Non Performing Assets for more details. The allowance for loan losses was $3.9 million at March 31, 2005, representing 1.39% of
total outstanding loans.



Non-Interest Income.For the three-month
period ended March 31, 2005, non-interest income was $544,000 compared to $492,000 for the same period in 2004. The largest components of non-interest income in the first quarter of 2005 were $193,000 in customer service fees, $172,000 in mortgage
loan origination fees, $57,000 increase in cash surrender value on life insurance and $44,000 in service charges and fees on deposit accounts. The Company also recognized $33,000 in investment referral fees.



A significant portion of non-interest income is derived from the mortgage loan origination
fees. Despite a significant decline in mortgage refinance activity, non-interest income from mortgage loan origination actually increased by $50,000. Our mortgage loan officers have successfully replaced the anticipated reduction in refinancing
activity with purchase money activity. However, any softening in the overall housing market could have a negative impact on non-interest income.



Non-Interest Expenses.Non-interest expenses increased by 25% to $2.4 million for the three-month period ended March 31, 2005 compared with $1.9 million for the
same period ended March 31, 2004. The largest component of non-interest expense for the current period was personnel expense. Salaries and benefits expense was $1.3 million for the three-month period ended March 31, 2005, compared to $1.0 million
for the same period in the prior year. Due to branch and administrative expansion, the number of employees has increased over the past twelve months. Management anticipates personnel expense to continue to increase as opportunities to hire quality
employees present themselves and we expand into new markets.



Occupancy and
equipment expenses increased by $48,000 or 14% from $344,000 for the three-month period ended March 31, 2004 to $392,000 for the current year period. Data processing costs increased from $125,000 for the three-months ended March 31, 2004 to $154,000
for the current three-month period. The Company outsources its data processing and expenses are closely tied to transaction and account volumes. Occupancy and data processing expenses have increased as the number of offices has increased. During the
first quarter of 2005, the Company operated nine full-service branch locations compared to seven full-service branches and a loan production office during the prior year period. As the Company continues to grow in accordance with its strategic plan,
management expects both occupancy and data processing costs to increase.



- 13 -



---

Other non-interest expenses increased by $121,000 to $575,000 for the first quarter of 2005 compared with $454,000 for
the first quarter in the prior year. The increase was primarily a result of the Companys continued growth. The largest components of other non-interest expenses include professional fees and services, office supplies and printing, advertising,
and loan related fees. Management expects that as the complexity and size of the Company increases, expenses associated with these categories will continue to increase.



Provision for Income Taxes.The Company recorded income tax expense of $320,000 during the three-months ended March 31, 2005 compared
to $225,000 for the prior year period. The effective tax rates for the two periods were 33.28% and 32.72%, respectively.



- 14 -



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NET INTEREST INCOME



Net interest income represents the difference between income derived from interest-earning assets and interest expense incurred on
interest-bearing liabilities. Net interest income is affected by both (1) the difference between the rates of interest earned on interest-earning assets and the rates paid on interest-bearing liabilities (interest rate spread) and (2)
the relative amounts of interest-earning assets and interest-bearing liabilities (net interest-earning balance). The following tables set forth information relating to average balances of the Companys assets and liabilities for the
three-month periods ended March 31, 2005 and 2004. The tables reflect the average yield on interest-earning assets and the average cost of interest-bearing liabilities (derived by dividing income or expense by the daily average balance of
interest-earning assets or interest-bearing liabilities, respectively) as well as the net interest margin. In preparing the table, non-accrual loans are included, when applicable, in the average loan balance.



|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|------------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | -------- | ---- | ----------------- |  | ------ | -------------- |  | -------- | ------- | ----------------- | - | ----- |  | ------ | -
|                                                                                      |  | For the Three-Months Ended March 31, |        
|                                                                                      |  | 2005                                 |         |          | 2004 |                  
|                                                                                      |  | AverageBalance                       |         | Interest |      | AverageYield/Cost |  |        | AverageBalance |  | Interest |         | AverageYield/Cost |  
|                                                                                      |  | (Dollars in thousands)               |        
|Interest-earnings assets                                                              |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Loan portfolio                                                                        |  | $                                    | 265,337 |          | $    | 4,186             |  | 6.40   | %              |  | $        | 223,827 |                   | $ | 3,203 |  | 5.76   | %
|Investment securities                                                                 |  |                                      | 54,947  |          |      | 569               |  | 4.14   | %              |  |          | 38,804  |                   |   | 402   |  | 4.14   | %
|Fed funds and other interest-earning assets                                           |  |                                      | 1,482   |          |      | 9                 |  | 2.46   | %              |  |          | 5,177   |                   |   | 11    |  | 0.85   | %
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Total interest-earning assets                                                         |  |                                      | 321,766 |          |      | 4,764             |  | 6.00   | %              |  |          | 267,808 |                   |   | 3,616 |  | 5.43   | %
|Noninterest-bearing assets                                                            |  |                                      | 20,612  |          |      |                   |  |        |                |  |          | 18,815  |                   |   |       |  |        |  
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Total assets                                                                          |  | $                                    | 342,378 |          |      |                   |  |        |                |  | $        | 286,623 |                   |   |       |  |        |  
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Interest-bearing liabilities                                                          |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Interest-bearing NOW                                                                  |  | $                                    | 39,076  |          |      | 78                |  | 0.81   | %              |  | $        | 40,375  |                   |   | 81    |  | 0.81   | %
|Money market and savings                                                              |  |                                      | 39,701  |          |      | 156               |  | 1.59   | %              |  |          | 30,631  |                   |   | 87    |  | 1.14   | %
|Time deposits                                                                         |  |                                      | 156,827 |          |      | 1,113             |  | 2.88   | %              |  |          | 128,763 |                   |   | 830   |  | 2.59   | %
|Short-term borrowings                                                                 |  |                                      | 2,788   |          |      | 17                |  | 2.47   | %              |  |          | 3,687   |                   |   | 12    |  | 1.31   | %
|Long-term debt                                                                        |  |                                      | 36,781  |          |      | 356               |  | 3.87   | %              |  |          | 20,000  |                   |   | 221   |  | 4.37   | %
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Total interest-bearing liabilities                                                    |  |                                      | 275,173 |          |      | 1,720             |  | 2.53   | %              |  |          | 223,456 |                   |   | 1,231 |  | 2.22   | %
|Other liabilities                                                                     |  |                                      | 39,834  |          |      |                   |  |        |                |  |          | 38,412  |                   |   |       |  |        |  
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Total Liabilities                                                                     |  |                                      | 315,007 |          |      |                   |  |        |                |  |          | 261,868 |                   |   |       |  |        |  
|Stockholders equity                                                                  |  |                                      | 27,371  |          |      |                   |  |        |                |  |          | 24,755  |                   |   |       |  |        |  
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Total liabilities & stockholders equity                                              |  | $                                    | 342,378 |          |      |                   |  |        |                |  | $        | 286,623 |                   |   |       |  |        |  
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Net interest income                                                                   |  |                                      |         |          | $    | 3,044             |  |        |                |  |          |         |                   | $ | 2,385 |  |        |  
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Interest rate spread                                                                  |  |                                      |         |          |      |                   |  | 3.47   | %              |  |          |         |                   |   |       |  | 3.21   | %
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Net interest-margin                                                                   |  |                                      |         |          |      |                   |  | 3.84   | %              |  |          |         |                   |   |       |  | 3.58   | %
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Percentage of average interest-earning assets to average interest-bearing liabilities |  |                                      |         |          |      |                   |  | 116.93 | %              |  |          |         |                   |   |       |  | 119.85 | %
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  



- 15 -



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VOLUME/RATE VARIANCE ANALYSIS



The following tables analyze the dollar amount of changes in interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities for the three-month periods ended March 31, 2005 and 2004. The table distinguishes between (i) changes attributable to volume (changes in volume multiplied by the prior periods rate), (ii) changes
attributable to rate (changes in rate multiplied by the prior periods volume), and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) has been
allocated equally to both the changes attributable to volume and the changes attributable to rate.



|                                            |  |                                                          |   |  |      |   |  |       |  
|------------------------------------------- |  | -------------------------------------------------------- | - |  | ---- | - |  | ----- | -
|                                            |  | Three Months Ended March 31,2005 vs. 2004 (in Thousands) |  
|                                            |  | Increase (Decrease) Due to                               |  
|                                            |  | Volume                                                   |   |  | Rate |   |  | Total |  
|Interest Income                             |  |                                                          |   |  |      |   |  |       |  
|Loan portfolio                              |  | 610                                                      |   |  | 373  |   |  | 983   |  
|Investment Securities                       |  | 168                                                      |   |  | (1   | ) |  | 167   |  
|Fed funds and other interest-earning assets |  | (16                                                      | ) |  | 14   |   |  | (2    | )
|                                            |  |                                                          |   |  |      |   |  |       |  
|Total interest-earning assets               |  | 762                                                      |   |  | 386  |   |  | 1,148 |  
|                                            |  |                                                          |  
|Interest Expense                            |  |                                                          |   |  |      |   |  |       |  
|Interest-bearing NOW                        |  | (3                                                       | ) |  | 0    |   |  | (3    | )
|Money market and savings                    |  | 30                                                       |   |  | 39   |   |  | 69    |  
|Time deposits                               |  | 186                                                      |   |  | 97   |   |  | 283   |  
|Short-term borrowings                       |  | (5                                                       | ) |  | 10   |   |  | 5     |  
|Long-term debt                              |  | 170                                                      |   |  | (35  | ) |  | 135   |  
|                                            |  |                                                          |   |  |      |   |  |       |  
|Total interest-bearing liabilities          |  | 378                                                      |   |  | 111  |   |  | 489   |  
|                                            |  |                                                          |  
|Net interest income                         |  | 384                                                      |   |  | 275  |   |  | 659   |  
|                                            |  |                                                          |   |  |      |   |  |       |  



- 16 -



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NONPERFORMING ASSETS



The table below sets forth, for the period indicated, information about our nonaccrual loans, restructured loans, total nonperforming loans
(nonaccrual loans plus restructured loans), and total nonperforming assets.



|                                                                        |  |                        |         |   |                 |   |        |      |  |   |           |   |  |   |          |  
|----------------------------------------------------------------------- |  | ---------------------- | ------- | - | --------------- | - | ------ | ---- |  | - | --------- | - |  | - | -------- | -
|                                                                        |  | At March 31,           |         |   | At December 31, |  
|                                                                        |  | 2005                   |         |   | 2004            |   |        | 2004 |  |   | 2003      |  
|                                                                        |  | (Dollars in thousands) |        
|Nonaccrual loans                                                        |  | $                      | 84      |   |                 | $ | 364    |      |  | $ | 5         |   |  | $ | 159      |  
|Restructured loans                                                      |  |                        |        |   |                 |   |       |      |  |   |          |   |  |   |         |  
|                                                                        |  |                        |         |   |                 |   |        |      |  |   |           |   |  |   |          |  
|Total nonperforming loans                                               |  |                        | 84      |   |                 |   | 364    |      |  |   | 5         |   |  |   | 159      |  
|                                                                        |  |                        |         |  
|Real estate owned                                                       |  |                        |        |   |                 |   | 45     |      |  |   | 245       |   |  |   |         |  
|Repossessed assets                                                      |  |                        |        |   |                 |   |       |      |  |   | 48        |   |  |   |         |  
|                                                                        |  |                        |         |   |                 |   |        |      |  |   |           |   |  |   |          |  
|Total nonperforming assets                                              |  | $                      | 84      |   |                 | $ | 409    |      |  | $ | 298       |   |  | $ | 159      |  
|                                                                        |  |                        |         |   |                 |   |        |      |  |   |           |   |  |   |          |  
|Accruing loans past due 90 days or more                                 |  | $                      |        |   |                 | $ |       |      |  | $ |          |   |  | $ | 647      |  
|Allowance for loan losses                                               |  |                        | 3,876   |   |                 |   | 3,538  |      |  |   | 3,668     |   |  |   | 3,304    |  
|Nonperforming loans to period end loans                                 |  |                        | 0.03    | % |                 |   | 0.16   | %    |  |   | 0.00      | % |  |   | 0.07     | %
|Allowance for loan losses to period end loans                           |  |                        | 1.39    | % |                 |   | 1.51   | %    |  |   | 1.42      | % |  |   | 1.52     | %
|Allowance for loan losses to nonperforming loans                        |  |                        | 4614.29 | % |                 |   | 971.98 | %    |  |   | 78,577.55 | % |  |   | 2,077.99 | %
|Nonperforming assets to total assets                                    |  |                        | 0.02    | % |                 |   | 0.13   | %    |  |   | 0.09      | % |  |   | 0.06     | %
|                                                                        |  |                        |         |  
|Nonperforming assets and loans past due 90 days or more to total assets |  |                        | 0.02    | % |                 |   | 0.13   | %    |  |   | 0.09      | % |  |   | 0.29     | %



Our financial statements are prepared
on the accrual basis of accounting, including the recognition of interest income on loans, unless we place a loan on nonaccrual basis. We account for loans on a nonaccrual basis when we have serious doubts about the collectibility of principal or
interest. Generally, our policy is to place a loan on nonaccrual status when the loan becomes past due 90 days. We also place loans on nonaccrual status in cases where we are uncertain whether the borrower can satisfy the contractual terms of the
loan agreement. Amounts received on nonaccrual loans generally are applied first to principal and then to interest only after all principal has been collected. Restructured loans are those for which concessions, including the reduction of interest
rates below a rate otherwise available to that borrower or the deferral of interest or principal have been granted due to the borrowers weakened financial condition. We accrue interest on restructured loans at the restructured rates when we
anticipate that no loss of original principal will occur. Potential problem loans are loans which are currently performing and are not included as nonaccrual or restructured loans above, but about which we have serious doubts as to the
borrowers ability to comply with present repayment terms. These loans are likely to be included later in nonaccrual, past due or restructured loans, so they are considered by our management in assessing the adequacy of our allowance for loan
losses. At March 31, 2005, we had identified one loan in the amount of $23,000 as a potential problem loan. The loan was not past due at March 31, 2005, but possesses certain undesirable characteristics. The loan is secured by a general security
agreement on the assets of the business.



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There were no foreclosed properties at March 31, 2005. The Company owned one piece of foreclosed real estate at March 31,
2004. A loan previously reported as a non-accrual at December 31, 2003, in the amount of $65,000, and secured by one-to-four family residential real estate was foreclosed during the first quarter of 2004. The Company charged $20,000 against the
allowance for loan losses and recorded the property at $45,000. The property was disposed of in June 2004 and a gain was recorded on the sale of $7,300.



There were three non-accrual loans at March 31, 2005 in the aggregate amount of $84,000. One loan in the amount of $79,000 is secured by general business assets. We
anticipate selling assets for approximately $10,000 and charging-off $69,000. The amount to be charged-off is fully reserved. The other two loans are each in the amount of $2,000. One is unsecured and will be charged-off and the other is making
payments in an agreed upon manner. Interest foregone on non-accrual loans was approximately $1,300. There were three non-accrual loans at March 31, 2004 in the aggregate amount of $364,000. Interest foregone on nonaccrual loans was approximately
$6,000 for the three-month period ended March 31, 2004.



ANALYSIS OF ALLOWANCE FOR LOAN LOSSES



The allowance for loan
losses is established through periodic charges to earnings in the form of a provision for loan losses. Increases to the allowance for loan losses occur as a result of provisions charged to operations and recoveries of amounts previously charged-off,
and decreases to the allowance occur when loans are charged-off. Management evaluates the adequacy of our allowance for loan losses on a monthly basis. The evaluation of the adequacy of the allowance for loan losses involves the consideration of
loan growth, loan portfolio composition and industry diversification, historical loan loss experience, current delinquency levels, adverse conditions that might affect a borrowers ability to repay the loan, estimated value of underlying
collateral, prevailing economic conditions and all other relevant factors derived from the Companys history of operations. Additionally, as an important component of their periodic examination process, regulatory agencies review the allowance
for loan losses and may require additional provisions for estimated losses based on judgments that differ from those of management.



The Company uses an internal grading system to assign the degree of inherent risk on each individual loan. The grade is initially assigned by the lending officer and
reviewed by the Loan Administration function. The internal grading system is reviewed and tested periodically by an independent third party credit review firm. The testing process involves the evaluation of a sample of new loans, loans having been
identified as possessing potential weakness in credit quality, past due loans and nonaccrual loans to determine the ongoing effectiveness of the internal grading system. The loan grading system is used to assess the adequacy of the allowance for
loan losses.



Management has developed a model for evaluating the adequacy of
the allowance for loan losses. The model distinguishes between loans that will be evaluated as a group by loan category and those loans to be evaluated individually. Using the various evaluation factors mentioned above, management predetermined
allowance percentages for each major loan category. Loans that exhibit an acceptable level of risk per the internal loan grading system are grouped by loan category and multiplied by the associated allowance percentage to determine an adequate level
of allowance for loan losses.



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Based on the loan grading system, management maintains an internally classified watch list. Loans classified as watch
list credits, and those loans that are not watch list credits but possess other characteristics which in the opinion of management suggest a higher degree of inherent risk, are evaluated individually, by loan category, using higher allowance
percentages. Using the data gathered during the monthly evaluation process, the model calculates an acceptable range for allowance for loan losses. Management and the Board of Directors are responsible for determining the appropriate level of the
allowance for loan losses within that range.



The primary reason for increases
to the allowance for loan losses has been growth in total outstanding loans; however, there were other factors influencing the provision. For the three-month period ended March 31, 2005, there were $4,000 in net loan recoveries and $84,000 in
non-accrual loans compared with $22,000 in net loan charge-offs and $364,000 in non-accrual loans at March 31, 2004. The allowance for loan losses at March 31, 2005 was $3.9 million, which represents 1.39% of total outstanding loans compared to $3.5
million and 1.51% for the prior year. The allowance for loan losses as a percentage of total outstanding loans declined from the prior year primarily due to improvement in the asset quality of the portfolio.



The allowance for loan losses represents managements estimate of an amount adequate to
provide for known and inherent losses in the loan portfolio in the normal course of business. While management believes the methodology used to establish the allowance for loan losses incorporates the best information available at the time, future
adjustments to the level of the allowance may be necessary and the results of operations could be adversely affected should circumstances differ substantially from the assumptions initially used. We believe that the allowance for loan losses was
established in conformity with generally accepted accounting principles; however, there can be no assurances that the regulatory agencies, after reviewing the loan portfolio, will not require management to increase the level of the allowance.
Likewise, there can be no assurance that the existing allowance for loan losses is adequate should there be deterioration in the quality of any loans or changes in any of the factors discussed above. Any increases in the provision for loan losses
resulting from such deterioration or change in condition could adversely affect the financial condition of the Company and results of its operations.



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The following table describes the allocation of the allowance for loan losses among various categories of loans for the
dates indicated.



Allocation of Allowance for Loan Losses



|                                |  |                        |       |                     |                      |   |        |   |                     |  |        |  
|------------------------------- |  | ---------------------- | ----- | ------------------- | -------------------- | - | ------ | - | ------------------- |  | ------ | -
|                                |  | At March 31, 2005      |       |                     | At December 31, 2004 |  
|                                |  | Amount                 |       | % of TotalLoans (1) |                      |   | Amount |   | % of TotalLoans (1) | 
|                                |  | (Dollars in thousands) |      
|Residential real estate loans   |  | $                      | 44    |                     | 4.18                 | % |        | $ | 44                  |  | 4.50   | %
|Home equity loans and lines     |  |                        | 177   |                     | 11.71                | % |        |   | 173                 |  | 12.00  | %
|Commercial mortgage loans       |  |                        | 1,405 |                     | 47.70                | % |        |   | 1,290               |  | 47.24  | %
|Construction loans              |  |                        | 782   |                     | 15.46                | % |        |   | 718                 |  | 15.09  | %
|Commercial and industrial loans |  |                        | 1,172 |                     | 18.95                | % |        |   | 1,105               |  | 18.90  | %
|Loans to individuals            |  |                        | 296   |                     | 2.00                 | % |        |   | 338                 |  | 2.27   | %
|                                |  |                        |       |                     |                      |   |        |   |                     |  |        |  
|Total loans                     |  | $                      | 3,876 |                     | 100.00               | % |        | $ | 3,668               |  | 100.00 | %
|                                |  |                        |       |                     |                      |   |        |   |                     |  |        |  

---

|(1) | Represents total of all outstanding loans in each category as a percent of total loans outstanding
|--- | --------------------------------------------------------------------------------------------------



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The following table presents information regarding changes in the allowance for loan losses for the periods indicated:



Changes in Allowance for Loan Losses



|                                                      |  |                               |         |   |      |   |         |  
|----------------------------------------------------- |  | ----------------------------- | ------- | - | ---- | - | ------- | -
|                                                      |  | For the Period EndedMarch 31, |        
|                                                      |  | 2005                          |         |   | 2004 |  
|                                                      |  | (Dollars in thousands)        |        
|Balance at the beginning of the year                  |  | $                             | 3,668   |   |      | $ | 3,304   |  
|Charge-offs:                                          |  |                               |         |   |      |   |         |  
|Commercial and industrial loans                       |  |                               |        |   |      |   |        |  
|Residential real estate loans                         |  |                               |        |   |      |   | 21      |  
|Loans to individuals                                  |  |                               | 6       |   |      |   | 1       |  
|                                                      |  |                               |         |   |      |   |         |  
|Total charge-offs                                     |  |                               | 6       |   |      |   | 22      |  
|                                                      |  |                               |         |   |      |   |         |  
|Recoveries                                            |  |                               | 10      |   |      |   |        |  
|                                                      |  |                               |         |   |      |   |         |  
|Net charge-offs (recoveries)                          |  |                               | (4      | ) |      |   | 22      |  
|                                                      |  |                              
|Provision for loan losses                             |  |                               | 204     |   |      |   | 256     |  
|                                                      |  |                               |         |   |      |   |         |  
|Balance at the end of the year                        |  | $                             | 3,876   |   |      | $ | 3,538   |  
|                                                      |  |                               |         |   |      |   |         |  
|Total loans outstanding at period-end                 |  | $                             | 278,279 |   |      | $ | 234,605 |  
|                                                      |  |                              
|Average loans outstanding for the period              |  | $                             | 265,337 |   |      | $ | 223,827 |  
|                                                      |  |                              
|Allowance for loan losses to total loans outstanding  |  |                               | 1.39    | % |      |   | 1.51    | %
|                                                      |  |                              
|Ratio of net charge-offs to average loans outstanding |  |                               | 0.00    | % |      |   | 0.01    | %



LIQUIDITY AND
CAPITAL RESOURCES



Maintaining adequate liquidity while managing interest
rate risk is the primary goal of the Companys asset and liability management strategy. Liquidity is the ability to fund the needs of the Companys borrowers and depositors, pay operating expenses, and meet regulatory liquidity
requirements. Maturing investments, loan and mortgage-backed security principal repayments, deposit growth, brokered time deposits and borrowings from the Federal Home Loan Bank and other correspondent banks are presently the main sources of the
Companys liquidity. The Companys primary uses of liquidity are to fund loans and to make investments.



As of March 31, 2005, liquid assets (cash and due from banks, interest-earning deposits with banks, Federal funds sold and investment securities available for sale) were
approximately $62.2 million, which represents 18% of total assets and 22% of total deposits. Supplementing this liquidity, the Company has available lines of credit from various correspondent banks of approximately $93.5 million of which $32.0
million is outstanding at March 31, 2005. At March 31, 2004, outstanding commitments for undisbursed lines of credit, letters of credit and undisbursed investment commitments amounted to approximately $98.5 million. Management



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intends to fund anticipated loan closings and operational needs through cash and cash equivalents on hand, brokered
deposits, scheduled principal repayments from the loan and securities portfolios, and anticipated increases in deposits and borrowings. Certificates of deposits represented 58% of the Companys total deposits at March 31, 2005 compared with 56%
at December 31, 2004. The Companys growth strategy will include marketing efforts focused at increasing the relative volume of low cost transaction deposit accounts; however, time deposits will continue to play an important role in the
Companys funding strategy. Certificates of deposit of $100,000 or more represented 36% of the Companys total deposits at March 31, 2005 and December 31, 2004. While these deposits are generally considered rate sensitive and the Company
will need to pay competitive rates to retain these deposits at maturity, there are other subjective factors that will determine the Companys continued retention of those deposits.



Under federal capital regulations, Crescent State Bank must satisfy certain minimum leverage ratio requirements and risk-based capital
requirements. At March 31, 2005, the Banks equity to asset ratio was 7.61%. All capital ratios place the Bank in excess of the minimum required to be deemed an adequately capitalized bank by regulatory measures. The Banks ratio of Tier I
capital to risk-weighted assets at March 31, 2005 was 11.01%.



IMPACT OF INFLATION AND CHANGING PRICES



A commercial bank has
an asset and liability composition that is distinctly different from that of a company with substantial investments in plant and inventory because the major portions of its assets are monetary in nature. As a result, a banks performance may be
significantly influenced by changes in interest rates. Although the banking industry is more affected by changes in interest rates than by inflation in the prices of goods and services, inflation is a factor that may influence interest rates.
However, the frequency and magnitude of interest rate fluctuations do not necessarily coincide with changes in the general inflation rate. Inflation does affect operating expenses in that personnel expenses and the cost of supplies and outside
services tend to increase more during periods of high inflation.



FORWARD-LOOKING INFORMATION



This quarterly report to
stockholders may contain, in addition to historical information, certain forward-looking statements that represent managements judgment concerning the future and are subject to risks and uncertainties that could cause the
Companys actual operating results and financial position to differ materially from those projected in the forward-looking statements. Such forward-looking statements can be identified by the use of forward-looking terminology such as
may, will, expect, anticipate, estimate or continue or the negative thereof or other variations thereof or comparable terminology. Factors that could influence the estimates
include changes in national, regional and local market conditions, legislative and regulatory conditions, and the interest rate environment.



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Item 3. Quantitative and Qualitative Disclosures about Market Risk



The Companys primary market risk is interest rate risk. Interest rate risk is the result of differing maturities or repricing intervals of interest earning assets and interest bearing liabilities and the fact
that rates on these financial instruments do not change uniformly. These conditions may impact the earnings generated by the Companys interest earning assets or the cost of its interest bearing liabilities, thus directly impacting the
Companys overall earnings. The Companys management actively monitors and manages interest rate risk. One way this is accomplished is through the development of and adherence to the Companys asset/liability policy. This policy sets
forth managements strategy for matching the risk characteristics of the Companys interest earning assets and liabilities so as to mitigate the effect of changes in the rate environment. The Companys market risk profile has not
changed significantly since December 31, 2004.



Item 4. Controls and Procedures



As of March
31, 2005, an evaluation was performed under the supervision and with the participation of the Companys management, including the CEO and CFO, of the effectiveness of the design and operation of the Companys disclosure controls and
procedures. Based on that evaluation, the Companys management, including the CEO and CFO, concluded that the Companys disclosure controls and procedures were effective as of March 31, 2005. There have been no significant changes in the
Companys internal controls or in other factors that could significantly affect internal controls during or subsequent to the period covered by this report.



- 23 -



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Part II. OTHER INFORMATION



Item 1. Legal Proceedings.



None.



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



None.



Item 3. Defaults Upon Senior Debt.



None.



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



None.



Item 5. Other Information.



None.



Item 6. Exhibits



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



|     |  |                                                                                                                                             
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Principal Executive Officer pursuant to Rule 13a  14(a)                                                                   
|     | 
|31.2 |  | Certification of Principal Financial Officer pursuant to Rule 13a  14(a)                                                                   
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    
|     | 
|32.2 |  | Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



- 24 -



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SIGNATURES



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



|                   |  |                                |  |                                      
|------------------ |  | ------------------------------ |  | -------------------------------------
|                   |  | CRESCENT FINANCIAL CORPORATION
|                   |  |                               
|Date: May 11, 2005 |  | By:                            |  | /s/ Michael G. Carlton               
|                   |  |                                |  | Michael G. Carlton                   
|                   |  |                                |  | President and Chief Executive Officer
|                   |  |                               
|Date: May 11, 2005 |  | By:                            |  | /s/ Bruce W. Elder                   
|                   |  |                                |  | Bruce W. Elder                       
|                   |  |                                |  | Vice President and Secretary         



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