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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20429



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FORM 10-QSB



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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, 2004



| ̈ | 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 small business issuer as specified in its charter)



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|                         |  |                                     
|------------------------ |  | ------------------------------------
|NORTH CAROLINA           |  | 56-2259050                          
|(State of Incorporation) |  | (IRS Employer Identification Number)



1005 HIGH HOUSE
ROAD, CARY, NORTH CAROLINA 27513

(Address of principal executive offices)



(919) 460-7770

(Issuers Telephone Number)



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Check whether the issuer (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the past 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 ̈



The number of shares of the registrants
common stock outstanding as of May 12, 2004 was 3,520,303.



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##### Table of Contents

|         |  |                                                                                         |  |         
|-------- |  | --------------------------------------------------------------------------------------- |  | --------
|         |  |                                                                                         |  | Page No.
|Part I.  |  | FINANCIAL INFORMATION                                                                   |  |         
|         |  |                                                                                        
|Item 1 - |  | Financial Statements (Unaudited)                                                        |  |         
|         |  |                                                                                        
|         |  | Consolidated Balance Sheets March 31, 2004 and December 31, 2003                        |  | 3       
|         |  |                                                                                        
|         |  | Consolidated Statements of Operations Three Month Periods Ended March 31, 2004 and 2003 |  | 4       
|         |  |                                                                                        
|         |  | Consolidated Statements of Cash Flows Three Months Ended March 31, 2004                 |  | 5       
|         |  |                                                                                        
|         |  | Notes to Consolidated Financial Statements                                              |  | 6 -7    
|         |  |                                                                                        
|Item 2 - |  | Managements Discussion and Analysis of Financial Condition and Results of Operations   |  | 8 -20   
|         |  |                                                                                        
|Item 3 - |  | Controls and Procedures                                                                 |  | 21      
|         |  |                                                                                        
|Part II. |  | Other Information                                                                       |  |         
|         |  |                                                                                        
|         |  | Item 6. Exhibits and Reports on Form 8-K                                                |  | 22      





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##### Table of Contents

Part I. FINANCIAL INFORMATION



Item 1 - Financial Statements



CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                      |  |                           |         |   |                   |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                      |  | March 31, 2004(Unaudited) |         |   | December 31,2003* |  
|                                                                                                                                                      |  | (dollars in thousands)    |        
|ASSETS                                                                                                                                                |  |                           |         |   |                   |   |         |  
|                                                                                                                                                      |  |                          
|Cash and due from banks                                                                                                                               |  | $                         | 8,249   |   |                   | $ | 6,613   |  
|Interest-earning deposits with banks                                                                                                                  |  |                           | 738     |   |                   |   | 438     |  
|Federal funds sold                                                                                                                                    |  |                           | 25,772  |   |                   |   |        |  
|Investment securities available for sale at fair value                                                                                                |  |                           | 40,657  |   |                   |   | 36,995  |  
|Loans                                                                                                                                                 |  |                           | 234,605 |   |                   |   | 216,746 |  
|Allowance for loan losses                                                                                                                             |  |                           | (3,538  | ) |                   |   | (3,304  | )
|                                                                                                                                                      |  |                           |         |   |                   |   |         |  
|NET LOANS                                                                                                                                             |  |                           | 231,067 |   |                   |   | 213,442 |  
|Accrued interest receivable                                                                                                                           |  |                           | 1,026   |   |                   |   | 964     |  
|Federal Home Loan Bank stock                                                                                                                          |  |                           | 694     |   |                   |   | 950     |  
|Bank premises and equipment                                                                                                                           |  |                           | 3,015   |   |                   |   | 2,699   |  
|Investment in life insurance                                                                                                                          |  |                           | 5,127   |   |                   |   | 5,073   |  
|Goodwill                                                                                                                                              |  |                           | 3,600   |   |                   |   | 3,600   |  
|Other assets                                                                                                                                          |  |                           | 3,105   |   |                   |   | 2,940   |  
|                                                                                                                                                      |  |                           |         |   |                   |   |         |  
|TOTAL ASSETS                                                                                                                                          |  | $                         | 323,050 |   |                   | $ | 273,714 |  
|                                                                                                                                                      |  |                           |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                  |  |                           |         |   |                   |   |         |  
|                                                                                                                                                      |  |                          
|LIABILITIES                                                                                                                                           |  |                           |         |   |                   |   |         |  
|Deposits                                                                                                                                              |  |                           |         |   |                   |   |         |  
|Demand                                                                                                                                                |  | $                         | 59,811  |   |                   | $ | 37,942  |  
|Savings                                                                                                                                               |  |                           | 2,412   |   |                   |   | 2,193   |  
|Money market and NOW                                                                                                                                  |  |                           | 75,303  |   |                   |   | 65,962  |  
|Time                                                                                                                                                  |  |                           | 138,641 |   |                   |   | 112,518 |  
|                                                                                                                                                      |  |                           |         |   |                   |   |         |  
|TOTAL DEPOSITS                                                                                                                                        |  |                           | 276,167 |   |                   |   | 218,615 |  
|                                                                                                                                                      |  |                          
|Short-term borrowings                                                                                                                                 |  |                           | 219     |   |                   |   | 9,002   |  
|Long-term borrowings                                                                                                                                  |  |                           | 12,000  |   |                   |   | 12,000  |  
|Trust preferred securities                                                                                                                            |  |                           | 8,000   |   |                   |   | 8,000   |  
|Accrued expenses and other liabilities                                                                                                                |  |                           | 1,714   |   |                   |   | 1,947   |  
|                                                                                                                                                      |  |                           |         |   |                   |   |         |  
|TOTAL LIABILITIES                                                                                                                                     |  |                           | 298,100 |   |                   |   | 249,564 |  
|                                                                                                                                                      |  |                           |         |   |                   |   |         |  
|STOCKHOLDERS EQUITY                                                                                                                                  |  |                           |         |   |                   |   |         |  
|Preferred stock, no par value, 5,000,000 shares authorized, none outstanding;                                                                         |  |                           |        |   |                   |   |        |  
|Common stock, $1 par value, 20,000,000 shares authorized; 3,510,534 shares outstanding March 31, 2004; 2,924,429 shares outstanding December
31, 2003 |  |                           | 3,511   |   |                   |   | 2,924   |  
|Additional paid-in capital                                                                                                                            |  |                           | 18,308  |   |                   |   | 18,885  |  
|Retained earnings                                                                                                                                     |  |                           | 2,694   |   |                   |   | 2,230   |  
|Accumulated other comprehensive income (Note D)                                                                                                       |  |                           | 437     |   |                   |   | 111     |  
|                                                                                                                                                      |  |                           |         |   |                   |   |         |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                                            |  |                           | 24,950  |   |                   |   | 24,150  |  
|                                                                                                                                                      |  |                           |         |   |                   |   |         |  
|COMMITMENTS (Note B)                                                                                                                                  |  |                           |         |   |                   |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                            |  | $                         | 323,050 |   |                   | $ | 273,714 |  
|                                                                                                                                                      |  |                           |         |   |                   |   |         |  

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



See accompanying notes.



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##### Table of Contents

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Three Months Ended March 31, 2004 and 2003



|                                                    |  |                                              |           |      |   |          
|--------------------------------------------------- |  | -------------------------------------------- | --------- | ---- | - | ---------
|                                                    |  | 2004                                         |           | 2003
|                                                    |  | (dollars in thousands except per share data)
|INTEREST INCOME                                     |  |                                              |           |      |   |          
|Loans                                               |  | $                                            | 3,203     |      | $ | 1,954    
|Investment securities available for sale            |  |                                              | 402       |      |   | 363      
|Federal funds sold and interest-earning deposits    |  |                                              | 11        |      |   | 19       
|                                                    |  |                                              |           |      |   |          
|TOTAL INTEREST INCOME                               |  |                                              | 3,616     |      |   | 2,336    
|                                                    |  |                                              |           |      |   |          
|INTEREST EXPENSE                                    |  |                                              |           |      |   |          
|Deposits                                            |  |                                              | 998       |      |   | 684      
|Borrowings                                          |  |                                              | 233       |      |   | 106      
|                                                    |  |                                              |           |      |   |          
|TOTAL INTEREST EXPENSE                              |  |                                              | 1,231     |      |   | 790      
|                                                    |  |                                              |           |      |   |          
|NET INTEREST INCOME                                 |  |                                              | 2,385     |      |   | 1,546    
|PROVISION FOR LOAN LOSSES                           |  |                                              | 256       |      |   | 108      
|                                                    |  |                                              |           |      |   |          
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |  |                                              | 2,129     |      |   | 1,438    
|                                                    |  |                                              |           |      |   |          
|NON-INTEREST INCOME                                 |  |                                              | 492       |      |   | 304      
|                                                    |  |                                              |           |      |   |          
|NON-INTEREST EXPENSE                                |  |                                              |           |      |   |          
|Salaries and employee benefits                      |  |                                              | 1,010     |      |   | 639      
|Occupancy and equipment                             |  |                                              | 344       |      |   | 224      
|Data processing                                     |  |                                              | 124       |      |   | 74       
|Other                                               |  |                                              | 454       |      |   | 240      
|                                                    |  |                                              |           |      |   |          
|TOTAL NON-INTEREST EXPENSE                          |  |                                              | 1,932     |      |   | 1,177    
|                                                    |  |                                              |           |      |   |          
|INCOME BEFORE INCOME TAXES                          |  |                                              | 689       |      |   | 565      
|INCOME TAX EXPENSE                                  |  |                                              | 225       |      |   | 202      
|                                                    |  |                                              |           |      |   |          
|NET INCOME                                          |  | $                                            | 464       |      | $ | 363      
|                                                    |  |                                              |           |      |   |          
|NET INCOME PER COMMON SHARE (Note C)                |  |                                              |           |      |   |          
|Basic                                               |  | $                                            | .13       |      | $ | .12      
|                                                    |  |                                              |           |      |   |          
|Diluted                                             |  | $                                            | .12       |      | $ | .12      
|                                                    |  |                                              |           |      |   |          
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note C) |  |                                              |           |      |   |          
|Basic                                               |  |                                              | 3,510,079 |      |   | 2,957,685
|                                                    |  |                                              |           |      |   |          
|Diluted                                             |  |                                              | 3,705,139 |      |   | 3,059,735
|                                                    |  |                                              |           |      |   |          



See
accompanying notes.



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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Three Months Ended March 31, 2004 and
2003



|                                                                                         |  |                |         |   |      |   |        |  
|---------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------ | -
|                                                                                         |  | 2004           |         |   | 2003 |  
|                                                                                         |  | (In Thousands) |        
|CASH FLOWS FROM OPERATING ACTIVITIES                                                     |  |                |         |   |      |   |        |  
|Net income                                                                               |  | $              | 464     |   |      | $ | 363    |  
|                                                                                         |  |                |         |   |      |   |        |  
|Adjustments to reconcile net income to net cash provided (used) by operating activities: |  |                |         |   |      |   |        |  
|Depreciation                                                                             |  |                | 131     |   |      |   | 74     |  
|Provision for loan losses                                                                |  |                | 256     |   |      |   | 108    |  
|Gain on sale of assets                                                                   |  |                |        |   |      |   | (3     | )
|Net accretion (amortization) of premiums on securities                                   |  |                | 24      |   |      |   | 4      |  
|Change in assets and liabilities:                                                        |  |                |         |   |      |   |        |  
|(Increase) in accrued interest receivable                                                |  |                | (62     | ) |      |   | (108   | )
|(Increase) in other assets                                                               |  |                | (369    | ) |      |   | (79    | )
|(Decrease) in accrued interest payable                                                   |  |                | (28     | ) |      |   | (6     | )
|Increase (decrease) in other liabilities                                                 |  |                | (179    | ) |      |   | 61     |  
|Payment of income taxes                                                                  |  |                | (25     | ) |      |   | (576   | )
|Increase in cash value of life insurance                                                 |  |                | (55     | ) |      |   |       |  
|                                                                                         |  |                |         |   |      |   |        |  
|TOTAL ADJUSTMENTS                                                                        |  |                | (307    | ) |      |   | (525   | )
|                                                                                         |  |                |         |   |      |   |        |  
|NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES                                         |  |                | 157     |   |      |   | (162   | )
|                                                                                         |  |                |         |   |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                     |  |                |         |   |      |   |        |  
|Purchases of securities available for sale                                               |  |                | (4,866  | ) |      |   | (2,440 | )
|Maturities of securities available for sale                                              |  |                | 250     |   |      |   | 500    |  
|Principal repayments of securities available for sale                                    |  |                | 1,716   |   |      |   | 3,446  |  
|Net increase in loans                                                                    |  |                | (17,881 | ) |      |   | (6,917 | )
|Purchases of bank premises and equipment                                                 |  |                | (446    | ) |      |   | (164   | )
|                                                                                         |  |                |         |   |      |   |        |  
|NET CASH USED BY INVESTING ACTIVITIES                                                    |  |                | (21,227 | ) |      |   | (5,575 | )
|                                                                                         |  |                |         |   |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                     |  |                |         |   |      |   |        |  
|Net increase (decrease) in deposits:                                                     |  |                |         |   |      |   |        |  
|Noninterest-bearing demand                                                               |  |                | 21,869  |   |      |   | 20,836 |  
|Savings                                                                                  |  |                | 219     |   |      |   | (109   | )
|Money market and NOW                                                                     |  |                | 9,341   |   |      |   | 2,357  |  
|Time deposits                                                                            |  |                | 26,123  |   |      |   | 2,303  |  
|Net decrease in borrowed funds                                                           |  |                | (8,783  | ) |      |   |       |  
|Proceeds from stock options exercised                                                    |  |                | 9       |   |      |   |       |  
|                                                                                         |  |                |         |   |      |   |        |  
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                                |  |                | 48,778  |   |      |   | 25,387 |  
|                                                                                         |  |                |         |   |      |   |        |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     |  |                | 27,708  |   |      |   | 19,650 |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                           |  |                | 7,051   |   |      |   | 26,232 |  
|                                                                                         |  |                |         |   |      |   |        |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                 |  | $              | 34,759  |   |      | $ | 45,882 |  
|                                                                                         |  |                |         |   |      |   |        |  



See
accompanying notes.



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##### Table of Contents

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, 2004 and
2003, 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 subsidiaries, Crescent
State Bank (the Bank) and Crescent Financial Capital Trust I (Capital Trust I). All significant inter-company transactions and balances are eliminated in consolidation. Operating results for the three-month period ended March
31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2004.



The organization and business of Crescent Financial Corporation and subsidiaries (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 2003 annual report on Form 10-KSB. This quarterly report should be read in conjunction with such annual report.



NOTE B  COMMITMENTS



At March 31, 2004, loan commitments are as follows



|                            |  |   |           
|--------------------------- |  | - | ----------
|Undisbursed lines of credit |  | $ | 58,884,000
|Stand-by letters of credit  |  |   | 1,498,000 



NOTE C  PER SHARE RESULTS



The Company effected a stock split in the form of a 20% stock dividend
paid on April 16, 2004 to stockholders of record March 12, 2004. 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.



For the three months ended March 31, 2004, the weighted-average number of common shares used in computing basic earnings per share, adjusted
for the stock split effected as a 20% stock dividend, was 3,510,079. The dilutive effect of stock options was 195,060 shares. The weighted-average number of common shares and dilutive potential common shares used in computing diluted earnings per
share was 3,705,139. For the three months ended March 31, 2003, the weighted-average number of common shares used in computing basic earnings per share, adjusted for the stock split effected as a 20% stock dividend, was 2,957,685. The dilutive
effect of stock options was 102,050 shares. The weighted-average number of common shares and dilutive potential common shares used in computing diluted earnings per share was 3,059,735.



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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements



NOTE D - COMPREHENSIVE INCOME



For the three months ended March 31, 2004 and 2003, total comprehensive income, consisting of net income and unrealized securities gains and losses, net of taxes, was
$790,000 and $189,000, respectively.



NOTE E  STOCK COMPENSATION PLANS



Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to
acquire the stock. Stock options issued under the companys stock option plans have no intrinsic value at the grant date and, under Opinion No. 25, no compensation cost is recognized for them. The company has elected to continue with the
accounting methodology in Opinion No. 25. 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 EndedMarch 31,                 
|                                                                                                                                      |  | 2004                                         |     | 2003
|                                                                                                                                      |  | (Amounts in thousands,except per share data)
|Net income:                                                                                                                           |  |                                              |     |      |   |    
|As reported                                                                                                                           |  | $                                            | 464 |      | $ | 363
|Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax
effects |  |                                              | 17  |      |   | 11 
|                                                                                                                                      |  |                                              |     |      |   |    
|Pro forma                                                                                                                             |  | $                                            | 447 |      | $ | 352
|                                                                                                                                      |  |                                              |     |      |   |    
|Basic earnings per share:                                                                                                             |  |                                              |     |      |   |    
|As reported                                                                                                                           |  | $                                            | .13 |      | $ | .12
|Pro forma                                                                                                                             |  |                                              | .13 |      |   | .11
|Diluted earnings per share:                                                                                                           |  |                                              |     |      |   |    
|As reported                                                                                                                           |  | $                                            | .12 |      | $ | .12
|Pro forma                                                                                                                             |  |                                              | .12 |      |   | .11



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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, 2004 and 2003. 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, 2004 AND DECEMBER 31, 2003



Total assets at March
31, 2004 are $323.0 million compared with $273.7 million at December 31, 2003. Earning assets totaled $302.5 million or 94% of total assets at March 31, 2004 compared with $254.9 million or 93% of total assets as of December 31, 2003. Components of
earning assets at March 31, 2004 are $234.6 million in loans, $41.4 million in investment securities and FHLB stock, $25.8 million in overnight investments and $738,000 in interest bearing deposits with correspondent banks. Total deposits and
stockholders equity at March 31, 2004 were $276.2 million and $24.9 million, respectively, compared to $218.6 million and $24.1 million at December 31, 2003.



Gross loans outstanding at March 31, 2004 increased by $17.9 million or 8% to $234.6 million compared to $216.7 million reported at December
31, 2003. The composition of the loan portfolio, by category, as of March 31, 2004 is 48% commercial mortgage loans, 18% commercial loans, 14% construction loans, 11% home equity loans and lines, 6% residential mortgage loans and 3% consumer loans.
The commercial mortgage category showed the most growth increasing $10.9 million from $101.3 million at December 31, 2003 to $112.2 million at March 31, 2004. The commercial loan portfolio increased by $5.3 million from $38.2 million at December 31,
2003 to $43.5 million at March 31, 2004. Home equity loans and lines increased by $2.7 million during the first quarter of 2004 from $23.0 million at December 31, 2003 to $25.7 million at March 31, 2004. Construction and development loans
experienced a net increase of $2.4 million, growing from $31.6 million at year end to $34.0 million at March 31, 2004. The consumer loan and residential mortgage loan portfolios experienced net declines during the first quarter of $2.4 million and
$1.1 million, respectively. The composition of the loan portfolio, by category, as of December 31, 2003 was 47% commercial mortgage loans, 18% commercial loans, 14% construction loans, 10% home equity loans and lines, 7% residential real estate
mortgage loans and 4% consumer loans.



The Company had an allowance for loan
losses at March 31, 2004 of $3.5 million or 1.51% of total outstanding loans compared to $3.3 million or 1.52% of total outstanding loans at December 31, 2003. At March 31, 2004, there were three loans totaling $364,000 in non-accrual status and no
loans 90 days or more past due and still accruing interest. Non-performing assets, which consist of loans in nonaccrual status plus other real estate owned, was $409,000 or 0.13% of total outstanding assets at March 31, 2004.



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The Company has investment securities with an amortized cost of $39.9 million at March 31, 2004. 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 $40.7 million. The Companys investment in debt securities at March 31, 2004, consists of U.S.
Government agency securities, collateralized mortgage obligations, mortgage-backed securities and municipal bonds. The portfolio increased by $3.7 million or 10% compared with $37.0 million at December 31, 2003. Activities resulting in increases to
the portfolio include the purchase of $4.9 million in new securities and a $531,000 increase in the fair market value of the portfolio. Activities resulting in decreases to the portfolio include $1.5 million of principal re-payments, $250,000
in bond maturities and $25,000 in net premium amortization. The Company also owned $694,000 of Federal Home Loan Bank stock at March 31, 2004 compared to $950,000 at December 31, 2003. The volume of Federal Home Loan Bank stock required is dictated
by a variety of factors including the Companys level of outstanding Federal Home Loan Bank borrowings and the volume mortgage-related assets on the Companys balance sheet. At March 31, 2004, the Company had committed to purchase $772,000
in securities to be settled in April 2004.



Federal funds sold at March 31,
2004 are $25.8 million compared with no Federal funds sold at December 31, 2003. 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 sharply at month-end due to several real estate settlement deposit accounts maintained by attorney customers. The month-end balance of Federal funds sold is not reflective of the normal daily balance of overnight investments. At March 31,
2004, the increase in the balance of Federal funds sold due to the sharp fluctuation in the real estate settlement accounts was approximately $20.4 million. The daily average balances for Federal funds sold for the three-month period ended March 31,
2004 was $4.6 million.



Interest-earning deposits held at correspondent banks
increased by approximately $300,000 from $438,000 at December 31, 2003 to $738,000 at March 31, 2004. The increase represents principal and interest payments from the investment portfolio waiting to be re-invested.



Non-earning and other assets increased by approximately $2.2 million between December 31,
2003 and March 31, 2004. Non-interest bearing cash due from banks decreased by $1.6 million during the three months ended March 31, 2004. Cash 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, 2003 and March 31, 2004 include interest receivable, bank premises and equipment, deferred tax asset and cash surrender value on bank owned life insurance. The Company
also made a commitment to invest in two Small Business Investment Corporations (SBICs) and at March 31, 2004, the amount of commitment still due is $288,000.



Total deposits increased by $57.6 million between December 31, 2003 and March 31, 2004 from $218.6 million to $276.2 million. The largest
increase occurred in the non-interest bearing demand deposit category, which increased by $21.9 million from $37.9 million on December 31, 2003 to $59.8 million on March 31, 2004. Total interest bearing deposit categories increased by $35.7 million
between December 31, 2003 and March 31, 2004. The individual interest-bearing deposit categories increased as follows: time deposits increased by $26.1 million from $112.5 million to $138.6 million, money market deposits increased by $7.1 million
from $24.9 million to $32.0 million, interest-bearing demand deposits increased by $2.2 million from $41.1 million to $43.3 million and savings deposits increased by $219,000 from $2.2 million to $2.4 million.



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As previously mentioned in the discussion of Federal funds sold, the Company maintains a number of deposit relationships
with real estate settlement attorneys. The nature of the settlement attorneys business dictates that cash flows into their deposit accounts prior to settling a real estate transaction and flows out following the transaction. The majority of
real estate transactions tend to occur toward the end of each month. At March 31, 2004, aggregate balances in the real estate settlement deposit accounts were $35.7 million compared to $15.7 million at December 31, 2003. Of the $35.7 million in real
estate settlement deposits on March 31, 2004, $28.5 million is in the non-interest bearing demand deposit category and $7.2 million is in the interest bearing demand category. At December 31, 2003, $12.3 million of the $15.7 million was in the
non-interest bearing demand deposit category and the remaining $3.4 million was in the interest bearing category. The average aggregate quarterly balances in these real estate settlement accounts were approximately $10.0 million and $11.8 million on
March 31, 2004 and December 31, 2003, respectively. Excluding the temporary, month-end effect of the real estate settlement deposit accounts, total deposits at March 31, 2004 and December 31, 2003 would have been approximately $250.5 million and
$214.7 million, respectively.



The composition of the deposit base, by
category, at March 31, 2004 is as follows: 50% time deposits, 22% non-interest-bearing demand deposits, 16% interest-bearing demand deposits, 11% money market and 1% statement savings. The composition of the deposit base, by category, at December
31, 2003 was 52% time deposits, 17% non-interest-bearing demand deposits, 19% interest-bearing demand deposits, 11% money market and 1% statement savings. Time deposits of $100,000 or more totaled $81.6 million at March 31, 2004 compared to $53.4
million at December 31, 2003. 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 $35.2 million at March 31, 2004 compared with $11.0 million at December 31, 2003.



The Company had $12.0 million of Federal Home Loan Bank borrowings outstanding at both March 31, 2004 and December 31, 2003. The total
borrowings are comprised of two $5.0 million advances and one $2.0 million advance.



On August 27, 2003, Crescent Capital Trust I issued Trust Preferred securities in the amount of $8.0 million at a variable interest rate equal to three-month LIBOR plus 310 basis points. The Trust Preferred securities have a thirty year
maturity with a continuous five year call provision and are eligible for inclusion as Tier 1 capital. The $8.0 million in Trust Preferred securities were outstanding at both March 31, 2004 and December 31, 2003.



On March 31, 2004, the Company had securities sold under repurchase agreements in the amount
of $219,000 compared to $633,000 at December 31, 2003. Securities sold under repurchase agreements generally mature within one to four days from the transaction date. The Company had $7.0 million of Federal Home Loan Bank overnight borrowings and
$1.4 million and Federal funds purchased at December 31, 2003. These short term borrowing were replaced with brokered certificates of deposit during the first quarter of 2004 and no such borrowings were outstanding on March 31, 2004.



Accrued interest payable and other liabilities decreased by $232,000 to $1.7 million at March
31, 2004 compared with $1.9 million at December 31, 2003. The decrease is primarily the result of the payment of merger consideration to former Centennial Bank shareholders as they present their share certificates for exchange.



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Between December 31, 2003 and March 31, 2004, total stockholders equity rose by $800,000. The increase resulted
from net income for the quarter of $464,000, unrealized gains on available for sale securities of $326,000 and $10,000 in new stock issuance pursuant to the exercise of stock options.



COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2003



Net Income.Net income for the three-month period ending March 31, 2004 was $464,000
or $.13 per basic ($.12 diluted) share compared with $363,000 or $.12 per basic and diluted share for the three-month period ended March 31, 2003. Annualized return on average assets was .65% and .86% for the two periods ended March 31, 2004 and
2003, respectively. The decline in return on average assets is primarily the result of additional expenses incurred due to franchise expansion during the current period. One full-service branch and one loan production office began operations in May
and September 2003, respectively, and have not yet achieved profitability. The Company anticipates an eighteen month period before expansion offices become profitable. Return on average equity for the current period was 7.51% compared to 8.17% for
the prior period. Return on average equity for the current period declined in relation to the prior period due to the issuance of additional shares to complete the Centennial Bank acquisition in August 2003.



Results of operations for the three-month period ended March 31, 2004, when compared with the
period ended March 31, 2003, were positively impacted by strong earning asset growth over the past twelve months resulting in improved net interest income, and an increase in non-interest income. The significant growth in loan volume for the first
three months of 2004 resulted in a sharp increase in provision for loan losses, and non-interest expenses increased due to the acquisition of Centennial Bank, hiring of additional administrative personnel to support growth and the two new offices
previously discussed.



Net Interest Income. Net interest income
increased by $839,000 or 54% from $1.5 million for the three-month period ended March 31, 2003 to $2.4 million for the three-month period ended March 31, 2004. Despite continued declines in the yield on interest earning assets, total interest income
increased due to strong growth in average earning assets. Total interest expense from deposits and other borrowings also increased due to growth in interest-bearing liabilities needed to fund the higher volume of assets.



Total interest income was $3.6 million for the three-month period ended March 31, 2004
compared to $2.3 million for the prior year period, an increase of $1.3 million or 55%. The total increase was the net result of a $1.5 million increase in interest income due to growth in average earning assets and a $259,000 decrease in interest
income due to a decline in the average yield earned on those assets. Total interest expense increased by $441,000 from $790,000 for the prior year period to $1.2 million for the current period. The increase was the net result of a $594,000 increase
in interest expense due to growth in interest-bearing liabilities and a $153,000 decrease in interest expense due to a decline in the Companys cost of funds.



Total average earning assets increased $104.7 million or 64% from an average of $163.1 million as of March 31, 2003 to an average of $267.8
million for the quarter ended March 31,



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2004. The average of loans outstanding during the three-month period ended March 31, 2004 was $223.8 million reflecting a
$94.7 million or 73% increase over the $129.1 million for the quarter ended March 31, 2003. The average balance of the investment securities portfolio for the current period was $38.8 million, increasing by $11.3 million or 41% compared to an
average of $27.5 million at March 31, 2003. The average balance of federal funds sold and other earning assets decreased to $5.2 million for the three-month period ended March 31, 2004 compared to $6.4 million for the prior period.



Total average interest-bearing liabilities increased by $102.0 million or 84% from an average
of $121.5 million for the period ended March 31, 2003 to $223.5 million for the current period. Average interest-bearing deposits were $199.8 million during the first quarter of 2004 compared with $110.9 million for the prior year period. Total
average borrowings increased by $13.1 million during the quarter ended March 31, 2004 to $23.7 million compared to $10.6 million for the period ended March 31, 2003.



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, 2004 was 3.58% compared to 3.84% for the three-month period ended March 31, 2003. The average yield on earning
assets for the current three-month period declined 38 basis points to 5.43% compared with 5.81% for the prior year period, while the average cost of interest-bearing funds decreased by 42 basis points to 2.22% from 2.64%. The interest rate spread,
which is the difference between the average yield on earning assets and the cost of interest-bearing funds, increased by 4 basis points from 3.17% to 3.21%. Despite the increase in interest rate spread, the net interest margin declined due to the
increased reliance on interest-bearing liabilities to fund asset growth.



With
the exception of a 25 basis point reduction in short-term rates in June 2003, rates have been relatively stable since December 2002. During this stable rate environment, the Company has been positioning its balance sheet to take advantage of an
environment in which rates might increase moderately. Approximately 60% to 65% of new loan volume has been priced at a variable interest rate. The rate on a typical variable loan might adjust based on the Prime lending rate (currently at 4.00%) plus
1/2% to 2%. This strategy tends to have a detrimental impact on the overall yield on earning assets in a level
or falling rate environment. However, in a rising rate environment, the yield earned on the variable rate loan portfolio will increase more quickly than the cost of interest-bearing liabilities to fund those loans.



Interest rates on the one-year certificates of deposit have declined by over 520 basis points
since early 2000. As shorter-term time deposits have matured and renew, there has been some tendency for customers to extend the term of their deposits into the two through five year time horizons to earn additional income. As a result, the cost of
funds has not fallen to the extent it would have had all funds been reinvested at the then current term. However, in a rising rate environment, the cost of these funds should remain lower for a longer period of time.



The Company is well positioned for a moderate increase in interest rates. If interest rates
increase over the short-term, yield on loans will increase faster than the cost of funds and the net interest margin should increase. If rates continue to hold steady, as has been the case, or we experience more rate reductions, there could be
downward pressure on the net interest margin.



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Provision for Loan Losses.The Companys provision for loan losses for the three-month period ended March 31,
2004 was $256,000 compared to $108,000 recorded for the same period in 2003. 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. The increase in the loan loss provision is due to significant loan growth in the first quarter of 2004 compared to the same quarter in 2003. The allowance for loan losses was $3.5 million at March
31, 2004, representing 1.51% of total outstanding loans.



Non-Interest
Income.For the three-month period ended March 31, 2004, non-interest income was $492,000 compared to $304,000 for the same period in 2003. The largest components of non-interest income in the first quarter of 2004 were $166,000 in customer
service charges, $122,000 in mortgage loan origination fees, $60,000 increase in cash surrender value on life insurance and $46,000 in service charges and fees on deposit accounts. The Company also recognized $42,000 in investment referral fees and
$37,000 from its investment in a mortgage company.



A significant portion of
non-interest income is derived from the mortgage loan origination fees. The volume of these fees has been driven, to a large extent, by refinancing due to the favorable interest rate environment. Should interest rates increase and the anticipated
reduction in refinancing activity is not replaced with an increase in purchase money activity, mortgage loan origination fees could decline.



Non-Interest Expenses.Non-interest expenses were $1.9 million for the three-month period ended March 31, 2004 compared with $1.2 million for the same period ended
March 31, 2003. The largest component of non-interest expense for the current period was personnel expense. Salaries and benefits expense was $1.0 million for the three-month period ended March 31, 2004, compared to $639,000 for the same period in
the prior year. Due to branch and administrative expansion and the acquisition of Centennial Bank in August 2003, the number of employees has increased significantly over the past twelve months. Management anticipates personnel expense to continue
to increase as opportunities to hire quality employees present themselves.



Occupancy and equipment expenses increased by $120,000 or 54% from $224,000 for the three-month period ended March 31, 2003 to $344,000 for the current year period. Data processing costs increased from $74,000 for the three-months ended
March 31, 2003 to $125,000 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 2004, the Company operated seven full-service branch locations and a loan production office compared to operating four branch locations 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.



Other non-interest expenses increased by $214,000 to $454,000 for the first quarter of 2004 compared with $240,000 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.



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Provision for Income Taxes.The Company recorded income tax expense of $225,000 during the three-months ended
March 31, 2004 compared to $202,000 for the prior year period.



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, 2004 and 2003. 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, |        
|                                                                                      |  | 2004                                 |         |          | 2003 |                  
|                                                                                      |  | AverageBalance                       |         | Interest |      | AverageYield/Cost |  |        | AverageBalance |  | Interest |         | AverageYield/Cost |  
|                                                                                      |  | (Dollars in thousands)               |        
|Interest-earnings assets                                                              |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Loan portfolio                                                                        |  | $                                    | 223,827 |          | $    | 3,203             |  | 5.76   | %              |  | $        | 129,098 |                   | $ | 1,954 |  | 6.14   | %
|Investment securities                                                                 |  |                                      | 38,804  |          |      | 402               |  | 4.14   | %              |  |          | 27,557  |                   |   | 363   |  | 5.27   | %
|Fed funds and other interest-earning assets                                           |  |                                      | 5,177   |          |      | 11                |  | 0.85   | %              |  |          | 6,444   |                   |   | 19    |  | 1.20   | %
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Total interest-earning assets                                                         |  |                                      | 267,808 |          |      | 3,616             |  | 5.43   | %              |  |          | 163,099 |                   |   | 2,336 |  | 5.81   | %
|Noninterest-bearing assets                                                            |  |                                      | 18,815  |          |      |                   |  |        |                |  |          | 7,574   |                   |   |       |  |        |  
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Total assets                                                                          |  | $                                    | 286,623 |          |      |                   |  |        |                |  | $        | 170,673 |                   |   |       |  |        |  
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Interest-bearing liabilities                                                          |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Interest-bearing NOW                                                                  |  | $                                    | 40,375  |          |      | 81                |  | 0.81   | %              |  | $        | 24,101  |                   |   | 63    |  | 1.06   | %
|Money market and savings                                                              |  |                                      | 30,631  |          |      | 87                |  | 1.14   | %              |  |          | 19,585  |                   |   | 62    |  | 1.28   | %
|Time deposits                                                                         |  |                                      | 128,763 |          |      | 830               |  | 2.59   | %              |  |          | 67,235  |                   |   | 559   |  | 3.37   | %
|Borrowings                                                                            |  |                                      | 23,687  |          |      | 233               |  | 3.89   | %              |  |          | 10,543  |                   |   | 106   |  | 4.02   | %
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Total interest-bearing liabilities                                                    |  |                                      | 223,456 |          |      | 1,231             |  | 2.22   | %              |  |          | 121,464 |                   |   | 790   |  | 2.64   | %
|Other liabilities                                                                     |  |                                      | 38,412  |          |      |                   |  |        |                |  |          | 31,218  |                   |   |       |  |        |  
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Total Liabilities                                                                     |  |                                      | 261,868 |          |      |                   |  |        |                |  |          | 152,682 |                   |   |       |  |        |  
|Stockholders equity                                                                  |  |                                      | 24,755  |          |      |                   |  |        |                |  |          | 17,991  |                   |   |       |  |        |  
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Total liabilities & stockholders equity                                              |  | $                                    | 286,623 |          |      |                   |  |        |                |  | $        | 170,673 |                   |   |       |  |        |  
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Net interest income                                                                   |  |                                      |         |          | $    | 2,385             |  |        |                |  |          |         |                   | $ | 1,546 |  |        |  
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Interest rate spread                                                                  |  |                                      |         |          |      |                   |  | 3.21   | %              |  |          |         |                   |   |       |  | 3.17   | %
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Net interest-margin                                                                   |  |                                      |         |          |      |                   |  | 3.58   | %              |  |          |         |                   |   |       |  | 3.84   | %
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  
|Percentage of average interest-earning assets to average interest-bearing liabilities |  |                                      |         |          |      |                   |  | 119.85 | %              |  |          |         |                   |   |       |  | 134.28 | %
|                                                                                      |  |                                      |         |          |      |                   |  |        |                |  |          |         |                   |   |       |  |        |  



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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, 2004 and 2003. 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 31,2004 vs. 2003 (in Thousands) |  
|                                            |  | Increase (Decrease) Due to                               |  
|                                            |  | Volume                                                   |   |  | Rate |   |  | Total |  
|Interest Income                             |  |                                                          |   |  |      |   |  |       |  
|Loan portfolio                              |  | 1,409                                                    |   |  | (160 | ) |  | 1,249 |  
|Investment Securities                       |  | 133                                                      |   |  | (94  | ) |  | 39    |  
|Fed funds and other interest-earning assets |  | (3                                                       | ) |  | (5   | ) |  | (8    | )
|                                            |  |                                                          |   |  |      |   |  |       |  
|Total interest-earning assets               |  | 1,539                                                    |   |  | (259 | ) |  | 1,280 |  
|                                            |  |                                                          |  
|Interest Expense                            |  |                                                          |   |  |      |   |  |       |  
|Interest-bearing NOW                        |  | 33                                                       |   |  | (15  | ) |  | 18    |  
|Money market and savings                    |  | 32                                                       |   |  | (7   | ) |  | 25    |  
|Time deposits                               |  | 399                                                      |   |  | (128 | ) |  | 271   |  
|Borrowings                                  |  | 130                                                      |   |  | (3   | ) |  | 127   |  
|                                            |  |                                                          |   |  |      |   |  |       |  
|Total interest-bearing liabilities          |  | 594                                                      |   |  | (153 | ) |  | 441   |  
|                                            |  |                                                          |  
|Net interest income                         |  | 945                                                      |   |  | (106 | ) |  | 839   |  
|                                            |  |                                                          |   |  |      |   |  |       |  



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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, |  
|                                                 |  | 2004                   |        |   | 2003            |   |        | 2003 |  |   | 2002     |  
|                                                 |  | (Dollars in thousands) |       
|Nonaccrual loans                                 |  | $                      | 364    |   |                 | $ | 186    |      |  | $ | 159      |   |  | $ |      |  
|Restructured loans                               |  |                        |       |   |                 |   |       |      |  |   |         |   |  |   |      |  
|                                                 |  |                        |        |   |                 |   |        |      |  |   |          |   |  |   |       |  
|Total nonperforming loans                        |  |                        | 364    |   |                 |   | 186    |      |  |   | 159      |   |  |   |      |  
|Real estate owned                                |  |                        | 45     |   |                 |   |       |      |  |   |         |   |  |   |      |  
|                                                 |  |                        |        |   |                 |   |        |      |  |   |          |   |  |   |       |  
|Total nonperforming assets                       |  | $                      | 409    |   |                 | $ | 186    |      |  | $ | 159      |   |  | $ |      |  
|                                                 |  |                        |        |   |                 |   |        |      |  |   |          |   |  |   |       |  
|Accruing loans past due 90 days or more          |  | $                      |       |   |                 | $ |       |      |  | $ | 647      |   |  | $ |      |  
|Allowance for loan losses                        |  |                        | 3,538  |   |                 |   | 1,806  |      |  |   | 3,304    |   |  |   | 1,711 |  
|Nonperforming loans to period end loans          |  |                        | .16    | % |                 |   | .14    | %    |  |   | 0.07     | % |  |   | 0.00  | %
|Allowance for loan losses to period end loans    |  |                        | 1.51   | % |                 |   | 1.36   | %    |  |   | 1.52     | % |  |   | 1.36  | %
|Allowance for loan losses to nonperforming loans |  |                        | 971.98 | % |                 |   | 970.97 | %    |  |   | 2,077.99 | % |  |   | 0.00  | %
|Nonperforming assets to total assets             |  |                        | .13    | % |                 |   | .09    | %    |  |   | 0.06     | % |  |   | 0.00  | %



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, 2004, we had identified four loans totaling $62,000 as potential problem loans. Three loans were past due at March 31, 2004 and are secured by vehicles. The fourth loan is secured by a second Deed of Trust on residential real
estate.



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



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Company charged $20,000 against the allowance for loan losses and recorded the property at $45,000. The property is
currently marketed for $52,000 and selling expenses are anticipated to be $4,000. There were no properties recorded as other real estate owned at March 31, 2003



There were three non-accrual loans at March 31, 2004 in the aggregate amount of $364,000. One loan in the amount of $271,000 is secured by commercial real estate upon
which the Company is in the process of foreclosure. One loan in the amount of $89,000 is a commercial business loan secured by a blanket lien on assets and carries the personal guaranty of the principals. The Company anticipates collecting $18,000
to $36,000 and charging off the remainder. The final loan in the amount of $4,000 is secured by an automobile and the maker is paying an agreed amount monthly. Interest foregone on nonaccrual loans was approximately $6,000 for the three-month period
ended March 31, 2004. At March 31, 2003, there were two loans in nonaccrual status totaling $186,000. Interest foregone on nonaccrual loans was approximately $2,000 for the three-month period ended March 31, 2003.



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 limited history of operations. Because of our limited history, we also consider the loss experience history and allowance ratios of other similar community banks and the knowledge and expertise
obtained by management and senior lending officers from prior years experience at former institutions. 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, 2004, there were $22,000 in net loan charge-offs and at March 31,
2004 there were $364,000 in non-performing loans. The allowance for loan losses at March 31, 2004 was $3.5 million, which represents 1.51% of total outstanding loans.



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.



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,           |      
|                                |  | 2004                   |       |                     | 2003   |  
|                                |  | Amount                 |       | % of TotalLoans (1) |        |   | Amount |   | % of TotalLoans (1) | 
|                                |  | (Dollars in thousands) |      
|Residential real estate loans   |  | $                      | 52    |                     | 5.82   | % |        | $ | 9                   |  | 1.78   | %
|Home equity loans and lines     |  |                        | 137   |                     | 10.92  | % |        |   | 84                  |  | 11.83  | %
|Commercial mortgage loans       |  |                        | 1,316 |                     | 47.83  | % |        |   | 663                 |  | 45.76  | %
|Construction loans              |  |                        | 660   |                     | 14.45  | % |        |   | 369                 |  | 18.06  | %
|Commercial and industrial loans |  |                        | 1,079 |                     | 18.41  | % |        |   | 608                 |  | 20.46  | %
|Loans to individuals            |  |                        | 294   |                     | 2.57   | % |        |   | 73                  |  | 2.11   | %
|                                |  |                        |       |                     |        |   |        |   |                     |  |        |  
|Total loans                     |  | $                      | 3,538 |                     | 100.00 | % |        | $ | 1,806               |  | 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 Ended March 31, |        
|                                                      |  | 2004                           |         |   | 2003 |  
|                                                      |  | (Dollars in thousands)         |        
|Balance at the beginning of the year                  |  | $                              | 3,304   |   |      | $ | 1,711   |  
|Charge-offs:                                          |  |                                |         |   |      |   |         |  
|Commercial and industrial loans                       |  |                                |        |   |      |   | 18      |  
|Residential real estate loans                         |  |                                | 21      |   |      |   |         |  
|Loans to individuals                                  |  |                                | 1       |   |      |   | 3       |  
|                                                      |  |                                |         |   |      |   |         |  
|Total charge-offs                                     |  |                                | 22      |   |      |   | 21      |  
|                                                      |  |                                |         |   |      |   |         |  
|Recoveries                                            |  |                                |        |   |      |   | 8       |  
|                                                      |  |                                |         |   |      |   |         |  
|Net charge-offs                                       |  |                                | 22      |   |      |   | 13      |  
|                                                      |  |                               
|Provision for loan losses                             |  |                                | 256     |   |      |   | 108     |  
|                                                      |  |                                |         |   |      |   |         |  
|Balance at the end of the year                        |  | $                              | 3,538   |   |      | $ | 1,806   |  
|                                                      |  |                                |         |   |      |   |         |  
|Total loans outstanding at period-end                 |  | $                              | 234,605 |   |      | $ | 132,570 |  
|                                                      |  |                               
|Average loans outstanding for the period              |  | $                              | 223,827 |   |      | $ | 129,097 |  
|                                                      |  |                               
|Allowance for loan losses to total loans outstanding  |  |                                | 1.51    | % |      |   | 1.36    | %
|                                                      |  |                               
|Ratio of net charge-offs to average loans outstanding |  |                                | 0.01    | % |      |   | 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, 2004, liquid assets (cash and due from banks, interest-earning deposits with banks, Federal funds sold and investment securities available for sale) were
approximately $75.4 million, which represents 23% of total assets and 27% of total deposits. Supplementing this liquidity, the Company has available lines of credit from various correspondent banks of approximately $58.2 million of which $12.0
million is outstanding at March 31, 2004. At March 31, 2004, outstanding commitments for undisbursed lines of credit, letters of credit and securities not yet settled amounted to approximately $60.4 million. Management intends to



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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. Certificates of deposits represented 50% of the Companys total deposits at March 31, 2004 compared with 52% at December 31, 2003. 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 29% of the Companys total deposits at March 31, 2004 compared to 24% at year-end December 31, 2003. 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, 2004, the Banks equity to asset ratio was 7.72%. 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, 2004 was 11.20%.



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 contains
certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and other business of Crescent Financial Corporation that are subject to various factors which could cause actual results to
differ materially from those estimates. 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. Controls and Procedures



As of
March 31, 2004, 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, 2004. 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.



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Part II. OTHER INFORMATION



Item 6. Exhibits and Reports on Form 8-K



| | (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



| | (b) | Reports on Form 8-K.
| | --- | --------------------



During the quarter ended March 31, 2004, the following Current Reports on Form 8-K were filed with the Securities Exchange Commission:



Form 8-K, dated January 20, 2004, included information regarding the January
16, 2004 press release announcing Crescent Financial Corporations fourth quarter and year-end earnings. The Company reported net income of $496,000 for the three-month period and $1,655,000 for the twelve-month period ended December 31, 2004.
Total assets at June 30, 2003 were $274 million.



Form 8-K,
dated February 20, 2004, included information regarding the 20% stock dividend declared by Crescent Financial Corporation on February 19, 2004, payable on April 16, 2004 to stockholders of record on March 12, 2004.



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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 12, 2004 |  | By:                            |  | /s/ Michael G. Carlton               
|                   |  |                                |  | Michael G. Carlton                   
|                   |  |                                |  | President and Chief Executive Officer
|                   |  |                               
|Date: May 12, 2004 |  | By:                            |  | /s/ Bruce W. Elder                   
|                   |  |                                |  | Bruce W. Elder                       
|                   |  |                                |  | Vice President and Secretary         



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