EXHIBIT 13

Crescent Financial Corporation

2003 Annual Report

Crescent Financial Corporation

TABLE OF CONTENTS

	Page No.
Report of Management	1
Selected Financial and Other Data	5
Management’s Discussion and Analysis	6
Independent Auditors’ Report	26
Financial Statements
Consolidated Balance Sheets	27
Consolidated Statements of Operations	28
Consolidated Statements of Changes in Stockholders’ Equity	29
Consolidated Statements of Cash Flows	30
Notes to Consolidated Financial Statements	31
Management and Bank Personnel	57
Market for the Common Stock	58
General Corporate Information	59

Crescent Financial Corporation and Subsidiaries

Report of Management

Dear Shareholders, Customers, and Friends:

As we complete our fifth year of operation, the management and Board of Directors of Crescent Financial Corporation and its subsidiary, Crescent State Bank take great pride in presenting the results of 2003. The year contained many significant events, which further strengthened our organization. We achieved record earnings, expanded our branching network through a successful acquisition and opened additional branches in high growth communities. Throughout the year, the employees worked together as a team, which resulted in the Bank exceeding goals on loans, deposits and assets. Through these unified efforts, the upcoming year holds great promise as we continue our quest of becoming the Bank of choice in the communities we serve.

Net income for 2003 was $1,655,000, which reflected an increase of 35 percent over net income of $1,228,000 for the prior year. Diluted earnings per share for both twelve-month periods was $.61. Although net income increased over the comparative periods, earnings per share were level due to the issuance of additional shares of stock in conjunction with the acquisition of Centennial Bank and the income tax benefit recorded during the prior year period. When analyzing the true income performance of the organization over the two-year period, we believe that a more accurate way of comparing the two years is on a pre-tax basis. From that stand point, net income for the twelve-month period ending December 2003 was $2,528,000 or $.93 per diluted share compared to $1,322,000 or $.66 per diluted share for the prior twelve-month period. The 41 percent increase in pre-tax earnings per share better reflects the true progress that the organization made during the year.

Your Bank experienced very solid growth trends in both loans and deposits throughout the year. This progress resulted in total assets of $274 million reflecting a 50 percent increase over the total assets of $182 million reported on December 31, 2002. During this same period, total net loans increased 72 percent from $124 million ending 2002 to $213 million at the end of 2003. Total deposits increased 43 percent from $153 million as of December 31, 2002 to $219 million at December 31, 2003.

Since inception, management has felt that one of the best ways to create shareholder value was to expand the franchise into other communities, primarily through de novo expansion. During the second quarter of 2003, we opened a full service banking office in the fast growing community of Holly Springs. In the fourth quarter, we entered the Sanford community with a loan production office. This production office will be temporary until we can locate and open a full service branch facility.

While our de novo growth strategy has been successful thus far, we also want to capitalize on acquisition opportunities that make sense both financially and strategically. Our success in this regard was a major highlight of the year for our Bank. We are pleased to report that the acquisition and conversion of Centennial Bank into Crescent has been successfully completed. These new branches in Southern Pines and Pinehurst represent a natural extension of our franchise and we believe that the communities have embraced our banking philosophy. We are hopeful that this acquisition experience will help our Company attract new investors and open more opportunities to expand our growing franchise.

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Crescent Financial Corporation and Subsidiaries

Report of Management

From a shareholder perspective, the progress we made in 2003 is reflected in the performance of our stock through the stock dividend and price appreciation. The Board of Directors declared a 15 percent stock dividend during the year. This marks the fourth straight year in which stock dividends have been announced. In addition, we believe that the 50 percent increase in share price over the course of the year reflects the overall success of the organization.

As we embark on a new year, it is a time to reflect upon our vision as an organization and our pledge to fulfill that vision. All of us at Crescent will advance our efforts toward safe, solid, and steady growth. We promise to add value to our customers, employees and the communities we serve in addition to providing a satisfactory return to our shareholders.

Many of you may recall that in 2000 we released a strategic plan that outlined our vision for the future. The future is here. Crescent’s Board of Directors and management recently met to review that original plan and we are pleased to report that all of the goals established for the end of 2004 have been accomplished as of the end of 2003 – a full year before the original timetable. Be assured that we are not resting on our achievements as we have updated the strategic plan for the future and are confident that the extensive goals will be accomplished.

While we are pleased with our successes thus far, we are even more excited about the possibilities that lie ahead. We have a firm foundation in place for the future with the right customers, board members, advisory board members, and staff to continue our success for future growth and progress of the Company. Our focus continues to remain on identifying and delivering financial products and services that exceed our customers’ expectations. We will expand our franchise by entering new markets when it benefits both our shareholders and the community. We are confident that the accomplishments of 2003 will result in a continued impressive performance in the future and build long-term shareholder value.

We would like to take this opportunity to thank you for the trust you have placed in us by investing in Crescent Financial Corporation and our principal objective is to build outstanding value for our shareholders. On behalf of the entire team of employees and Board of Directors, we thank you for your continued support and loyalty.

Sincerely

Michael G. Carlton	Bruce I. Howell
President and Chief Executive Officer	Chairman of the Board

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Crescent Financial Corporation and Subsidiaries

Selected Financial and Other Data

	At or for the Year Ended December 31,
	2003			2002
Summary of Consolidated Operations
Interest and fee income	$	10,950,283		$	8,555,855
Interest expense		3,749,015			3,188,644
Net interest income		7,201,268			5,367,211
Provision for loan losses		551,037			689,024
Net interest income after provision for loan losses		6,650,231			4,678,187
Non-interest income		1,644,656			767,700
Non-interest expense		5,766,570			4,124,126
Income before income taxes		2,528,317			1,321,761
Income taxes		873,600			93,603
Net income	$	1,654,717		$	1,228,158
Balance Sheet Information
Total assets	$	273,714,481		$	182,004,928
Investments(1)		38,382,986			45,558,987
Loans, net of allowance for loan losses		213,441,507			123,961,641
Deposits		218,614,956			153,105,470
Stockholders’ equity		24,149,900			17,731,988
Per Share Data (3)
Basic net income(2)	$	.63		$	.63
Diluted net income	$	.61		$	.61
Book value	$	8.26		$	7.19
Selected Other Data
Return on average assets (4)		.79	%		.85	%
Return on average equity (4)		8.25	%		9.31	%
Average equity to average assets		9.55	%		9.13	%
Net yield on average interest-earning assets		5.53	%		6.17	%
Average interest-earning assets to average interest-bearing liabilities		128.94	%		130.06	%
Ratio of non-interest expense to average total assets		2.75	%		2.85	%
Nonperforming assets and loans past due 90 days or more to total assets		0.29	%		0.00	%
Nonperforming loans and loans past due 90 days or more to total loans		0.37	%		0.00	%
Allowance for loan losses to total loans		1.52	%		1.36	%

⁽¹⁾ Includes interest-earning deposits, federal funds sold, investment securities and FHLB stock.

⁽²⁾ Income per share is computed based on the weighted average number of shares outstanding during the period.

⁽³⁾ Restated to reflect the 15.0% stock dividends paid in 2003 and 2002, respectively.

⁽⁴⁾ During the year ended December 31, 2001, the returns on average assets and average equity were .31% and 2.97%, respectively.

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

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 years ended December 31, 2003 and 2002. 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.

OVERVIEW

In August 1998, a group of local business leaders announced the formation of a community bank to serve the financial needs of small businesses and individuals in Wake County, North Carolina. Crescent State Bank (the “Bank”) began operations four months later on December 31, 1998. Five years later, the Bank has expanded beyond Wake County and now has seven full service branches and one loan production office serving businesses and individuals in Johnston, Moore and Lee counties. Crescent Financial Corporation (the “Company”) was formed on June 29, 2001 for the purpose of becoming a bank holding company for the Bank. Upon formation, one share of the Company’s $1 par value common stock was exchanged for each of the then outstanding 1,289,527 shares of the Bank’s $5 par value common stock. The Company formed Crescent Financial Capital Trust I during 2003 in order to facilitate the issuance of trust preferred securities. The Company currently has no operations and conducts no business on its own other than owning the Bank and the Trust. The formation of the Company had no impact on the operations of the Bank. The consolidated capitalization, assets, liabilities, income and expenses of the Company immediately following its formation were substantially the same as those of the Bank immediately prior to the formation.

Crescent State Bank is a North Carolina-chartered banking corporation. The primary business of the Bank is to solicit deposits and invest those funds by originating loans in its established market area. The Bank’s lending activities are oriented to the small-to-medium sized business as well as to the consumer/retail customer located in Wake, Johnston, Moore and Lee Counties. The Bank offers commercial, consumer, and mortgage lending products, as well as the ability to structure credit products to fit specialized needs. Funds are also invested, to a lesser extent, in investment securities, federal funds and interest earning accounts with correspondent banks. The deposit services offered by the Bank include small business and personal checking, savings accounts and certificates of deposit. The Bank concentrates on customer relationships in building its deposit base and competes aggressively in the area of transaction accounts. Additional sources of funding available to the Bank include borrowings from the Federal Home Loan Bank, Federal funds purchased from correspondent banks and brokered certificates of deposit.

Crescent State Bank operates six branch locations in addition to its Main Office at 1005 High House Road in Cary, NC. The Bank’s first location opened on December 31, 1998 and is located at 1155 Kildaire Farm Road in Cary, NC. The second location at 303 South Salem Street in Apex, NC was opened in late November 1999. The corporate headquarters and Main Office on High House Road opened in April 2000. The Bank opened its fourth location in December 2000 at 315 E. Main Street in Clayton, NC. In May 2003, Crescent opened its fifth banking office in Holly Springs, NC. The temporary branch location was at 105 Bass Lake Road and the permanent facility was built next door at 700 Holly Springs Road. The staff relocated to the permanent building in January 2004. On August 29, 2003, the Company acquired Centennial Bank of Southern Pines, NC and began operating two branches in Moore County. The branch locations are at 185 Morganton Road in Southern Pines and 211-M Central Park Avenue in Pinehurst, NC. A loan production office was opened in September 2003 in Sanford, North Carolina at the Simpson Executive Center, 503 Carthage Street.

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

The following discussion and analysis contains the consolidated financial results for the Company, the Bank, and the Trust for the years ended December 31, 2003 and 2002. Because the Company has no operations and conducts no business on its own other than owning Crescent State Bank and Crescent Financial Capital Trust I, 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 its subsidiaries are collectively referred to herein as the Company unless otherwise noted.

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2003 AND 2002

On August 29, 2003, Crescent Financial Corporation acquired Centennial Bank of Southern Pines (Centennial) and merged Centennial into Crescent State Bank. When appropriate during discussions regarding increases in certain asset or liability categories, information will be included to allow the reader to determine the portion of overall increases attributable to the merger and that attributable to core internal growth.

The Company had $273.7 million in total assets at December 31, 2003 reflecting an increase of $91.7 million or 50% compared to $182.0 million at December 31, 2002. At the time of the acquisition transaction, the merger of Centennial Bank added approximately $69.9 million in assets, of which $3.8 million were intangible (goodwill and core deposit premiums). Total earning assets increased by 49% from $170.6 million at December 31, 2002 to $254.9 million at December 31, 2003. Earning assets at December 31, 2003 consisted of $216.7 million in gross loans, $37.8 million in investment securities and Federal Home Loan Bank (FHLB) stock and $438,000 in overnight investments. Total liabilities increased by $85.3 million or 52% from $164.3 million at December 31, 2002 to $249.6 million at December 31, 2003. Total stockholders’ equity increased from $17.7 million at December 31, 2002 to $24.1 million at December 31, 2003. The increase was due primarily to the issuance of new shares to complete the acquisition of Centennial and net income.

Gross loans increased by $91.1 million or 72% growing from $125.7 million as of December 31, 2002 to $216.8 million at December 31, 2003. The commercial mortgage loan category experienced the most significant net growth increasing $48.9 million from $52.4 million to $101.3 million. Significant net growth in other loan categories included $13.6 million in commercial loans increasing from $24.6 million to $38.2 million, $12.5 million in residential mortgage loans increasing from $2.3 million to $14.8 million, $7.0 million in home equity loans and lines increasing from $16.0 million to $23.0 million, $5.2 million in consumer loans increasing from $3.0 million to $8.2 million and $4.1 million in construction loans increasing from $27.5 million to $31.6 million. On August 29, 2003, the Centennial loan portfolio was $57.9 million in gross loans consisting of $22.3 million in commercial mortgage loans, $15.1 million in residential mortgage loans, $6.7 million in commercial loans, $5.4 million in consumer loans, $4.3 million in construction loans and $4.1 million in home equity lines.

The acquisition of Centennial, the continued softness of the economy and the low interest rate environment lead to changes in the composition of the Company’s loan portfolio. The composition of the loan portfolio, by category, as of December 31, 2003 is as follows: 47% commercial mortgage loans, 18% commercial loans, 14% construction loans, 10% home equity loans and lines of credit, 7% residential mortgage loans and 4% consumer loans. The

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

composition of the loan portfolio at December 31, 2002, by category, was 42% commercial mortgage loans, 22% construction loans, 19% commercial loans, 13% home equity loans and lines, 2% consumer loans and 2% residential mortgage loans. The Centennial loan portfolio had higher concentrations of residential mortgage loans and consumer loans than the existing Crescent portfolio causing increases in those categories. The construction loan portfolio was impacted due to the caution shown by both Crescent and residential builders with regard to speculative home building. The commercial mortgage loan portfolio experienced solid growth due to the opportunity for borrowers of owner-occupied commercial real estate to lower their interest rate.

The allowance for loan losses was $3.3 million or 1.52% of total outstanding loans at December 31, 2003 and $1.7 million or 1.36% of total outstanding loans at December 31, 2002. On August 29, 2003, the Company acquired $1.1 million in allowance for loan losses from Centennial. Despite the economic conditions prevalent throughout the year, the credit quality of the Company’s loan portfolio remains high. At December 31, 2003, there were four loans totaling approximately $159,000 in non-accrual status and one loan for approximately $647,000 that was more than 90 days past due and still accruing interest. The latter loan remained in accruing status because management and the borrower were working toward a satisfactory resolution. In addition to the five loans noted above, there were several loans with an aggregate balance of $855,000 that were 30 days or more past due as of December 31, 2003. At December 31, 2002, there were no non-performing loans and no loans past due for 90 days or more. There were several loans with an aggregate outstanding balance of $189,000 that were over 30 days past due as of December 31, 2002. Non-performing loans represented .07% and non-performing loans and loans past due 90 days or more and still accruing interest represented .37% of total outstanding loans at December 31, 2003. See the section entitled “Non Performing Assets” for more details.

The Company had investment securities with an amortized cost of $36.8 million at December 31, 2003. 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 $37.0 million. The portfolio increased by $9.2 million or 33% compared with $27.6 million at December 31, 2002. The Company’s investment in debt securities at December 31, 2003, consists of U.S. Government agency securities, collateralized mortgage obligations (CMOs), mortgage-backed securities (MBSs), municipal bonds and a trust preferred stock issue. There were $22.7 million in purchases during 2003. Activities resulting in portfolio decreases included $17.3 million in principal re-payments on CMOs and MBSs, $1.5 million in bond maturities and $130,000 in net premium amortization. The Company also owned $950,000 of Federal Home Loan Bank stock at December 31, 2003 compared with $500,000 at December 31, 2002. The Company acquired $5.4 million in investment securities and $207,000 of Federal Home Loan Bank stock through the merger with Centennial.

There were no Federal funds sold at December 31, 2003 compared to $16.7 million at December 31, 2002. Federal funds sold represent excess funds invested on a short-term overnight basis. These funds are used to provide liquidity for future loan demand and to satisfy fluctuations in deposit levels. Historically, the Company has experienced increases in Federal funds sold at month-end due to several real estate settlement deposit accounts maintained by bank customers. The volume of deposits maintained in the real estate settlement accounts at December 31, 2002 was $31.6 million compared to $15.7 million at December 31, 2003. Due to the fluctuations in these deposit accounts, the month-end balance of Federal funds sold is not reflective of the normal daily level of overnight investments. The daily average balance of Federal funds sold during the month of December 2003 was $677,000. For a more detailed discussion regarding liquidity, see the section entitled “Liquidity and Capital Resources.”

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

Interest-earning deposits held at correspondent banks increased by approximately $357,000 from $81,000 at December 31, 2002 to $438,000 at December 31, 2003. Funds held in interest-earning deposit accounts result primarily from the receipt of principal and interest from the investment portfolio. As funds accumulate, they are reinvested in investment securities.

Non-interest earning assets increased by approximately $9.4 million from $12.5 million at December 31, 2002 to $21.9 million at December 31, 2003. The Company purchased $5.0 million of bank owned life insurance in late August 2003. By December 31, 2003, the cash value of the investment had grown to $5.1 million. There were two intangible assets recognized as a result of the Centennial acquisition; goodwill in the amount of $3.6 million and a core deposit premium of $209,000. The goodwill will be reviewed periodically to determine impairment, and the core deposit premium will be amortized and charged against earnings over a ten year period. There was a $1.1 million net increase in premises and equipment over the twelve month period. New purchases amounted to $990,000 over half of which was due to the construction of a branch facility located in Holly Springs, North Carolina. Depreciation of new and existing fixed assets was approximately $338,000 for the year. Assets acquired in the Centennial transaction amounted to $428,000. The Company’s net deferred tax assets increased $1.2 million during the year as a result of the acquisition of Centennial. Centennial Bank had accumulated net operating loss carry forwards during its three plus year life. Accrued interest receivable increased by $413,000 during the year due to an increase in earning asset volume. Non-interest bearing and cash due from banks declined by $2.8 million during the twelve month period from December 31, 2002 to December 31, 2003. 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 Statements of Cash Flows.

Total deposits increased by $65.5 million between December 31, 2002 and December 31, 2003 from $153.1 million to $218.6 million. Time deposits experienced the greatest increase growing by $47.3 million from $65.2 million to $112.5 million. Increases in other deposit categories included $13.4 million in interest-bearing demand growing from $27.7 million to $41.1 million, $6.4 million in money market growing from $18.4 million to $24.8 million and $758,000 in savings increasing from $1.4 million to $2.2 million. The non interest-bearing demand deposit category experienced a net decrease of $2.4 million declining from $40.3 at December 31, 2002 to $37.9 at December 31, 2003. On August 29, 2003, the Company acquired $57.3 million in total deposits from the Centennial transaction. Total deposits acquired were comprised of $37.7 million in time deposits, $14.0 million in interest-bearing demand deposits, $3.2 million in non interest-bearing demand deposits, $1.8 million in money market deposits and $624,000 in savings accounts.

The Bank maintains a number of deposit relationships with real estate settlement attorneys. Balances in these escrow accounts can fluctuate significantly based on the amount of mortgage loan activity. At December 31, 2003, the aggregate balance in the real estate settlement accounts was $15.7 million compared to $31.5 million at December 31, 2002. Of the $15.8 million decrease in real estate settlement balances, $9.6 million was in the non interest-bearing demand category with the remaining $6.2 million in interest-bearing demand accounts.

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

The composition of the deposit base, by category, at December 31, 2003 is as follows: 52% in time deposits, 19% in interest-bearing demand deposits, 17% in non interest-bearing demand deposits, 11% in money market deposits and 1% in savings deposits. The composition of the deposit base at December 31, 2002 was 43% time, 26% non interest-bearing demand, 18% interest-bearing demand, 12% money market and 1% savings. Changes in the deposit mix are attributable, in part, to the acquisition of Centennial. On the acquisition date, the deposit mix of Centennial Bank was 66% time deposits, 24% interest-bearing demand, 6% non interest-bearing demand, 3% money market and 1% savings.

At December 31, 2003, the Company had $53.4 million in time deposits of $100,000 or more compared to $34.0 million at December 31, 2002. The Company uses brokered certificates of deposit as an alternative funding source. Brokered deposits represent a source of fixed rate funds that do not need to be collateralized like Federal Home Loan Bank borrowings. The Company expects to utilize the brokered deposit market in the future. Brokered deposits at December 31, 2003 were $11.0 million compared to $10.9 million at December 31, 2002.

Total borrowings increased by $19.0 million from $10.0 million at December 31, 2003 to $29.0 million at December 31, 2003. At December 31, 2003, the Company had $12.0 million in Federal Home Loan Bank term advances compared to $10.0 million at December 31, 2002. The Company was borrowing $7.0 million from the Federal Home Loan Bank on a short-term overnight basis at December 31, 2003. Additionally, the Company was borrowing $1.4 million on a short-term overnight basis from a correspondent bank and had securities sold under repurchase agreements in the amount of $633,000. Securities sold under repurchase agreements generally mature within one to four days from the transaction date.

Accrued expenses and other liabilities increased by $780,000 to $1.9 million at December 31, 2003 compared with $1.2 million at December 31, 2002. This increase is primarily the result of a liability recognized to account for cash due to former Centennial shareholders pursuant to the merger.

Between December 31, 2002 and December 31, 2003, total stockholders’ equity increased by $6.4 million. The Company issued 405,502 shares at $10.84 per share for $4.6 million in conjunction with the acquisition of Centennial Bank. The remaining $1.8 million increase resulted from net income for the year of $1.7 million, $448,000 from the exercise of stock options and a $298,000 decrease in the unrealized gain on investments available for sale.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED

DECEMBER 31, 2003 AND 2002

Net Income. Net income for the year ended December 31, 2003 was $1.7 million or $.63 per basic share and $.61 per diluted share compared with net income of $1.2 million or $.63 per basic share and $.61 per diluted share for the year ended December 31, 2002. The 2002 per share data has been adjusted for the 15% stock split effected as a stock dividend payable on April 25, 2003 to shareholders of record on April 11, 2003. Annualized return on average assets was 0.79% and 0.85% for the years ended December 31, 2003 and 2002, respectively. Return on average equity for the year ended December 31, 2003 was 8.25% compared to 9.31% for the prior period.

Net income for the year ended December 31, 2003 increased by $427,000 compared to that of the prior year. Earnings per share remained level over the comparative periods due to an income tax benefit recognized during 2002. The tax benefit recognized in 2002 effectively

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

reduced income tax expense recognized during 2002 by approximately $396,000. Income tax expense recorded in 2003 was $780,000 higher than income tax expense for 2002. The increase in income taxes also played a role in the decline in the two financial performance ratios, return on average assets and return on average equity. Return on average assets experienced a slight decline in 2003 compared with 2002 due to the significant growth in average assets. Total average assets increased by over 45% while net income increased by 35%. The decline in return on average equity was due to the increase in weighted average shares outstanding in 2003 compared to 2002. In August 2002, the Company issued 690,000 shares in a public offering and in August 2003, 406,000 shares were issued in conjunction with the acquisition of Centennial Bank.

Earnings for the year ended December 31, 2003 were positively impacted by strong growth in average earning assets and non-interest income, and a slight reduction in the provision for loan losses compared with the prior year.

Net Interest Income. Net interest income increased by $1.8 million or 34% from $5.4 million for the year ended December 31, 2002 to $7.2 million for the year ended December 31, 2003. The increase in net interest income was due to the continued growth in average earning assets during 2003. The potential increase in net interest income from earning asset growth was somewhat tempered due to the decline in average yield earned on those assets. Due to the low interest rate environment and the composition and underlying terms of the Company’s earning assets and interest-bearing liabilities, the spread between the yield on earning assets and the cost of interest-bearing liabilities declined during 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 year ended December 31, 2003 was 3.64% compared to 3.87% for the year ended December 31, 2002. The average yield on earning assets for the period declined 64 basis points to 5.53% compared with 6.17% for the prior year period, while the average cost of interest-bearing funds decreased by 55 basis points to 2.44% from 2.99%. The Federal Reserve Open Market Committee (“FOMC”) held short-term interest rates steady for the first ten months of 2002 and then lowered rates by 50 basis points in November 2002. Because the rate change came late in the year, the impact of lower rates was felt more in 2003 than in 2002. The FOMC reduced short-term interest rates by an additional 25 basis points in June 2003 due to perceived disinflationary pressure.

As a result of the monetary policies of the FOMC, the prime lending rate (the rate used as the base index for many commercial floating rate loans) and the Federal funds rate fell from 4.75% to 4.00% and from 1.75% to 1.00%, respectively. Since a significant portion of earning assets such as certain loans and short-term investments are tied to these rates, the yield on average earning assets declined directly after the rate reductions. Interest rates on a significant portion of interest-bearing liabilities such as certificates of deposits and borrowings are fixed until maturity. Due to the lower interest rate environment, the Company experienced a greater reduction in the yield on earning assets than in the cost of interest-bearing funds. As a result, the interest rate spread, which is the difference between the average yield on earning assets and the cost of interest-bearing funds, declined by 9 basis points from 3.18% for 2002 to 3.09% for 2003. The reduction in interest spread and a greater reliance on interest-bearing liabilities to fund earning assets lead to the decline in net interest margin.

Total average earning assets were $198.1 million for the year ended December 31, 2003, increasing by $59.5 million when compared to an average of $138.6 million for the year ended

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

December 31, 2002. Average loans outstanding grew $55.6 million or 53% from $104.5 million for 2002 to $160.1 million for 2003. The average balance of the investment securities portfolio for 2003 increased by 22% or $5.5 million, growing from $24.6 million in 2002 to $30.1 million for 2003. The average balance of Federal funds sold and other earning assets declined from $9.5 million during 2002 to $7.8 million in 2003.

Total interest income increased by $2.4 million for 2003 compared to 2002. This increase was the net result of a $3.8 million increase in interest income due to earning assets growth and a $1.4 million decrease in interest income due to the decline in yield. Total interest expense experienced a net increase of $560,000. Interest expense increased by $1.3 million due to growth in interest-bearing funds and declined by $773,000 due to the lower interest rate environment.

Provision for Loan Losses. The Company’s provision for loan losses for 2003 was $551,000 compared to $689,000 recorded in the prior year. The loan loss provision was not as large as the prior year due to a reduction in net loan growth (excluding the acquired loan growth) during 2003. Total gross loans outstanding increased by $91.1 million during 2003 of which $57.9 million were acquired in the Centennial transaction. Gross loans increased by $33.2 million, net of those acquired, compared to $45.1 million in 2002. The provision for loan losses declined in 2003 compared to 2002 primarily due to the reduction in the volume of originated loans. Provisions for loan losses are 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.”

Non-Interest Income. For the year ended December 31, 2003, non-interest income was $1.6 million compared to $768,000 for the prior year period. The 114% increase was due primarily to large increases in mortgage origination income and deposit service and activity fees. The largest components of non-interest income in 2003 were $620,000 in mortgage loan origination and other loan related fees, $455,000 in customer service charges, $208,000 in distributions from our investment in a mortgage origination company and $163,000 in service charges and fees on deposit accounts. Management expects the level of other non-interest income to increase with the volume of deposit accounts and with the introduction of new products.

A significant portion of non-interest income is derived from mortgage loan origination fees and the distributions from the mortgage company in which the Company has an investment. The volume of these fees and distributions 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 for the year ended December 31, 2003 were approximately $5.8 million compared to $4.1 million for the prior year. The 40% increase in non-interest expenses is due principally to the expansion of the Company’s franchise. The largest components of non-interest expense for the year ended December 31, 2003 were personnel expense, occupancy expense, data processing expense, and professional fees.

Salaries and benefits expense was $3.0 million for the year ended December 31, 2003, representing an $896,000 or 43% increase over the $2.1 million recorded for the prior year. During 2003, the Company opened or acquired offices in four new markets in North Carolina. Full service banking locations in the towns of Holly Springs, Southern Pines and Pinehurst were operational for all or part of the year. The Company also established a loan production office

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

located in Sanford, North Carolina. The expansion of our franchise required the addition of corporate support staff to accommodate the high rate of asset growth. Management anticipates personnel expense to continue to increase as the Company executes its strategic growth plans. Occupancy expenses amounted to $1.0 million for 2003, increasing by $234,000 or 29% over the $801,000 incurred during 2002. The Company plans to continue to identify new markets that enhance and complement the current franchise. Management believes that occupancy expenses will increase in the near-term as the Company pursues growth in accordance with its strategic plan.

Data processing expenses were $370,000 for the year ended December 31, 2003 compared with $271,000 for the prior year. The $99,000 or 36% increase was due to growth in account volumes, contractual increases in data processing costs, and the additional data line expenses for the new offices. Because data processing expense is tied closely to transaction and account volumes, these expenses should increase as the Company continues to grow.

Expenses related to professional fees and services increased by 29% or $84,000 from $283,000 in 2002 to $367,000 in 2003. The largest components of professional fees and services were directors’ fees, legal expenses, and accounting and audit expenses. Management expects that as the organization grows in complexity, expenses for professional services will increase.

All other non-interest expenses totaled $1.0 million for the year ended December 31, 2003 compared to $686,000 for the prior year. The increase was primarily the result of the Company’s continued growth. The largest components of other non-interest expenses include office supplies and printing, advertising, and loan related fees. Management expects that as the Company continues to expand, expenses associated with these categories will increase.

Provision for Income Taxes. The Company’s provision for income taxes was $874,000 for the year ended December 31, 2003 compared to $94,000 for the year ended December 31, 2002. Prior to achieving profitability, the Company generated a deferred tax benefit due to the net operating losses incurred in 1999 and 2000. During 2001, and in accordance with generally accepted accounting principles, the Company maintained a valuation allowance for a significant portion of these deferred tax assets. In 2002, the Company determined that it was more likely than not that tax benefits would be derived from the deferred tax assets; and therefore, the valuation allowance was released and had the effect of reducing the Company’s provision for income taxes from $490,000 to $94,000.

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

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 table sets forth information relating to average balances of the Company’s assets and liabilities for the years ended December 31, 2003 and 2002. The table reflects 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 in the average loan balance.

	For the Years Ended December 31,
	2003							2002							2001
	Average balance			Interest		Average rate		Average balance			Interest		Average Rate		Average Balance			Interest		Average Rate
	(Dollars in thousands)
Interest-earning assets:
Loans portfolio	$	160,134		$	9,546	5.96	%	$	104,519		$	6,944	6.64	%	$	65,906		$	5,548	8.42	%
Investment securities		30,141			1,321	4.38	%		24,612			1,443	5.86	%		18,245			1,140	6.25	%
Federal funds and other interest-earning assets		7,816			83	1.06	%		9,522			169	1.77	%		10,389			475	4.57	%
Total interest-earning assets		198,091			10,950	5.53	%		138,653			8,556	6.17	%		94,540			7,163	7.58	%
Non-interest-earning assets		11,936							5,830							4,186
Total assets	$	210,027						$	144,483						$	98,726
Interest-bearing liabilities:
Deposits:
Interest-bearing NOW	$	31,340			295	0.94	%	$	19,668			316	1.61	%	$	9,146			83	0.91	%
Money market and savings		24,133			318	1.32	%		20,534			376	1.83	%		18,157			634	3.49	%
Time deposits		83,211			2,534	3.05	%		58,845			2,177	3.70	%		44,440			2,568	5.78	%
Borrowings		14,943			602	4.03	%		7,563			320	4.23	%		2,607			116	4.45	%
Total interest-bearing liabilities		153,627			3,749	2.44	%		106,610			3,189	2.99	%		74,350			3,401	4.57	%
Other liabilities		36,351							24,680							14,041
Total liabilities		189,978							131,290							88,391
Stockholders’ equity		20,049							13,193							10,335
Total liabilities and stockholders’ equity	$	210,027						$	144,483						$	98,726
Net interest income and interest rate spread				$	7,201	3.09	%				$	5,367	3.18	%				$	3,762	3.01	%
Net interest margin						3.64	%						3.87	%						3.98	%
Ratio of average interest-earning assets to average interest- bearing liabilities		128.94	%						130.06	%						127.16	%

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

VOLUME/RATE VARIANCE ANALYSIS

The following table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. 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.

	Year Ended December 31, 2003 vs. 2002									Year Ended December 31, 2002 vs. 2001
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume			Rate			Total			Volume			Rate			Total
	(Dollars in thousands)
Interest income:
Loans portfolio	$	3,505		$	(903	)	$	2,602		$	2,908		$	(1,512	)	$	1,396
Investment securities		283			(405	)		(122	)		386			(83	)		303
Federal funds and other interest-earning assets		(24	)		(62	)		(86	)		(28	)		(278	)		(306	)
Total interest income		3,764			(1,370	)		2,394			3,266			(1,873	)		1,393
Interest expense:
Deposits:
Interest-bearing NOW		149			(170	)		(21	)		132			101			233
Money market and savings		57			(115	)		(58	)		63			(321	)		(258	)
Time deposits		822			(465	)		357			683			(1,074	)		(391	)
Borrowings		305			(23	)		282			215			(11	)		204
Total interest expense		1,333			(773	)		560			1,093			(1,305	)		(212	)
Net interest income increase (decrease)	$	2,431		$	(597	)	$	1,834		$	2,173		$	(568	)	$	1,605

NONPERFORMING ASSETS

Our financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on loans, unless we place a loan in 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 in nonaccrual status when the loan becomes past due 90 days. We also place loans in 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

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

that no loss of original principal will occur. Potential problem loans are loans which are currently performing and are not included in 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 December 31, 2003, there was one loan in the amount of $647,000 identified as a potential problem loan. The loan is 90 days or more past due and still accruing interest because management and the borrower are working towards resolution. It is possible this loan, or a portion thereof, could be moved to a nonaccrual status in the future.

The table sets forth, for the period indicated, information about our nonaccrual loans, loans past due 90 days or more and still accruing interest, total nonperforming loans (nonaccrual loans plus loans past due 90 days or more and still accruing interest), and total nonperforming assets.

	At December 31,
	2003			2002			2001			2000			1999
	(Dollars in thousands)
Nonaccrual loans	$	159		$	—		$	429		$	—		$	—
Restructured loans		—			—			—			—			—
Total nonperforming loans		159			—			429			—			—
Real estate owned		—			—			—			—			—
Total nonperforming assets	$	159		$	—		$	429		$	—		$	—
Accruing loans past due 90 days or more	$	647		$	—		$	—		$	—		$	—
Allowance for loan losses		3,304			1,711			1,116			630			241
Nonperforming loans to period end loans		0.07	%		0.00	%		0.53	%		0.00	%		0.00	%
Nonperforming loans and loans past due 90 days or more to period end loans		0.37	%		0.00	%		0.53	%		0.00	%		0.00	%
Allowance for loan losses to period end loans		1.52	%		1.36	%		1.38	%		1.30	%		1.30	%
Allowance for loan losses to nonperforming loans		2,077.99	%		0.00	%		260.14	%		0.00	%		0.00	%
Allowance for loan losses to nonperforming loans and loans past due 90 days or more		409.93	%		0.00	%		260.14	%		0.00	%		0.00	%
Nonperforming assets to total assets		0.06	%		0.00	%		0.33	%		0.00	%		0.00	%
Nonperforming assets and loans past due 90 days or more to total assets		0.29	%		0.00	%		0.33	%		0.00	%		0.00	%

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

The $159,000 in non-performing assets at December 31, 2003 consisted of four loans: one is secured by an automobile, two are secured by perfected liens on a primary residence and one is secured by a blanket lien on business assets. The borrower on the loan secured by the automobile is in Chapter 13 bankruptcy and making payments as agreed. The Company does not anticipate taking a loss on the credit. The Company is in the process of foreclosing on the property securing the two residential real estate loans and anticipates losing between $10,000 and $20,000 on the subsequent disposition of that property. The final credit is guaranteed by four principals of the business and we are in the process of discussing repayment. The Company anticipates a minimal loss if any. Interest foregone on these loans during 2003 totaled $6,500.

There were no nonaccrual loans at December 31, 2002. Interest foregone on loans in nonaccrual status during 2002 was approximately $9,000.

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 adjustments 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 Credit 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 determining 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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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

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. The Company experienced net loan charge-offs of $87,000 for the year ended December 31, 2003 compared with $94,000 for the prior year. The percentage of net charge-offs to total average loans for 2003 and 2002 were .05% and .09%, respectively. The reduction in internal loan growth (excluding the effect of the Centennial acquisition) and the decrease in net charge-offs were factors contributing to the decreased provision for loan losses in the current year compared with the prior year.

In conjunction with the acquisition of Centennial Bank on August 29, 2003, the Company recorded an allowance for loan losses of $1.1 million associated with the Centennial loan portfolio. At the time of the transaction, Centennial’s loan loss reserve represented 1.95% of total outstanding loans. The allowance for loan losses at December 31, 2003 was $3.3 million or 1.52% of total outstanding loans and 409.93% of non-performing loans and loans 90 days past due and still accruing interest compared with $1.7 million or 1.36% of total outstanding loans at December 31, 2002.

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 adjust the level of the allowance. Likewise, there can be no assurance that the existing allowance for loan losses is adequate should there be deterioration in the quality of any loans or changes in any of the factors discussed above. Any increases in the provision for loan losses resulting from such deterioration or change in condition could adversely affect the financial condition of the Company and results of its operations.

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

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

	At December 31,
	2003				2002				2001
	Amount		% of Total Loans (1)		Amount		% of Total Loans (1)		Amount		% of Total Loans (1)
	(Dollars in thousands)
Real estate - commercial	$	1,330	46.66	%	$	584	41.58	%	$	312	31.31	%
Real estate - residential		54	6.80	%		9	1.84	%		5	2.00	%
Construction loans		778	14.56	%		435	21.84	%		387	28.71	%
Commercial and industrial loans		841	17.61	%		518	19.60	%		306	24.01	%
Home equity loans and lines of credit		115	10.59	%		88	12.75	%		40	10.43	%
Loans to individuals		186	3.78	%		77	2.38	%		66	3.54	%
Total allowance	$	3,304	100.00	%	$	1,711	100.00	%	$	1,116	100.00	%

	At December 31,
	2000				1999
	Amount		% of Total Loans (1)		Amount		% of Total Loans (1)
	(Dollars in thousands)
Real estate - commercial	$	163	21.92	%	$	62	20.44	%
Real estate - residential		3	1.53	%		1	0.46	%
Construction loans		198	38.48	%		76	24.53	%
Commercial and industrial loans		189	19.70	%		72	31.99	%
Home equity loans and lines of credit		46	15.42	%		18	18.97	%
Loans to individuals		31	2.95	%		12	3.61	%
Total allowance	$	630	100.00	%	$	241	100.00	%

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

The following table describes our loan portfolio composition by category:

	At December 31,
	2003					2002					2001
	Amount			% of Total Loans		Amount			% of Total Loans		Amount			% of Total Loans
	(Dollars in thousands)
Real estate - commercial	$	101,316		46.66	%	$	52,361		41.58	%	$	25,288		31.31	%
Real estate - residential		14,765		6.80	%		2,319		1.84	%		1,614		2.00	%
Construction loans		31,612		14.56	%		27,503		21.84	%		23,168		28.71	%
Commercial and industrial loans		38,237		17.61	%		24,681		19.60	%		19,393		24.01	%
Home equity loans and lines of credit		22,985		10.59	%		16,051		12.75	%		8,424		10.43	%
Loans to individuals		8,213		3.78	%		3,002		2.38	%		2,863		3.54	%
Total loans		217,128		100.00	%		125,917		100.00	%		80,768		100.00	%
Less: Net deferred loan fees		(382	)				(244	)				(194	)
Total loans, net	$	216,746				$	125,673				$	80,574

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

	At December 31,
	2000					1999
	Amount			% of Total Loans		Amount			% of Total Loans
	(Dollars in thousands)
Real estate - commercial	$	10,651		21.92	%	$	3,798		20.44	%
Real estate - residential		742		1.53	%		85		0.46	%
Construction loans		18,696		38.48	%		4,559		24.53	%
Commercial and industrial loans		9,574		19.70	%		5,944		31.99	%
Home equity loans and lines of credit		7,493		15.42	%		3,525		18.97	%
Loans to individuals		1,435		2.95	%		671		3.61	%
Total loans		48,591		100.00	%		18,582		100.00	%
Less: Net deferred loan fees		(122	)				(47	)
Total loans, net	$	48,469				$	18,535

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

	At or for the Years Ended December 31,
	2003			2002			2001			2000			1999
	(Dollars in thousands)
Balance at beginning of period	$	1,711		$	1,116		$	630		$	241		$	—
Charge-offs:
Construction loans		27			—			—			—			—
Commercial and industrial loans		59			21			13			—			—
Loans to individuals		13			74			4			—			—
Total charge-offs		99			95			17			—			—
Recoveries:
Commercial and industrial loans		4			1			—			—			—
Loans to individuals		8			—			—			—			—
Total recoveries		12			1			—			—			—
Net charge-offs		87			94			17			—			—
Allowance acquired from Centennial Bank merger		1,129			—			—			—			—
Provision for loan losses		551			689			503			389			241
Balance at the end of the year	$	3,304		$	1,711		$	1,116		$	630		$	241
Total loans outstanding at year-end	$	217,128		$	125,917		$	80,768		$	48,591		$	18,582
Average loans outstanding for the year	$	160,134		$	104,519		$	65,906		$	31,693		$	9,727
Allowance for loan losses to loans outstanding		1.52	%		1.36	%		1.38	%		1.30	%		1.30	%
Ratio of net loan charge-offs to average loans outstanding		0.05	%		0.09	%		0.03	%		0.00	%		0.00	%

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

INVESTMENT ACTIVITIES

The Company’s investment portfolio plays a major role in management of liquidity and interest rate sensitivity and, therefore, is managed in the context of the overall balance sheet. The securities portfolio generates a nominal percentage of our interest income and serves as a necessary source of liquidity. We account for investment securities as follows:

Available for Sale. Debt and equity securities that will be held for indeterminate periods of time, including securities that we may sell in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and the yield of alternative investments are classified as available for sale. The Company carries these investments at market value, which we generally determine using published quotes as of the close of business. Unrealized gains and losses are excluded from our earnings and are reported, net of applicable income tax, as a component of accumulated other comprehensive income or loss in stockholders’ equity until realized.

The following table summarizes the amortized costs and market value of available for sale securities at the dates indicated:

	At December 31, 2003				At December 31, 2002				At December 31, 2001
	Amortized cost		Fair value		Amortized cost		Fair value		Amortized cost		Fair value
	(In thousands)
Securities available for sale:
U.S. government securities and obligations of U.S. government agencies	$	1,759	$	1,762	$	2,260	$	2,302	$	3,760	$	3,851
Mortgage-backed securities		27,647		27,758		21,778		22,370		18,489		18,713
Municipal		6,908		6,975		3,584		3,615		278		269
Other		500		500		—		—		—		—
Total securities available for securities	$	36,814	$	36,995	$	27,622	$	28,287	$	22,527	$	22,833

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 securities principal repayments, deposit growth, the brokered deposit market, and borrowings from the Federal Home Loan Bank 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.

At December 31, 2003, liquid assets (cash and due from banks, interest-earning deposits with banks, federal funds sold and investment securities available for sale) were approximately $44.0 million, which represents 16% of total assets and 20% of total deposits. Supplementing this liquidity, the Company has available lines of credit from various correspondent banks of approximately $49.8 million of which $20.4 million was outstanding. At December 31, 2003, outstanding commitments for undisbursed lines of credit and letters of credit amounted to $52.0 million. Management believes that the combined aggregate liquidity position of the Company is sufficient to meet the funding requirements of loan demand and deposit maturities and

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

withdrawals in the near term. Certificates of deposit represented 52% of the Company’s total deposits at December 31, 2003. The Company’s growth strategy will include efforts focused at increasing the relative volume of transaction deposit accounts. Certificates of deposit of $100,000 or more represented 24% of the Company’s total deposits at year-end. 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 December 31, 2003, the Bank’s equity to asset ratio was 8.82%. All capital ratios place the Bank in excess of the minimum required to be deemed a well-capitalized bank by regulatory measures. The Bank’s ratio of Tier I capital to risk-weighted assets at December 31, 2003 was 10.85%.

ASSET/LIABILITY MANAGEMENT

The Company’s asset/liability management, or interest rate risk management, program is focused primarily on evaluating and managing the composition of its assets and liabilities in view of various interest rate scenarios. Factors beyond the Company’s control, such as market interest rates and competition, may also have an impact on the Company’s interest income and interest expense.

In the absence of other factors, the yield or return associated with the Company’s earning assets generally will increase from existing levels when interest rates rise over an extended period of time and, conversely, interest income will decrease when interest rates decline. In general, interest expense will increase when interest rates rise over an extended period of time and, conversely, interest expense will decrease when interest rates decline.

Interest Rate Gap Analysis. As a part of its interest rate risk management policy, the Company calculates an interest rate “gap.” Interest rate “gap” analysis is a common, though imperfect, measure of interest rate risk, which measures the relative dollar amounts of interest-earning assets and interest-bearing liabilities which reprice within a specific time period, either through maturity or rate adjustment. The “gap” is the difference between the amounts of such assets and liabilities that are subject to repricing. A “positive” gap for a given period means that the amount of interest-earning assets maturing or otherwise repricing within that period exceeds the amount of interest-bearing liabilities maturing or otherwise repricing within the same period. Accordingly, in a declining interest rate environment, an institution with a positive gap would generally be expected, absent the effects of other factors, to experience a decrease in the yield on its assets greater than the decrease in the cost of its liabilities and its net interest income should be negatively affected. Conversely, the yield on its assets for an institution with a positive gap would generally be expected to increase more quickly than the cost of funds in a rising interest rate environment, and such institution’s net interest income generally would be expected to be positively affected by rising interest rates. Changes in interest rates generally have the opposite effect on an institution with a “negative gap.”

The table below sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2003 that are projected to reprice or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which reprice or mature within a particular period were determined in accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

of the next upcoming adjustment period. Money market deposit accounts and negotiable order of withdrawal or other transaction accounts are assumed to be subject to immediate repricing and depositor availability and have been placed in the shortest period. In making the gap computations, none of the assumptions sometimes made regarding prepayment rates and deposit decay rates have been used for any interest-earning assets or interest-bearing liabilities. In addition, the table does not reflect scheduled principal payments that will be received throughout the lives of the loans or investments. The interest rate sensitivity of the Company’s assets and liabilities illustrated in the following table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.

	Terms to Repricing at December 31, 2003
	1 Year or Less			More Than 1 Year to 3 Years			More Than 3 Years to 5 Years			More Than 5Years			Total
	(Dollars in thousands)
INTEREST-EARNING ASSETS:
Loans receivable:
Commercial mortgage loans	$	68,041		$	23,234		$	10,042		$	—		$	101,317
Residential mortgage loans		7,668			4,754			1,702			641			14,765
Construction and development		30,098			1,514			—			—			31,612
Commercial and industrial loans		33,541			4,696			—			—			38,237
Home equity lines and loans		22,230			556			190			9			22,985
Loans to individuals		6,535			1,345			325			7			8,212
Interest-earning deposits with banks		438			—			—			—			438
Investment securities available for sale		6,250			8,397			8,458			13,890			36,995
Federal Home Loan Bank stock		950			—			—			—			950
Total interest-earning assets	$	175,751		$	44,496		$	20,717		$	14,547		$	255,511
INTEREST-BEARING LIABILITIES:
Deposits:
Money market, NOW and savings	$	106,097		$	—		$	—		$	—		$	106,097
Time		79,698			18,583			14,238			—			112,519
Borrowings		17,003			2,000			—			10,000			29,003
Total interest-bearing liabilities	$	202,798		$	20,583		$	14,238		$	10,000		$	247,619
INTEREST SENSITIVITY GAP PER PERIOD	$	(27,047	)	$	23,913		$	6,479		$	4,547		$	7,892
CUMULATIVE INTEREST SENSITIVITY GAP	$	(27,047	)	$	(3,134	)	$	3,345		$	7,892		$	7,892
CUMULATIVE GAP AS A PERCENTAGE OF TOTAL INTEREST-EARNING ASSETS		(10.59	)%		(1.23	)%		1.31	%		3.09	%		3.09	%
CUMULATIVE INTEREST-EARNING ASSETS AS A PERCENTAGE OF CUMULATIVE INTEREST-BEARING LIABILITIES		86.66	%		98.60	%		101.41	%		103.19	%		103.19	%

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

The following table presents at December 31, 2003 (i) the aggregate maturities of loans in the named categories of our loan portfolio and (ii) the aggregate amounts of such loans, by variable and fixed rates that mature after one year:

	Within 1 Year		1-5 Years		After 5 Years Years		Total
	(In thousands)
Commercial mortgage	$	11,564	$	79,480	$	10,272	$	101,316
Residential mortgage		1,028		9,747		3,990		14,765
Construction, acquisition and development		20,020		10,706		886		31,612
Commercial and industrial		17,990		18,208		2,039		38,237
Home equity lines and loans		1,269		1,493		20,223		22,985
Individuals		3,873		3,403		937		8,213
Total	$	55,744	$	123,037	$	38,347	$	217,128
Fixed rate loans							$	63,958
Variable rate loans								97,426
							$	161,384

CRITICAL ACCOUNTING POLICY

The Company’s most significant critical accounting policy is the determination of its allowance for loan losses. A critical accounting policy is one that is both very important to the portrayal of the Company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments. What makes these judgments difficult, subjective and/or complex is the need to make estimates about the effects of matters that are inherently uncertain. Refer to the discussion within Analysis of Allowance for Loan Losses and Note B to the consolidated financial statements for comprehensive discussion regarding this accounting policy.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued FASB Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities. This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. In December 2003, the FASB issued a revision to FIN 46 (FIN 46R) to clarify some of the provisions of FIN 46 and to exempt certain entities from its requirements. Small business issuers must apply FIN 46R no later than the end of the first reporting period ending after December 15, 2004. FIN 46 is effective for public entities that have interests in structures that are commonly referred to as special-purpose entities for periods ending after December 15, 2003.

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Crescent Financial Corporation and Subsidiaries

Management’s Discussion and Analysis

Adoption of FIN 46R will result in deconsolidation of the Company’s trust preferred subsidiary, Crescent Financial Capital Trust I. Upon deconsolidation, the junior subordinated debentures issued by the Company to the trust will be included in long-term debt (instead of the trust preferred securities) and the Company’s equity interest in the trust will be included in other assets. If these trusts were deconsolidated as of December 31, 2003, the effect on the Company’s balance sheet would be an increase in other assets of $248,000 with a corresponding increase in long-term debt. The deconsolidation of the trust will not materially impact net income.

The trust preferred securities presently qualify as Tier 1 regulatory capital and are reported in Federal Reserve regulatory reports as a minority interest in a consolidated subsidiary. The junior subordinated debentures do not qualify as Tier 1 regulatory capital. On July 2, 2003, the Board of Governors of the Federal Reserve issued a letter, SR 03-13, stating that notwithstanding FIN 46, trust preferred securities will continue to be included in Tier 1 capital until notice is given to the contrary. There can be no assurance that the Federal Reserve will continue to allow institutions to include trust preferred securities in Tier I capital for regulatory capital purposes. In the event of a disallowance, there would be a reduction in the Company’s consolidated capital ratios. However, the Company believes that the Bank would remain “well capitalized” under Federal Reserve Board guidelines (or the Company would still exceed the regulatory required minimums for capital adequacy purposes).

OFF-BALANCE SHEET ARRANGEMENTS

The Company has various financial instruments (outstanding commitments) with off-balance sheet risk that are issued in the normal course of business to the meet the financing needs of its customers. See Note O to the consolidated financial statements for more information regarding these commitments and contingent liabilities.

FORWARD-LOOKING INFORMATION

This annual report to stockholders 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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INDEPENDENT AUDITORS’ REPORT

To the Stockholders and the Board of Directors

Crescent Financial Corporation

Cary, North Carolina

We have audited the accompanying consolidated balance sheets of Crescent Financial Corporation and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Crescent Financial Corporation and subsidiaries at December 31, 2003 and 2002 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Sanford, North Carolina

February 10, 2004

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2002

	2003			2002
ASSETS
Cash and due from banks	$	6,613,091		$	9,460,820
Interest-earning deposits with banks		438,066			80,592
Federal funds sold		—			16,691,000
Investment securities available for sale (Note C)		36,994,920			28,287,395
Loans (Note D)		216,745,757			125,672,941
Allowance for loan losses		(3,304,250	)		(1,711,300	)
NET LOANS		213,441,507			123,961,641
Accrued interest receivable		964,376			551,799
Federal Home Loan Bank stock, at cost		950,000			500,000
Premises and equipment (Note E)		2,699,164			1,630,865
Investment in life insurance		5,072,688			—
Goodwill		3,600,298			—
Other assets		2,940,371			840,816
TOTAL ASSETS	$	273,714,481		$	182,004,928
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand	$	37,941,562		$	40,338,729
Savings		2,193,336			1,435,539
Money market and NOW		65,961,823			46,084,969
Time (Note F)		112,518,235			65,246,233
TOTAL DEPOSITS		218,614,956			153,105,470
Short-term borrowings (Note G)		9,002,546			—
Long-term debt (Note G)		12,000,000			10,000,000
Trust preferred securities		8,000,000			—
Accrued expenses and other liabilities		1,947,079			1,167,470
TOTAL LIABILITIES		249,564,581			164,272,940
Stockholders’ Equity (Note M)
Common stock, $1 par value, 20,000,000 shares authorized; 2,924,429 shares and 2,143,249 shares issued and outstanding at December 31, 2003 and 2002, respectively		2,924,429			2,143,249
Additional paid-in capital		18,884,505			14,604,591
Retained earnings		2,229,984			575,267
Accumulated other comprehensive income		110,982			408,881
TOTAL STOCKHOLDERS’ EQUITY		24,149,900			17,731,988
Commitments (Notes I and N)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	273,714,481		$	182,004,928

See accompanying notes.

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2003 and 2002

	2003		2002
INTEREST AND FEE INCOME
Loans	$	9,546,450	$	6,943,890
Investment securities available for sale		1,320,644		1,443,327
Interest-earning deposits with banks		8,286		27,925
Federal funds sold		74,903		140,713
TOTAL INTEREST AND FEE INCOME		10,950,283		8,555,855
INTEREST EXPENSE
Money market, NOW and savings deposits		613,167		691,791
Time deposits		2,533,934		2,176,685
Federal funds purchased and borrowings		601,914		320,168
TOTAL INTEREST EXPENSE		3,749,015		3,188,644
NET INTEREST INCOME		7,201,268		5,367,211
PROVISION FOR LOAN LOSSES (Note D)		551,037		689,024
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		6,650,231		4,678,187
NON-INTEREST INCOME (Note K)		1,644,656		767,700
NON-INTEREST EXPENSE
Salaries and employee benefits		2,978,666		2,082,952
Occupancy and equipment		1,035,043		801,216
Other (Note K)		1,752,861		1,239,958
TOTAL NON-INTEREST EXPENSE		5,766,570		4,124,126
INCOME BEFORE INCOME TAXES		2,528,317		1,321,761
INCOME TAXES (Note J)		873,600		93,603
NET INCOME	$	1,654,717	$	1,228,158
NET INCOME PER COMMON SHARE
Basic	$	.63	$	.63
Diluted	$	.61	$	.61
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		2,611,069		1,960,810
Diluted		2,706,454		2,017,408

See accompanying notes.

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2003 and 2002

	Common stock			Additional paid-in capital			Retained earnings (deficit)			Accumulated other comprehensive income			Total equity
	Shares	Amount
Balance at December 31, 2001	1,289,527	$	1,289,527	$	9,625,506		$	(652,891	)	$	187,579		$	10,449,721
Comprehensive income:
Net income	—		—		—			1,228,158			—			1,228,158
Net unrealized holding gains on available-for-sale securities, net	—		—		—			—			221,302			221,302
Total comprehensive income														1,449,460
Common stock issued pursuant to:
Sale of common stock	690,412		690,412		5,126,932			—			—			5,817,344
Stock options exercised	2,531		2,531		17,464			—			—			19,995
Fifteen percent stock split effected in the form of a stock dividend with cash paid for fractional shares	160,779		160,779		(165,311	)		—			—			(4,532	)
Balance at December 31, 2002	2,143,249		2,143,249		14,604,591			575,267			408,881			17,731,988
Comprehensive income:
Net income	—		—		—			1,654,717			—			1,654,717
Net unrealized holding loss on available-for-sale securities, net	—		—		—			—			(297,899	)		(297,899	)
Total comprehensive income														1,356,818
Common stock issued pursuant to:
Stock options exercised	54,190		54,190		394,247			—			—			448,437
Fifteen percent stock split effected in the form of a stock dividend with net cash received for fractional shares	321,488		321,488		(321,482	)		—			—			6
Shares issued in connection with Business combination	405,502		405,502		4,207,149			—			—			4,612,651
Balance at December 31, 2003	2,924,429	$	2,924,429	$	18,884,505		$	2,229,984		$	110,982		$	24,149,900

See accompanying notes.

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2003 and 2002

	2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,654,717		$	1,228,158
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		468,175			308,872
Provision for loan losses		551,037			689,024
Deferred income taxes		(53,180	)		(582,981	)
Gain on disposition of assets		9,270			(14,916	)
Change in assets and liabilities:
Increase in accrued interest receivable		(412,577	)		(38,735	)
Increase in other assets		29,525			(129,976	)
Increase in accrued expenses and other liabilities		37,163			598,102
Net cash provided by operating activities		2,284,130			2,057,548
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities available for sale		(22,781,451	)		(10,976,162	)
Proceeds from maturities and repayments of investment securities available for sale		18,821,155			5,888,659
Loan originations and principal collections, net		(33,444,785	)		(45,533,780	)
Purchases of premises and equipment		(982,632	)		(1,096,072	)
Proceeds from disposals of premises and equipment		1,300			1,450
Capital expenditures on foreclosed assets		(20,861	)		—
Proceeds from sales of foreclosed assets		174,127			354,998
Purchases of Federal Home Loan Bank stock		(243,100	)		(250,000	)
Investment in life insurance		(5,072,688	)		—
Net cash paid in business combination		(3,042,396	)		—
Net cash used by investing activities		(46,591,331	)		(51,610,907	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits accounts		8,192,367			39,950,115
Net increase in short-term borrowings		8,485,136			—
Net increase in long-term debt		—			5,000,000
Proceeds from issuance of trust preferred securities		8,000,000			—
Proceeds from sale of common stock, net		—			5,817,344
Proceeds from stock options exercised		448,437			19,995
Net cash received in lieu of fractional shares		6			(4,532	)
Net cash provided by financing activities		25,125,946			50,782,922
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(19,181,255	)		1,229,563
CASH AND CASH EQUIVALENTS, BEGINNING		26,232,412			25,002,849
CASH AND CASH EQUIVALENTS, ENDING	$	7,051,157		$	26,232,412

See accompanying notes.

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE A - ORGANIZATION AND OPERATIONS

On June 29, 2001, Crescent Financial Corporation (the “Company”) was formed as a holding company for Crescent State Bank (the “Bank”). Upon formation, one share of the Company’s $1 par value common stock was exchanged for each of the then outstanding 1,289,527 shares of the Bank’s $5 par value common stock.

The Bank was incorporated December 22, 1998 and began banking operations on December 31, 1998. The Bank is engaged in general commercial and retail banking in Wake, Johnston, Lee and Moore Counties, North Carolina, operating under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank undergoes periodic examinations by those regulatory authorities.

The Company formed Crescent Financial Capital Trust I during 2003 in order to facilitate the issuance of trust preferred securities. The Trusts are statutory business trusts formed under the laws of the state of Delaware, of which all common securities are owned by the Company.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the accounts and transactions of Crescent Financial Corporation and its wholly-owned subsidiaries, Crescent State Bank and Crescent Financial Capital Trust I. All significant intercompany transactions and balances have been eliminated in consolidation. Crescent Financial Corporation and its subsidiaries are collectively referred to herein as the “Company.”

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and due from banks, interest-earning deposits with banks and federal funds sold.

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Securities Available for Sale

Available-for-sale securities are carried at fair value and consist of bonds and notes not classified as trading securities or as held-to-maturity securities. Unrealized holding gains and losses on available-for-sale securities are reported as a net amount in other comprehensive income, net of related tax effects. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. Such write-downs would be included in earnings as realized losses. Premiums and discounts are recognized in interest income using the interest method over the period to maturity.

Loans

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity, are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. Interest on loans is recorded based on the principal amount outstanding. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. Generally, loans are placed on nonaccrual when they are past due 90 days. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. The provision for loan losses is based upon management’s best estimate of the amount needed to maintain the allowance for loan losses at an adequate level. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of the current status of the portfolio, historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. Management segments the loan portfolio by loan type in considering each of the aforementioned factors and their impact upon the level of the allowance for loan losses.

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Allowance for Loan Losses (Continued)

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.

Premises and Equipment

Land is carried at cost. Furniture and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets which are 3 - 10 years for furniture and equipment. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Repairs and maintenance costs are charged to operations as incurred, and additions and improvements to premises and equipment are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and any gains or losses are reflected in current operations.

Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.

Stock in Federal Home Loan Bank of Atlanta

As a requirement for membership, the Company invests in stock of the Federal Home Loan Bank of Atlanta (“FHLB”). This investment is carried at cost.

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets are also recognized for operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled.

Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized.

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 (“APB”) 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 APB Opinion No. 25, no compensation cost is recognized for them. The Company has elected to continue with the accounting methodology in APB Opinion No. 25 and, as a result, has provided 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.

At December 31, 2003, the Company has two stock-based compensation plans, which are more fully described in Note O. Had compensation costs for the Company’s stock option plans been determined based on the fair value at the grant date for awards in 2003 and 2002, the Company’s net income and net income per share would have changed to the pro forma amounts indicated as follows:

	2003			2002
	(Dollars in thousands)
Net income:
As reported	$	1,655		$	1,228
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(23	)		(88	)
Pro forma	$	1,632		$	1,140

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

	2003			2002
Basic earnings per share:
As reported	$	.63		$	.63
Pro forma		.62			.58
Diluted earnings per share:
As reported	$	.61		$	.61
Pro forma		.60			.57
Assumptions in estimating option values:
Risk-free interest rate		3.00	%		3.00	%
Dividend yield		—	%		—	%
Volatility		23.88	%		29.20	%
Expected life		7 years			7 years
The weighted average grant date fair value of options	$	4.11		$	3.64

Per Share Results

During both 2003 and 2002, the Company paid a 15% stock split effected in the form of a stock dividend. Basic and diluted net income 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 dividends.

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 year ended December 31, 2002, there were 246,066 outstanding stock options which were not included in the computation of diluted earnings per share because they had no dilutive effect. There were no anti-dilutive shares at December 31, 2003.

Comprehensive Income

The Company reports as comprehensive income all changes in stockholders’ equity during the year from sources other than shareholders. Other comprehensive income refers to all components (revenues, expenses, gains, and losses) of comprehensive income that are excluded from net income. The Company’s only component of other comprehensive income is unrealized gains and losses on investment securities available for sale.

- 35 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The components of other comprehensive income and related tax effects are as follows:

	2003			2002
Unrealized holding gains (lossess) on available-for-sale securities	$	(484,783	)	$	360,135
Tax effect		186,884			(138,833	)
		(297,899	)		221,302
Reclassification adjustment for gains realized in income		—			—
Tax effect		—			—
Net of tax amount	$	(297,899	)	$	221,302

Mortgage Loan Origination and Other Fees

Mortgage loan origination fees represent fees received for the origination of loans for sale in the secondary market through the Company’s relationship with Sidus Financial Corporation, a mortgage broker in which the Company has invested. These fees are recognized in income as they are earned upon the closing of each loan.

Fees derived from leasing and investment transactions with Republic Leasing and the Capital Investment Group, Inc., respectively, are recognized in income as these transactions are consummated.

Goodwill

Goodwill arose from the 2003 purchase of Centennial Bank. Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, goodwill acquired will not be amortized but will be subject to an annual impairment test. Goodwill recorded by the Company amounted to $3,600,298 at December 31, 2003. The Company had no recorded goodwill at December 31, 2002.

Other Intangible Assets

Other intangible assets were acquired in conjunction with the 2003 purchase of Centennial Bank. Subject to the provisions of SFAS No. 142, such other intangible assets, which consist solely of the deposit base premium acquired through the purchase of Centennial, are amortized over the approximate estimated lives of the related acquired deposit relationships. In accordance with the Company’s estimate of the approximate lives of the acquired deposit relationships, a 10 year straight-line amortization schedule has been established for the other intangible asset related to the financial institution acquisition. The Company will continue to evaluate the amortization period and such amortization period could be revised downwards (but not upwards) in the future if circumstances warrant. The initial deposit premium was $209,012. Amortization of the deposit premium amounted to $6,968 for the year ended December 31, 2003. The Company had no such intangible assets at December 31, 2002.

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Segment Reporting

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, requires management to report selected financial and descriptive information about reportable operating segments. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Generally, disclosures are required for segments internally identified to evaluate performance and resource allocation. In all material respects, the Company’s operations are entirely within the commercial and retail banking segment, and the financial statements presented herein reflect the results of that segment. Also, the Company has no foreign operations or customers.

New Accounting Standards

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities. This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. In December 2003, the FASB issued a revision to FIN 46 (FIN 46R) to clarify some of the provisions of FIN 46 and to exempt certain entities from its requirements. FIN 46R is effective for public entities that have interests in structures that are commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by small business issuers to variable interest entities other than special-purpose entities is required for periods ending after December 15, 2004. The Company is in the process of determining the impact of FIN 46 and FIN 46R on its consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified by the Company after May 31, 2003, and is effective at the beginning of the first interim period beginning after June 15, 2003. However, the FASB has deferred indefinitely the classification and measurement provisions as they related to certain mandatorily redeemable noncontrolling interests. The Company’s adoption of SFAS No. 150 did not have a material impact on its consolidated financial statements.

In November 2003, the Emerging Issues Task Force (EITF) reached a partial consensus on Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. Issue 03-1 requires certain quantitative and qualitative disclosures for investments subject to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The Company adopted the partial consensus on Issue 03-1 during 2003 and has provided the new disclosures in Note C. The EITF is expected to continue deliberating other aspects of Issue 03-1, including when to recognize other-than-temporary impairment.

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Reclassifications

Certain amounts in the 2002 and 2001 consolidated financial statements have been reclassified to conform to the 2003 presentation. The reclassifications had no effect on net income or stockholders’ equity as previously reported.

NOTE C - INVESTMENT SECURITIES

The following is a summary of the securities portfolios by major classification:

	December 31, 2003
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
Securities available for sale:
U.S. government and obligations of U.S. government agencies	$	1,758,960	$	11,330	$	7,813	$	1,762,477
Mortgage-backed		27,647,441		306,825		196,719		27,757,547
Municipal		6,907,894		119,315		52,313		6,974,896
Other		500,000		—		—		500,000
	$	36,814,295	$	437,470	$	256,845	$	36,994,920

	December 31, 2002
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Securities available for sale:
U.S. government and obligations of U.S. government agencies	$	2,259,817	$	42,447	$	—		$	2,302,264
Mortgage-backed		21,777,894		592,733		(1,024	)		22,369,603
Municipal		3,584,275		56,642		(25,389	)		3,615,528
	$	27,621,986	$	691,822	$	(26,413	)	$	28,287,395

- 38 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE C - INVESTMENT SECURITIES (Continued)

The following table shows investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2003. These unrealized losses on investment securities are a result of volatility in the market during 2003 and relate to one U.S. Government agency security, thirteen mortgage-backed securities, and five municipal securities. All unrealized losses on investment securities are considered by management to be temporarily impaired given the credit ratings on these investment securities and the short duration of the unrealized loss.

	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
	(Amounts in thousands)
Securities available for sale:
U.S. government securities and obligations of U.S. government agencies	$	496,771	$	7,813	$	—	$	—	$	496,771	$	7,813
Mortgage-backed securities		9,362,839		196,719		—		—		9,362,839		196,719
Municipals		2,125,408		52,313		—		—		2,125,408		52,313
Total temporarily impaired securities	$	11,985,018	$	256,845	$	—	$	—	$	11,985,018	$	256,845

At December 31, 2003 and 2002, investment securities with a carrying value of $8,305,000 and $10,872,000, respectively, were pledged to secure public deposits, borrowings and for other purposes required or permitted by law.

The amortized cost and fair values of securities available for sale at December 31, 2003 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized cost		Fair value
Due within one year	$	7,844,396	$	7,945,294
Due after one year through five years		15,586,421		15,659,751
Due after five years through ten years		9,842,248		9,789,056
Due after ten years		3,541,230		3,600,819
	$	36,814,295	$	36,994,920

- 39 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE C - INVESTMENT SECURITIES (Continued)

The following table presents the carrying values, intervals of maturities or repricings, and weighted average yields of our investment portfolio at December 31, 2003:

	Repricing or Maturing
	Less than one year			One to five years			Five to ten years			Over ten years			Total
	(Dollars in thousands)
Securities available for sale:
U. S. government agencies
Balance	$	760		$	1,002		$	—		$	—		$	1,762
Weighted average yield		3.47	%		3.43	%		—			—			3.45	%
Mortgage-backed securities
Balance	$	7,185		$	13,361		$	6,330		$	882		$	27,758
Weighted average yield		3.93	%		4.05	%		4.07	%		4.47	%		4.04	%
Municipal securities
Balance	$	—		$	1,297		$	3,459		$	2,219		$	6,975
Weighted average yield		—			5.46	%		4.87	%		6.50	%		5.50	%
Other
Balance	$	—		$	—		$	—		$	500		$	500
Weighted average yield		—			—			—			9.00	%		9.00	%
Total
Balance	$	7,945		$	15,660		$	9,789		$	3,601		$	36,995
Weighted average yield		3.89	%		4.12	%		4.35	%		6.35	%		4.35	%

NOTE D - LOANS

Following is a summary of loans at December 31, 2003 and 2002.

	2003			2002
Real estate - commercial	$	101,316,594		$	52,361,172
Real estate - residential		14,765,446			2,318,778
Construction loans		31,611,948			27,502,731
Commercial and industrial loans		38,236,711			24,680,968
Home equity loans and lines of credit		22,984,518			16,051,828
Loans to individuals		8,213,175			3,001,683
Total loans		217,128,392			125,917,160
Less:
Deferred loan fees		(382,635	)		(244,219	)
Allowance for loan losses		(3,304,250	)		(1,711,300	)
Total	$	213,441,507		$	123,961,641

- 40 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE D - LOANS (Continued)

Loans are primarily made in the Triangle area of North Carolina, principally Wake and Johnston Counties. Real estate loans can be affected by the condition of the local real estate market. Commercial and consumer and other loans can be affected by the local economic conditions.

No loans have been restructured during 2003 or 2002. Loans totaling $159,000 and $0 were considered impaired as of December 31, 2003 and 2002, respectively. Impaired loans at December 31, 2003 of $159,000, which represented all of the Company’s non-accruing loans on that date, had a corresponding valuation allowance of $47,000. The average recorded investment in impaired loans during the years ended December 31, 2003 and 2002 was $84,000 and $87,000, respectively. For the years ended December 31, 2003 and 2002, the interest income the Company recognized from impaired loans during the portion of the year that they were impaired was not material.

The Bank has granted loans to certain directors and executive officers of the Bank and their related interests. Such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers and, in management’s opinion, do not involve more than the normal risk of collectibility. All loans to directors and executive officers or their related interests are submitted to the Board of Directors for approval. A summary of loans to directors, executive officers and their interests follows:

Loans to directors and officers as a group at December 31, 2002	$	4,312,331
Net disbursements during year ended December 31, 2003		1,435,302
Loans to directors and officers as a group at December 31, 2003	$	5,747,633

At December 31, 2003, the Bank had pre-approved but unused lines of credit totaling $610,802 to executive officers, directors and their related interests. No additional funds are committed to be advanced at December 31, 2003.

An analysis of the allowance for loan losses follows:

	2003			2002
Balance at beginning of year	$	1,711,300		$	1,115,800
Provision for loan losses		551,037			689,024
Charge-offs		(98,748	)		(94,654	)
Recoveries		12,161			1,130
Net charge-offs		(86,587	)		(93,524	)
Allowance recorded related to loans acquired in acquisition of Centennial Bank		1,128,500			—
Balance at end of year	$	3,304,250		$	1,711,300

- 41 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE E - PREMISES AND EQUIPMENT

Following is a summary of premises and equipment at December 31, 2003 and 2002:

	2003			2002
Land	$	1,043,923		$	933,503
Buildings and leasehold improvements		1,219,098			549,051
Furniture and equipment		1,613,887			1,051,246
Less accumulated depreciation		(1,177,744	)		(902,935	)
Total	$	2,699,164		$	1,630,865

Depreciation and amortization amounting to $338,396 for the year ended December 31, 2003 and $315,888 for the year ended December 31, 2002 is included in occupancy and equipment expense.

NOTE F - DEPOSITS

The weighted average cost of time deposits was 2.71% and 3.49% at December 31, 2003 and 2002, respectively.

At December 31, 2003, the scheduled maturities of certificates of deposit are as follows:

	Less than $100,000		$100,000 or more		Total
Three months or less	$	13,220,356	$	7,990,195	$	21,210,551
Over three months through one year		28,195,504		29,963,431		58,158,935
Over one year through three years		10,297,553		8,509,056		18,806,609
Over three years to five years		7,422,593		6,919,547		14,342,140
Total	$	59,136,006	$	53,382,229	$	112,518,235

NOTE G - BORROWINGS

Short-term Borrowings

The Company may purchase federal funds through an unsecured federal funds guidance line of credit totaling $8.8 million at December 31, 2003. This line is intended for short-term borrowings and is subject to restrictions limiting the frequency and terms of advances. This line of credit is payable on demand and bears interest based upon the daily federal funds rate. The Company had $1,370,000 outstanding balance on the line of credit as of December 31, 2003. In addition, the Company has $7.0 million outstanding from the Federal Home Loan Bank of Atlanta and bears interest based upon the daily federal funds rate. This line of credit is secured as discussed below.

- 42 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE G - BORROWINGS (Continued)

Also included in short-term borrowings are repurchase agreements with outstanding balances of $632,545 at December 31, 2003. Securities sold under agreements to repurchase generally mature within one day from the transaction date and are collateralized by U.S. Government Agency obligations.

A summary of selected data related to short-term borrowed funds follows:

	For the Year Ended December 31,
	2003			2002			2001
	(Dollars in thousands)
Short-term borrowings:
Repurchase agreements and federal funds purchased
Balance outstanding at end of year	$	9,003		$	—		$	—
Maximum amount outstanding at any month end during the year		9,003			1,663			5,000
Average balance outstanding during the year		1,302			248			155
Weighted-average interest rate during the year		1.25	%		2.00	%		4.12	%
Weighted-average interest rate at end of year		1.25	%		0.00	%		0.00	%

Long-term Debt

The Company has a $41.0 million credit line available with the Federal Home Loan Bank for advances. These advances are secured by a blanket floating lien on qualifying first mortage loans and pledged investment securities with a market value of $7.8 million.

At December 31, 2003, the Company had the following advances outstanding from the Federal Home Loan Bank of Atlanta:

Maturity	Interest Rate		Rate Type	2003		2002
May 10, 2006	4.56	%	Fixed	$	2,000,000	$	—
July 6, 2011	4.44	%	Convertible		5,000,000		5,000,000
July 16, 2012	3.84	%	Fixed		5,000,000		5,000,000
				$	12,000,000	$	10,000,000

At December 31, 2003 and 2002, the weighted average interest rates on the above advances were 4.21% and 4.14%, respectively. The advance maturing on July 6, 2011 bears interest at 4.44% and is continuously convertible every three months after July 7, 2003 to a variable rate at the three month London Inter-Bank Offering Rate.

- 43 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE H - TRUST PREFERRED SECURITIES

The Company has cumulative trust preferred securities (the “Preferred Securities”) outstanding through a wholly owned Subsidiary. The Trust issuer has invested the total proceeds from the sale of the Trust Preferred in the Junior Subordinated Deferrable Interest Debentures (the “Junior Subordinated Debentures”) issued by the Company.

On August 27, 2003, $8.0 million of Trust Preferred were placed through Crescent Financial Capital Trust I (the “Trust”). The preferred securities pay cumulative cash distributions quarterly at an annual rate, reset quarterly, equal to LIBOR plus 3.10%. The dividends paid to holders of the preferred securities, which will be recorded as interest expense, are deductible for income tax purposes. The Trust Preferred are redeemable on October 7, 2008 or afterwards in whole or in part, on any January 7, April 7, July 7, or October 7. Redemption is mandatory at October 7, 2033. The Company guarantees the preferred securities through the combined operation of the junior subordinated debentures and other related documents. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company. The preferred securities quality as Tier I capital for regulatory capital purposes.

NOTE I - LEASES

The Bank has entered into three non-cancelable operating leases for its main office and branch facilities. Future minimum lease payments under these leases for the years ending December 31 are as follows:

2004	$	331,902
2005		331,963
2006		299,213
2007		227,629
2008		231,258
Thereafter		3,645,145
Total	$	5,067,110

The leases contain renewal options for various additional terms after the expiration of the initial term of each lease. The cost of such rentals is not included above. Total rent expense for the years ended December 31, 2003 and 2002 amounted to $391,204 and $297,538, respectively.

- 44 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE J - INCOME TAXES

The significant components of the provision for income taxes for the years ended December 31, 2003 and 2002 are as follows:

	2003			2002
Current tax provision:
Federal	$	748,362		$	556,229
State		178,419			120,355
		926,781			676,584
Deferred tax provision (benefit):
Federal		(43,662	)		(153,516	)
State		(9,519	)		(33,468	)
		(53,181	)		(186,984	)
Provision for income tax expense before adjustment to deferred tax asset valuation allowance		873,600			489,600
Decrease in valuation allowance		—			(395,997	)
Net provision for income taxes	$	873,600		$	93,603

The difference between the provision for income taxes and the amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes is summarized below:

	2003			2002
Tax computed at statutory rate of 34%	$	859,627		$	449,399
Effect of state income taxes		115,038			60,140
Non-taxable income		(108,844	)
Other		7,779			(19,939	)
Decrease in deferred tax asset valuation allowance		—			(395,997	)
	$	873,600		$	93,603

Significant components of deferred taxes at December 31, 2003 and 2002 are as follows:

	2003			2002
Deferred tax assets:
Allowance for loan losses	$	1,106,827		$	576,616
Net operating loss carryforwards		647,866			—
Pre-opening costs and expenses		—			23,709
Premises and equipment		95,191			68,383
Rent abatement		23,952			28,000
Other		151,642			48,194
Net deferred tax assets		2,025,478			744,902
Deferred tax liabilities:
Intangible assets		(77,896	)		—
Net unrealized holding gains on available-for-sale securities		(69,643	)		(256,528	)
Net deferred tax liabilities		(147,539	)		(256,528	)
Net recorded deferred tax asset	$	1,877,939		$	488,374

- 45 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE J - INCOME TAXES (Continued)

It is management’s opinion that realization of the net deferred tax asset is more likely than not based on the Company’s history of taxable income and estimates of future taxable income.

The Company has net operating loss carryforwards of approximately $1.7 million, which were acquired in the merger of Centennial Bank and which expire at various dates through 2023.

NOTE K - NON-INTEREST INCOME AND OTHER NON-INTEREST EXPENSE

The major components of non-interest income for the years ended December 31, 2003 and 2002 are as follows:

	2003		2002
Mortgage loan origination and other loan related fees	$	619,714	$	276,570
Service charges and fees on deposits accounts		617,924		440,989
Distribution from mortgage company		207,948		—
Other		199,070		50,141
Total	$	1,644,656	$	767,700

The major components of other non-interest expense for the years ended December 31, 2003 and 2002 are as follows:

	2003		2002
Postage, printing and office supplies	$	261,455	$	162,938
Advertising and promotions		199,462		127,328
Data processing expense		369,923		271,433
Professional fees and services		366,868		283,380
Other		555,153		394,879
Total	$	1,752,861	$	1,239,958

NOTE L - RESERVE REQUIREMENTS

The aggregate net reserve balances maintained under the requirements of the Federal Reserve, which are non-interest bearing, were approximately $1,677,000 at December 31, 2003.

- 46 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE M - BUSINESS COMBINATION

On March 12, 2003, the Company entered into an “Agreement and Plan of Reorganization and Merger” with Centennial Bank of Southern Pines, North Carolina. The acquisition was approved at the annual shareholders’ meeting on July 22, 2003 and the transaction took place effective with the close of business on August 29, 2003. Centennial Bank shareholders could elect to receive $10.11 in cash for each share of Centennial Bank stock they owned, exchange each share of Centennial Bank stock for 0.9323 shares of Crescent Financial Corporation stock or receive 50% in cash and 50% in stock. As a result of the acquisition, the Company paid $4.4 million for shares exchanged for cash and has issued 405,502 additional shares of stock. The acquisition was accounted for using the purchase method of accounting, with the operating results of Centennial Bank subsequent to August 29, 2003 included in the Company’s consolidated financial statements.

The following table reflects the unaudited proforma combined results of operations for the years ended December 31, 2003 and 2002, assuming the acquisition had occurred at the beginning of fiscal year 2002.

	2003		2002
Net interest income	$	8,788,195	$	7,645,906
Net income		1,596,349		1,303,823
Net income per share:
Basic	$	0.55	$	0.55
Diluted		0.53		0.53

The proforma net income for the year ended December 31, 2003 does not reflect approximately $681,000 in merger related costs incurred by Centennial Bank. In management’s opinion, these unaudited results are not necessarily indicative of what actual combined results of operations might have been if the acquisition had been effective at the beginning of fiscal 2002.

A summary of the total purchase price of the transaction is as follows (in thousands):

Fair value of 405,502 shares of common stock issued	$	4,396
Cash paid for shares		4,427
Fair value of options granted to Centennial shareholders		217
Transaction costs		325
Total	$	9,365

- 47 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE M - BUSINESS COMBINATION (Continued)

A summary of the estimated value of the assets acquired and liabilities assumed is as follows (in thousands):

Cash	$	840
Investment securities available for sale		5,355
Federal funds sold		870
Loans, net		56,747
Federal Home Loan Bank stock, at cost		207
Core deposit intangible		209
Goodwill		3,600
Premises and equipment		427
Deferred income tax assets, net		1,149
Other assets		537
Deposits		(57,317	)
Borrowings		(2,517	)
Accrued expenses and other liabilities		(742	)
Total purchase price	$	9,365

NOTE N - REGULATORY MATTERS

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

The Bank, as a North Carolina banking corporation, may pay dividends to the Company only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure the financial soundness of the bank.

- 48 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE N - REGULATORY MATTERS (Continued)

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2003 and 2002, that the Company and the Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2003, the most recent notification from the Federal Deposit Insurance Corporation categorized Crescent State Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category. The Banks’ actual capital amounts and ratios as of December 31, 2003 and 2002 are presented in the table below.

	Actual				Minimum for capital adequacy purposes				Minimum to be well capitalized under prompt corrective action provisions
As of December 31, 2003:	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Total Capital (to Risk-Weighted Assets)	$	29,148	12.11	%	$	19,261	8.00	%	$	24,077	10.00	%
Tier I Capital (to Risk-Weighted Assets)		26,135	10.85	%		9,631	4.00	%		14,446	6.00	%
Tier I Capital (to Average Assets)		26,135	9.86	%		10,601	4.00	%		13,251	5.00	%

	Actual				Minimum for capital adequacy purposes				Minimum to be well capitalized under prompt corrective action provisions
As of December 31, 2002:	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Total Capital (to Risk-Weighted Assets)	$	14,391	10.00	%	$	11,512	8.00	%	$	14,391	10.00	%
Tier I Capital (to Risk-Weighted Assets)		12,680	8.81	%		5,756	4.00	%		8,634	6.00	%
Tier I Capital (to Average Assets)		12,680	7.38	%		6,876	4.00	%		8,595	5.00	%

The Company is also subject to these requirements. At December 31, 2003, the Company’s total capital to risk-weighted assets, Tier I capital to risk-weighted assets and Tier I capital to average assets were 12.95%, 11.70% and 10.63%, respectively.

NOTE O - OFF-BALANCE SHEET RISK

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE O - OFF-BALANCE SHEET RISK (Continued)

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral obtained varies but may include real estate, stocks, bonds, and certificates of deposit.

A summary of the contract amount of the Bank’s exposure to off-balance sheet credit risk as of December 31, 2003 is as follows (amounts in thousands):

Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	29,924
Undisbursed equity lines of credit		20,588
Financial standby letters of credit		1,549

NOTE P - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

Financial instruments include cash and due from banks, interest-earning deposits with banks, federal funds sold, investment securities, loans, Federal Home Loan Bank stock, investment in life insurance, accrued interest receivable, accrued interest payable, deposit accounts, borrowings, and trust preferred securities. Fair value estimates are made at a specific moment in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no active market readily exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Due from Banks, Interest-Earning Deposits With Banks, and Federal Funds Sold

The carrying amounts for cash and due from banks, interest-earning deposits with banks, and federal funds sold approximate fair value because of the short maturities of those instruments.

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE P - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

Investment Securities

Fair value for investment securities equals quoted market price if such information is available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans

For certain homogenous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Federal Home Loan Bank Stock

The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Investment in Life Insurance

The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurers.

Deposits

The fair value of demand deposits, savings, money market and NOW accounts is the amount payable on demand at the reporting date. The fair value of time deposits is estimated using the rates currently offered for instruments of similar remaining maturities.

Borrowings and Trust Preferred Securities

The fair value of borrowings and trust preferred securities are based upon the discounted value when using current rates at which borrowings of similar maturity could be obtained.

Accrued Interest Receivable and Accrued Interest Payable

The carrying amounts of accrued interest receivable and payable approximate fair value, because of the short maturities of these instruments.

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE P - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

The carrying amounts and estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, are as follows at December 31, 2003 and 2002:

	2003				2002
	Carrying amount		Estimated fair value		Carrying amount		Estimated fair value
Financial assets:
Cash and due from banks	$	6,613,091	$	6,613,091	$	9,460,820	$	9,460,820
Interest-earning deposits with banks		438,066		438,066		80,592		80,592
Federal funds sold		—		—		16,691,000		16,691,000
Investment securities		36,994,920		36,994,920		28,287,395		28,287,395
Federal Home Loan Bank stock		950,000		950,000		500,000		500,000
Loans, net		213,441,507		213,886,000		123,961,641		125,213,000
Investment in life insurance		5,072,688		5,072,688		—		—
Accrued interest receivable		964,376		551,799		551,799		551,799
Other assets		712,500		712,500		125,000		125,000
Financial liabilities:
Deposits		218,614,956		218,515,000		153,105,470		153,062,000
Borrowings		21,002,546		20,807,546		10,000,000		8,869,000
Trust preferred securities		8,000,000		8,011,000		—		—
Accrued interest payable		343,252		343,252		217,067		217,067

NOTE Q - EMPLOYEE AND DIRECTOR BENEFIT PLANS

Stock Option Plans

During 1999 the Company adopted, with shareholder approval, an Employee Stock Option Plan (the “Employee Plan”) and a Director Stock Option Plan (the “Director Plan”). During 2002, with shareholder approval, the Company amended the Employee plan to increase the number of shares available under the plan. As amended, the employee plan makes available options to purchase 203,694 shares of the Company’s common stock while the Director plan makes available options to purchase 139,218 shares of the Company’s common stock. The weighted-average exercise price of all options granted to date is $6.98. Certain of the options granted under the Director Plan vested immediately at the time of grant. All other options granted vested twenty-five percent at the grant date, with the remainder vesting over a three-year period. All unexercised options expire ten years after the date of grant. A summary of the Company’s option plans as of and for the years ended December 31, 2003 and 2002 is as follows:

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE Q - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

	Shares Available for Future Grants		Outstanding Options
			Number Outstanding		Weighted Average Exercise Price
At December 31, 2001	1,856		318,347		$	6.89
Options authorized	74,147		—			—
Options granted/vested	(18,400	)	18,400			8.42
Options exercised	—		(2,911	)		6.87
Options forfeited	14,036		(14,036	)		6.90
At December 31, 2002	71,639		319,800			6.98
Options acquired	26,420		136,335			8.04
Options granted/vested	(24,000	)	24,000			12.41
Options exercised	—		(54,190	)		8.28
Options forfeited	12,773		(12,773	)		8.87
At December 31, 2003	86,832		413,172		$	7.82

There were 390,369 and 292,172 exercisable options outstanding at December 31, 2003 and 2002, respectively, with weighted average exercise prices of $7.82 and $6.98, respectively.

The range of exercise prices for options outstanding at December 31, 2003 was $6.87 to $12.41. The weighted average remaining contractual life of those options was 74 months.

Supplemental Retirement

During 2003, the Bank adopted a Supplemental Executive Retirement Plan (SERP) for its senior executives. The Company has purchased life insurance policies in order to provide future funding of benefit payments. Plan benefits will accrue and vest during the period of employment and will be paid in monthly benefit payments over the officer’s remaining life commencing with the officer’s retirement at any time after attainment of age sixty-five. Benefits will accrue based upon the performance of the underlying life insurance policies both during employment and after retirement. During 2003, expense attributable to this plan amounted to $18,242.

Defined Contribution Plan

The Company sponsors a contributory profit-sharing plan which provide for participation by substantially all employees. Participants may make voluntary contributions resulting in salary deferrals in accordance with Section 401(k) of the Internal Revenue Code. The plans provide for employee contributions up to $12,000 of the participant’s annual salary and an employer contribution of 100% matching of the first 3% of pre-tax salary contributed by each participant and 50% matching on the next 2% of pre-tax salary contributed by each participant. The Bank may make additional discretionary profit sharing contributions to the plan on behalf of all participants; however, no such discretionary contributions have been made. Amounts deferred above the first 5% of salary are not matched by the Bank. Expenses related to these plans for the years ended December 31, 2003 and 2002 were $70,206 and $53,793, respectively.

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE Q - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

Employment Agreements

The Company has entered into employment agreements with certain of its executive officers to ensure a stable and competent management base. The agreements provide for benefits as spelled out in the contracts and cannot be terminated by the Board of Directors, except for cause, without prejudicing the officers’ rights to receive certain vested rights, including compensation. In the event of a change in control of the Company, as outlined in the agreements, the acquirer will be bound to the terms of the contracts.

NOTE R - SALE OF COMMON STOCK

The Company completed the sale of 690,000 shares of its common stock at $9.25 per share on August 20, 2002. Expenses associated with the sale amounted to $569,688 resulting in net proceeds from the offering of $5,812,812. Additionally during the year, the Company sold 412 shares of its common stock for $10.00 per share.

NOTE S - PARENT COMPANY FINANCIAL DATA

Following is the condensed financial statement of Crescent Financial Corporation as of and for the years ended December 31, 2003 and 2002:

Condensed Statements of Financial Condition

December 31, 2003 and 2002

	2003		2002
ASSETS
Cash and due from banks	$	2,892,701	$	4,640,941
Investment in subsidiaries		30,355,520		13,088,926
Other assets		159,862		2,121
TOTAL ASSETS	$	33,408,083	$	17,731,988
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Accrued Interest Payable	$	123,372	$	—
Due to Centennial Shareholders		884,610		—
Accrued expenses and other liabilities		2,201		—
Subordinated debentures		8,248,000		—
TOTAL LIABILITIES		9,258,183		—
Stockholders’ equity:
Common stock		2,924,429		2,143,249
Additional paid-in capital		18,884,505		14,604,591
Retained earnings		2,229,984		575,267
Accumulated other comprehensive income		110,982		408,881
TOTAL STOCKHOLDERS’ EQUITY		24,149,900		17,731,988
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	33,408,083	$	17,731,988

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE S - PARENT COMPANY FINANCIAL DATA (Continued)

Condensed Statements of Operations

Years Ended December 31, 2003 and 2002

	2003			2002
Equity in earnings of subsidiaries	$	1,651,574		$	1,217,903
Interest income		49,453			35,049
Management fees		135,000			24,931
Interest expense		(130,796	)		—
Other operating expenses		(47,914	)		(49,725	)
Income tax expense		(2,600	)		—
Net income	$	1,654,717		$	1,228,158

Condensed Statements of Cash Flows

Years Ended December 31, 2003 and 2002

	2003			2002
Cash flows from operating activities:
Net income	$	1,654,717		$	1,228,158
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Amortization		6,968			—
Equity in earnings of Crescent State Bank		(1,651,573	)		(1,217,903	)
Changes in assets and liabilities:
Increase in other assets		(164,709	)		(2,121	)
Increase in accrued interest payable		123,372			—
Increase in accrued expenses and other liabilities		2,201			—
Net cash provided (used) by operating activities		(29,024	)		8,134
Cash flows from investing activities:
Investment in Subsidiaries		(11,300,269	)		(1,200,000	)
Net cash used by investing activities		(11,300,269	)		(1,200,000	)
Cash flows from financing activities:
Net proceeds from issuance of common stock		—			5,817,344
Proceeds from exercise of stock options		448,437			19,995
Due to Centennial Shareholders		884,610			—
Proceeds from issuance of subordinated debentures		8,248,000			—
Cash paid in lieu of fractional shares		6			(4,532	)
Net cash provided by financing activities		9,581,053			5,832,807
Net increase (decrease) in cash and cash equivalents		(1,748,240	)		4,640,941
Cash and cash equivalents, beginning		4,640,941			—
Cash and cash equivalents, ending	$	2,892,701		$	4,640,941

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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003 and 2002

NOTE T - SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS

	2003			2002
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest	$	3,499,458		$	3,188,077
Income taxes		1,483,200			276,836
Supplemental Disclosure of Noncash Investing and Financing Activities:
Transfer of loans to foreclosed assets	$	160,400		$	340,852
Increase (decrease) in fair value of securities available for sale, net of tax		(297,899	)		221,302

Acquisition of Centennial Bank in 2003:

	Centennial Bank
Assets acquired:
Cash	$	839,874
Investment securities		5,354,823
Federal funds sold		870,000
Loans, net		56,746,518
Federal Home Loan Bank stock		206,900
Premises and equipment		427,499
Goodwill		3,600,298
Other intangible assets		209,012
Deferred income tax assets, net		1,149,500
Other assets		537,472
Total assets acquired		69,941,896
Liabilities assumed:
Deposits		57,317,119
Borrowings		2,517,410
Accrued expenses and other liabilities		742,446
Total liabilities assumed		60,576,975
Equity adjustment		4,612,651
Cash consideration paid (received)	$	4,752,270
Net cash paid (received) in acquisition	$	3,912,396

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Crescent Financial Corporation and Subsidiaries

Management and Bank Personnel

BOARD OF DIRECTORS

Bruce I. Howell Chairman President Emeritus, Wake Technical Community College	Brent D. Barringer Attorney and Partner, Barringer Law Firm, LLP	Michael G. Carlton President and CEO, Crescent Financial Corporation
Joseph S. Colson, Jr. Retired from Lucent Technologies, Inc.	James A. Lucas, CPA Partner, James A. Lucas and Company, LLP CPA’s	Kenneth A. Lucas President and CEO, TarHeel Companies of North Carolina, Inc.
Sheila Hale Ogle Owner and CEO, Media Research Planning & Placement, Inc.	Francis R. Quis Owner and President, Quis Machinery, Inc.	Jon S. Rufty Owner and President, Rufty Custom Built Homes, Inc.
	Stephen K. Zaytoun President, Zaytoun & Associates, Inc.

SENIOR EXECUTIVE OFFICERS

Michael G. Carlton President and Chief Executive Officer Bruce W. Elder Senior Vice President and Chief Financial Officer Thomas E. Holder, Jr. Senior Vice President and Senior Commercial Lender

CORPORATE OFFICERS

James F. Bryd Senior Vice President	Douglas M. Gay Senior Vice President	W. Bruce Lawson Senior Vice President
Jonathan H. Taylor Senior Vice President	Mark J. Bolebruch Vice President	William A. Bullard Vice President
Deborah C. Carter Vice President	Debra D. Edwards Vice President	William F. Greene Vice President
Larry G. Holt Vice President	Linda D. Lee Vice President	Lesa C. Lindsay Vice President
Alexander W. Macklin V Vice President	Wanda S. Markuson Vice President	Deborah L. McLamb Vice President
Robert L. Myers, Jr. Vice President	William L. Riggsbee Vice President	Paula M. Bouchard Assistant Vice President
Tracy A. Bureau Assistant Vice President	Erica L. Gilchrist Assistant Vice President	Kevin H. Dail Assistant Vice President
Laura E. Edwards Assistant Vice President		Lewyn M. Hayes III Assistant Vice President

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Crescent Financial Corporation and Subsidiaries

Market For The Common Stock

Crescent Financial Corporation’s stock is listed on the NASDAQ Small Capital Market under the symbol “CRFN.” There were 2,924,429 shares outstanding at December 31, 2003 owned by approximately 2,200 shareholders. The table below lists the high and low prices at which trades were completed during each quarter. The Company’s stock is considered thinly traded with only a few thousand shares traded, on average, per month.

	Low (1)		High (1)
January 1, 2002 to March 31, 2002	$	6.80	$	10.87
April 1, 2002 to June 30, 2002		7.17		10.43
July 1, 2002 to September 30, 2002		7.97		8.70
October 1, 2002 to December 31, 2002		7.39		10.00
January 1, 2003 to March 31, 2003		9.02		10.43
April 1, 2003 to June 30, 2003		10.07		11.25
July 1, 2003 to September 30, 2003		10.40		12.39
October 1, 2003 to December 31, 2003		12.20		13.85

(1) The 2002 prices quoted above have been adjusted to reflect the effect of the 15% stock dividend paid in 2003.

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Crescent Financial Corporation and Subsidiaries

General Corporate Information

Office Locations

Main Branch and Corporate Offices 1005 High House Road Cary, NC 27513	Kildaire Farm Branch 1155 Kildaire Farm Road Cary, NC 27511	Apex Branch 303 South Salem Street Apex, NC 27502
Clayton Branch 315 East Main Street Clayton, NC 27520	Holly Springs Branch 700 Holly Springs Road Holly Springs, NC 27540	Pinehurst Branch 211-M Central Park Avenue Pinehurst, NC 28374
Southern Pines Branch 185 Morganton Road Southern Pines, NC 27378		Sanford Loan Production Office Simpson Executive Center Suite 305, 503 Carthage Street Sanford, NC 27330

Regulatory and Securities Counsel

Gaeta & Associates, P.A.

8305 Falls of Neuse Road

Suite 203

Raleigh, NC 27615

Stock Transfer Agent First Citizens Bank 100 East Tryon Road Raleigh, NC 27603 (919) 716-2003 Independent Auditors Dixon Hughes PLLC P.O. Box 70 Sanford, NC 27331-0070

Annual Shareholders’ Meeting

The Annual Meeting of the shareholders of Crescent Financial Corporation will be held at 3:00 p.m., Tuesday, April 27, 2004, at MacGregor Downs Country Club, 430 St. Andrews Lane, Cary, North Carolina 27511.

Form 10-KSB

Copies of Crescent Financial Corporation’s 2003 Annual Report on Form 10-KSB as filed with the Securities and Exchange Commission may be obtained by shareholders at no charge by writing: Bruce W. Elder, Senior Vice President and Controller, Crescent Financial Corporation, 1005 High House Road, Cary, NC 27513.

This annual report serves as the annual financial disclosure statement furnished pursuant to the Federal Deposit Insurance Corporation’s rules and regulations. This statement has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation.

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