UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      DC 20549





**FORM
      10-Q**





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





For
      the
      Quarterly Period Ended **June
      30, 2008**





o
      TRANSITION REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
      PERIOD FROM _________ TO ___________





Commission
      File Number 000-32951





**CRESCENT
      FINANCIAL CORPORATION**


(Exact
      name of registrant as specified in its charter)





**NORTH
                CAROLINA**
            **56-2259050**(State
                or other jurisdiction of Incorporation
              or
                organization)
            (IRS
                Employer Identification
                Number)




**1005
      HIGH HOUSE ROAD, CARY, NORTH CAROLINA**


**27513**


(Address
      of principal executive offices)


(Zip
      Code)





**(919)
      460-7770**


(Registrant’s
      telephone number, including area code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


Yes x No o





Indicate
      by check mark whether **** the
      registrant is a large accelerated filer, an accelerated filer, a non-accelerated
      filer, or a smaller reporting company. See the definition of “large accelerated
      filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
      Exchange Act.




Large accelerated filer o
            
            Accelerated filer xNon-accelerated filer o
            
            Smaller reporting company o





Indicate
      by check mark whether **** the
      registrant is a shell company (as defined in Rule 12b-2 of the Exchange
      Act).


Yes o  **** No
x




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





**Common
      Stock, $1.00 par value**


**9,604,826
      shares outstanding as of August 4, 2008**





-1-




Page
      No.


**Part
                    I.****FINANCIAL
                    INFORMATION****Item
                    1 -****Financial
                    Statements (Unaudited)**Consolidated
                    Balance SheetsJune
                    30, 2008 (unaudited) and December 31, 2007
                3Consolidated
                    Statements of OperationsThree
                    and Six Months Ended June 30, 2008 and 2007 (unaudited)
                4Consolidated
                    Statements of Cash FlowsSix
                    Months Ended June 30, 2008 and 2007 (unaudited)
                5Notes
                    to Consolidated Financial Statements
                6
                    -
                    10**Item
                    2 -****Management’s
                    Discussion and Analysis of Financial Condition and Results of
                    Operations**
                11
                    - 26**Item
                    3 -****Quantitative
                    and Qualitative Disclosures about Market Risk**
                27**Item
                    4 -****Controls
                    and Procedures**
                27**Part
                    II.****Other
                    Information****Item
                    1 - Legal Proceedings**
                28**Item
                    1a - Risk Factors**
                28**Item
                    2 - Unregistered Sales of Equity Securities and Use of
                    Proceeds**
                28**Item
                    3 - Defaults Upon Senior Debt**
                28**Item
                    4 - Submission of Matters to a Vote of Security
                    Holders**
                28**Item
                    5 - Other Information**
                28**Item
                    6 - Exhibits**
                29




-2-


**Part
      I.** **FINANCIAL
      INFORMATION**


**Item
      1 - Financial Statements**




***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


***CONSOLIDATED
      BALANCE SHEETS***





June
                30, 2008
            
            
            December
                31,(Unaudited)
            
            
            2007***ASSETS**Cash
                and due from banks
            
            $
            13,234,272
            
            $
            12,047,600Interest-earning
                deposits with banks
            
            
            390,993
            
            
            211,804Federal
                funds sold
            
            
            98,000
            
            
            97,000Investment
                securities available for sale at fair value
            
            
            95,979,074
            
            
            90,758,467Loans
            
            
            742,855,044
            
            
            675,916,228Allowance
                for loan losses
            
            
            (8,855,000
            )
            
            (8,273,000
            )NET
                LOANS
            
            
            734,000,044
            
            
            667,643,228Accrued
                interest receivable
            
            
            3,105,100
            
            
            3,761,600Federal
                Home Loan Bank stock, at cost
            
            
            7,714,000
            
            
            6,790,700Bank
                premises and equipment, net
            
            
            10,155,733
            
            
            8,094,521Investment
                in life insurance
            
            
            16,342,498
            
            
            9,122,697Goodwill
            
            
            30,233,049
            
            
            30,233,049Other
                assets
            
            
            9,323,266
            
            
            6,779,390TOTAL
                ASSETS
            
            
            920,576,029
            
            $
            835,540,056**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**LIABILITIESDepositsDemand
            
            
            64,306,090
            
            $
            69,367,630Savings
            
            
            76,590,384
            
            
            110,516,217Money
                market and NOW
            
            
            128,273,948
            
            
            80,316,251Time
            
            
            384,508,246
            
            
            345,231,215TOTAL
                DEPOSITS
            
            
            653,678,668
            
            
            605,431,313Short-term
                borrowings
            
            
            30,894,000
            
            
            13,755,000Long-term
                borrowings
            
            
            138,248,000
            
            
            121,248,000Accrued
                expenses and other liabilities
            
            
            3,692,027
            
            
            3,446,931TOTAL
                LIABILITIES
            
            
            826,512,695
            
            
            743,881,244STOCKHOLDERS’
                EQUITYPreferred
                stock, no par value, 5,000,000 shares authorized,
              none
                outstanding;
            
            
            -
            
            
            -Common
                stock, $1 par value, 20,000,000 shares authorized;
              9,604,826
                shares outstanding June 30, 2008; 9,404,579
              shares
                outstanding December 31, 2007
            
            
            9,604,826
            
            
            9,404,579Additional
                paid-in capital
            
            
            74,172,710
            
            
            73,596,427Retained
                earnings
            
            
            10,508,820
            
            
            8,619,617Accumulated
                other comprehensive income (loss) (Note D)
            
            
            (223,022
            )
            
            38,189TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            94,063,334
            
            
            91,658,812COMMITMENTS
                (Note B)TOTAL
                LIABILITIES ANDSTOCKHOLDERS’
                EQUITY
            
            
            920,576,029
            
            $
            835,540,056




*
      Derived
      from audited consolidated financial statements.




-3-


***CRESCENT
        FINANCIAL CORPORATION AND SUBSIDIARY***
 ***CONSOLIDATED
        STATEMENTS OF OPERATIONS (Unaudited)***
 ***Three
        and Six Month Periods Ended June 30, 2008 and 2007***
 
  Three-month
                  Periods
              
              Six-month
                  PeriodsEnded
                  June 30,
              
              Ended
                  June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007INTEREST
                  INCOMELoans
              
              $
              11,935,814
              
              
              12,330,915
              
              $
              24,407,406
              
              
              23,906,309Investment
                  securities available for sale
              
              
              1,227,001
              
              
              1,095,955
              
              
              2,433,443
              
              
              2,156,411Federal
                  funds sold and interest-bearing deposits
              
              
              14,573
              
              
              175,058
              
              
              58,207
              
              
              296,453TOTAL
                  INTEREST INCOME
              
              
              13,177,388
              
              
              13,601,928
              
              
              26,899,056
              
              
              26,359,173INTEREST
                  EXPENSEDeposits
              
              
              5,502,419
              
              
              5,964,960
              
              
              11,211,278
              
              
              11,525,960Short-term
                  borrowings
              
              
              90,924
              
              
              208,871
              
              
              207,603
              
              
              499,006Long-term
                  borrowings
              
              
              1,292,320
              
              
              858,664
              
              
              2,664,494
              
              
              1,520,599TOTAL
                  INTEREST EXPENSE
              
              
              6,885,663
              
              
              7,032,495
              
              
              14,083,375
              
              
              13,545,565NET
                  INTEREST INCOME
              
              
              6,291,725
              
              
              6,569,433
              
              
              12,815,681
              
              
              12,813,608PROVISION
                  FOR LOAN LOSSES
              
              
              459,311
              
              
              322,449
              
              
              1,265,707
              
              
              681,596NET
                  INTEREST INCOME AFTERPROVISION
                  FOR LOAN LOSSES
              
              
              5,832,414
              
              
              6,246,984
              
              
              11,549,974
              
              
              12,132,012NON-INTEREST
                  INCOMEMortgage
                  loan origination revenue
              
              
              150,701
              
              
              135,494
              
              
              322,609
              
              
              250,501Fees
                  on deposit accounts
              
              
              381,485
              
              
              321,990
              
              
              763,155
              
              
              669,644Earnings
                  on life insurance
              
              
              143,738
              
              
              99,910
              
              
              242,470
              
              
              183,379Loss
                  on disposal of assets
              
              
              (62,984
              )
              
              -
              
              
              (72,031
              )
              
              (941
              )Gain
                  on sale of available for sale securities
              
              
              15,535
              
              
              -
              
              
              15,535
              
              
              -Other
              
              
              188,648
              
              
              89,919
              
              
              353,934
              
              
              173,610TOTAL
                  NON-INTEREST INCOME
              
              
              817,123
              
              
              647,313
              
              
              1,625,672
              
              
              1,276,193NON-INTEREST
                  EXPENSESalaries
                  and employee benefits
              
              
              2,917,198
              
              
              2,535,287
              
              
              5,721,328
              
              
              4,939,586Occupancy
                  and equipment
              
              
              655,895
              
              
              563,949
              
              
              1,318,611
              
              
              1,111,886Data
                  processing
              
              
              260,900
              
              
              256,530
              
              
              531,993
              
              
              517,255Other
              
              
              1,258,965
              
              
              1,267,364
              
              
              2,542,203
              
              
              2,274,801TOTAL
                  NON-INTEREST EXPENSE
              
              
              5,092,958
              
              
              4,623,130
              
              
              10,114,135
              
              
              8,843,528INCOME
                  BEFORE INCOME TAXES
              
              
              1,556,579
              
              
              2,271,167
                  3,061,511
              
              
              4,564,677INCOME
                  TAXES
              
              
              525,900
              
              
              822,900
              
              
              1,030,500
              
              
              1,650,800NET
                  INCOME
              
              $
              1,030,679
              
              $
              1,448,267
              
              $
              2,031,011
              
              $
              2,913,877NET
                  INCOME PER COMMON SHAREBasic
              
              
              .11
              
              
              .16
              
              
              .22
              
              
              .32Diluted
              
              
              .11
              
              
              .15
              
              
              .21
              
              
              .30WEIGHTED
                  AVERAGE COMMONSHARES
                  OUTSTANDING (Note C)Basic
              
              
              9,467,294
              
              
              9,140,356
              
              
              9,442,494
              
              
              9,117,004Diluted
              
              
              9,618,744
              
              
              9,626,134
              
              
              9,638,509
              
              
              9,620,185
  See
        accompanying notes.


-4-


***CRESCENT
        FINANCIAL CORPORATION AND SUBSIDIARY***
 ***CONSOLIDATED
        STATEMENTS OF CASH FLOWS (Unaudited)***
 ***Six
        Months Ended June 30, 2008 and 2007***
 
 2008
                
                
                2007CASH
                    FLOWS FROM OPERATING ACTIVITIESNet
                    income
                
                $
                2,031,011
                
                $
                2,913,877Adjustments
                    to reconcile net income to net cash providedby
                    operating activities:Depreciation
                
                
                378,293
                
                
                352,486Provision
                    for loan losses
                
                
                1,265,707
                
                
                681,596Deferred
                    income taxes
                
                
                (201,000
                )
                
                (308,000
                )Amortization
                    of core deposit premium
                
                
                66,675
                
                
                66,675Gain
                    on sale of available for sale securities
                
                
                (15,535
                )
                
                -Loss
                    on disposal of assets
                
                
                72,031
                
                
                941Net
                    accretion on securities
                
                
                (49,958
                )
                
                (46,262
                )Accretion
                    of loan discount
                
                
                (219,910
                )
                
                (219,910
                )Amortization
                    of deposit premium
                
                
                92,775
                
                
                203,138Net
                    increase in cash value of life insurance
                
                
                (219,801
                )
                
                (163,686
                )Stock
                    based compensation
                
                
                104,795
                
                
                84,988Change
                    in assets and liabilities:(Increase)
                    decrease in accrued interest receivable
                
                
                656,500
                
                
                (376,069
                )Increase
                    in other assets
                
                
                (1,216,694
                )
                
                (111,837
                )Increase
                    (decrease) in accrued interest payable
                
                
                (59,370
                )
                
                301,737Increase
                    (decrease) in other liabilities
                
                
                162,655
                
                
                (478,528
                )TOTAL
                    ADJUSTMENTS
                
                
                817,163
                
                
                (12,731
                )NET
                    CASH PROVIDED BY OPERATING ACTIVITIES
                
                
                2,848,174
                
                
                2,901,146CASH
                    FLOWS FROM INVESTING ACTIVITIESPurchases
                    of investment securities available for sale
                
                
                (15,382,351
                )
                
                (9,456,156
                )Principal
                    repayments of investment securities available for sale
                
                
                8,258,961
                
                
                5,204,588Proceeds
                    from sale of securities available for sale
                
                
                1,543,197
                
                
                -Purchase
                    of Federal Home Loan Bank stock
                
                
                (923,300
                )
                
                (687,900
                )Proceeds
                    from disposal of foreclosed assets
                
                
                564,290
                
                
                -Net
                    increase in loans
                
                
                (68,995,890
                )
                
                (58,370,660
                )Investment
                    in life insurance
                
                
                (7,000,000
                )
                
                (3,100,000
                )Cash
                    provided in business combination
                
                
                -
                
                
                (7,500
                )Purchases
                    of bank premises and equipment
                
                
                (2,511,535
                )
                
                (1,368,482
                )NET
                    CASH USED BY INVESTING ACTIVITIES
                
                
                (84,446,628
                )
                
                (67,786,110
                )CASH
                    FLOWS FROM FINANCING ACTIVITIESNet
                    increase (decrease) in deposits:Demand
                
                
                (5,061,540
                )
                
                10,760,580Savings
                
                
                (33,925,833
                )
                
                23,049,641Money
                    market and NOW
                
                
                47,957,698
                
                
                (196,467
                )Time
                    deposits
                
                
                39,184,256
                
                
                42,114,832Net
                    increase (decrease) in short-term borrowings
                
                
                17,139,000
                
                
                (24,451,000
                )Net
                    increase in long-term borrowings
                
                
                17,000,000
                
                
                30,000,000Proceeds
                    from stock options exercised
                
                
                584,334
                
                
                364,677Cash
                    paid in lieu of fractional shares
                
                
                -
                
                
                (7,687
                )Excess
                    tax benefits from stock options exercised
                
                
                87,400
                
                
                135,400NET
                    CASH PROVIDED BY FINANCING ACTIVITIES
                
                
                82,965,315
                
                
                81,769,976NET
                    INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                1,366,861
                
                
                16,885,012CASH
                    AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                
                
                12,356,404
                
                
                15,150,110CASH
                    AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                13,723,265
                
                $
                32,035,122
  See
          accompanying notes.


-5-




***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


***Notes
      to Consolidated Financial Statements***








**NOTE
      A - BASIS OF PRESENTATION**


In
      management’s opinion, the financial information, which is unaudited, reflects
      all adjustments (consisting solely of normal recurring adjustments) necessary
      for a fair presentation of the financial information as of and for the three
      and
      six-month periods ended June 30, 2008 and 2007, in conformity with accounting
      principles generally accepted in the United States of America. The financial
      statements include the accounts of Crescent Financial Corporation (the
“Company”) and its wholly owned subsidiary, Crescent State Bank (the “Bank”).
      All significant inter-company transactions and balances are eliminated in
      consolidation. Operating results for the three and six-month period ended June
      30, 2008 are not necessarily indicative of the results that may be expected
      for
      the fiscal year ending December 31, 2008.





The
      organization and business of the Company, accounting policies followed by the
      Company and other information are contained in the notes to the consolidated
      financial statements filed as part of the Company’s 2007 annual report on Form
      10-K. This quarterly report should be read in conjunction with such annual
      report.





**NOTE
      B - COMMITMENTS**


At
      June
      30, 2008, commitments are as follows:


Undisbursed
                  lines of credit
              
              $
              177,567,000Stand-by
                  letters of credit
              
              
              6,548,000Undisbursed
                  commitment to purchase additionalinvestment
                  in Small Business Investment Corporation
              
              
              413,000


**NOTE
      C - PER SHARE RESULTS**


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.




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 to outstanding stock
      options and restricted stock and are determined using the treasury stock
      method.




-6-


***CRESCENT
        FINANCIAL CORPORATION AND SUBSIDIARY***
 ***Notes
        to Consolidated Financial Statements***


Three
                    months ended
                  June
                    30,
                
                Six
                    months ended
                  June
                    30,2008
                
                
                2007
                
                
                2008
                
                
                2007Weighted
                    average number of sharesused
                    in computing basic net incomeper
                    share
                
                
                9,467,294
                
                
                9,140,356
                
                
                9,442,484
                
                
                9,117,004Effect
                    of dilutive stock options
                
                
                151,450
                
                
                485,778
                
                
                196,025
                
                
                503,181Weighted
                    average number of sharesused
                    in computing diluted netincome
                    per share
                
                
                9,618,744
                
                
                9,626,134
                
                
                9,638,509
                
                
                9,620,185




At
      June
      30, 2008, there were 93,134 options that were anti-dilutive and at June 30,
      2007
      there were 45,727
      options that were anti-dilutive.




**NOTE
      D - COMPREHENSIVE INCOME**


For
      the
      three months ended June 30, 2008 and 2007, total comprehensive income,
      consisting of net income and unrealized securities gains and losses, net of
      taxes, was approximately $143,000 and $634,000, respectively. For the six months
      ended June 30, 2008 and 2007, total comprehensive income was approximately
      $1,770,000 and $2,431,000, respectively.





**NOTE** **E
      - RECENT ACCOUNTING PRONOUNCEMENTS**


*Statement
      of Financial Accounting Standard (SFAS) No. 159 “The Fair Value Option Financial
      Assets and Financial Liabilities”* **


The
      Company adopted the provisions of SFAS 159 effective January 1, 2008
      which became effective in February 2007. SFAS 159 generally permits the
      measurement of selected eligible financial instruments at fair value at
      specified election dates. Changes in fair value from one period to the next
      are
      recognized through the income statement. This election can generally be applied
      on an instrument by instrument basis. The Company chose not to account for
      any
      financial assets or liabilities under the fair value option.





*Statement
      of Financial Accounting Standard (SFAS) No. 157 "Fair Value
      Measurement"* ** **


In
      connection with the adoption of SFAS 159, the Company was required to adopt
      SFAS No. 157, "Fair
      Value Measurement" ("SFAS 157").
      SFAS 157 defines fair value, establishes a framework for measuring fair
      value in generally accepted accounting principles, and expands disclosures
      about
      fair value measurements.





*Fair
      Value Hierarchy*


Under
      SFAS 157, the Company groups assets and liabilities at fair value in three
      levels, based on the markets in which the assets and liabilities are traded
      and
      the reliability of the assumptions used to determine fair value. These levels
      are:





·
            Level
                1 - Valuation is based upon quoted prices for identical instruments
                traded
                in active markets.


·
            Level
                2 - Valuation is based upon quoted prices for similar instruments
                in
                active markets, quoted prices for identical or similar instruments
                in
                markets that are not active and model-based valuation techniques
                for which
                all significant assumptions are observable in the
                market.


·
            Level
                3 - Valuation is generated from model-based techniques that use at
                least
                one significant assumption no observable in the market. These unobservable
                assumptions reflect estimates of assumptions that market participants
                would use in pricing the asset or liability. Valuation techniques
                include
                use of option pricing models, discounted cash flows models and similar
                techniques.




-7-


Following
      is a description of valuation methodologies used for assets and liabilities
      recorded at fair value.





*Investment
      Securities Available-for-Sale*


Investment
      securities available-for-sale are recorded at fair value on a recurring basis.
      Fair value measurement is based upon quoted prices, if available. If quoted
      prices are not available, fair values are measured using independent pricing
      models or other model-based valuation techniques such as the present value
      of
      future cash flows, adjusted for the security’s credit rating, prepayment
      assumptions and other factors such as credit loss assumptions. Level 1
      securities include those traded on an active exchange, such as the New York
      Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers
      in active over-the-counter markets and money market funds. Level 2 securities
      include mortgage-backed securities issued by government sponsored entities,
      municipal bonds and corporate debt securities. Securities classified as Level
      3
      include asset-backed securities in less liquid markets.





*Loans*


The
      Company does not record loans at fair value on a recurring basis. However,
      from
      time to time, a loan is considered impaired and an allowance for loan losses
      is
      established. Loans for which it is probable that payment of interest and
      principal will not be made in accordance with the contractual terms of the
      loan
      agreement are considered impaired. Once a loan is identified as individually
      impaired, management measures impairment in accordance with SFAS 114,
“Accounting by Creditors for Impairment of a Loan,” (SFAS 114). The fair value
      of impaired loans is estimated using one of several methods, including
      collateral value, market value of similar debt, enterprise value, liquidation
      value and discounted cash flows. Those impaired loans not requiring an allowance
      represent loans for which the fair value of the expected repayments or
      collateral exceed the recorded investments in such loans. At June 30, 2008,
      all
      of the total impaired loans were evaluated based on the fair value of the
      collateral. In accordance with SFAS 157, impaired loans where an allowance
      is
      established based on the fair value of collateral require classification in
      the
      fair value hierarchy. When the fair value of the collateral is based on an
      observable market price or a current appraised value, the Corporation records
      the impaired loan as nonrecurring Level 2. When an appraised value is not
      available or management determines the fair value of the collateral is further
      impaired below the appraised value and there is no observable market price,
      the
      Corporation records the impaired loan as nonrecurring Level 3.





*Foreclosed
      Assets*


Foreclosed
      and repossessed assets are adjusted to fair value upon transfer of the loans
      to
      the Company’s books. Subsequently, foreclosed and repossessed assets are carried
      at the lower of carrying value or fair value. Fair value is based upon
      independent market prices, appraised values of the collateral or management’s
      estimation of the value of the collateral. When the fair value of the collateral
      is based on an observable market price or a current appraised value, the
      Corporation records the foreclosed asset as nonrecurring Level 2. When an
      appraised value is not available or management determines the fair value of
      the
      collateral is further impaired below the appraised value and there is no
      observable market price, the Corporation records the foreclosed asset as
      nonrecurring Level 3.





-8-


*Goodwill
      and Other Intangible Assets*


Goodwill
      and identified intangible assets are subject to impairment testing. A projected
      cash flow valuation method is used in the completion of impairment testing.
      This
      valuation method requires a significant degree of management judgment. In the
      event the projected undiscounted net operating cash flows are less than the
      carrying value, the asset is recorded at fair value as determined by the
      valuation model. As such, the Corporation classifies goodwill and other
      intangible assets subjected to nonrecurring fair value adjustments as Level
      3.





The
      following table summarizes quantitative disclosures about the fair value
      measurement for each category of assets carried at fair value as of June 30,
      2008:





Description
            
            
            June
                30,2008
            
            
            Quoted
                Prices in
              Active
                Markets
              for
                Identical
              Assets
              (Level
                1)
            
            
            Significant
              Other
                Observable
              Inputs
              (Level
                2)
            
            
            Significant
              Unobservable
              Inputs
              (Level
                3)Available
                for sale securities
            
            $
            95,979,074
            
            $
            442,709
            
            $
            95,536,365
            
            $
            -Impaired
                loans
            
            $
            2,268,523
            
            $
            -
            
            $
            1,887,072
            
            $
            381,451Foreclosed
                assets
            
            $
            1,890,460
            
            $
            -
            
            $
            1,890,460
            
            $
            -





As
      of
      June 30, 2008, the Bank identified $4.5 million in impaired loans. Of these
      impaired loans, $3.1 million had specific loss allowance aggregating $846,000.





*Emerging
      Issues Task Force (EITF) No. 06-4 "Accounting for Deferred Compensation and
      Postretirement benefit Aspects of Endorsement Split-Dollar Life Insurance
      Arrangements"*


In
      September 2006, the FASB ratified the consensuses reached by the FASB’s Emerging
      Issues Task Force (“EITF”) relating to EITF 06-4. EITF 06-4 states that an
      employer accounting for endorsement split-dollar life insurance arrangements
      that provide a benefit to an employee that extends to postretirement periods
      should recognize a liability for future benefits in accordance with SFAS
      No. 106, “Employers’ Accounting for Postretirement Benefits Other Than
      Pensions”, or Accounting Principles Board (“APB”) Opinion No. 12, “Omnibus
      Opinion—1967”. The Company adopted EITF 06-4 on January 1, 2008, and in
      connection therewith recorded a liability of $142,000 as a reduction of retained
      earnings. Subsequent increases in this liability will be reflected as an expense
      in determining operating results.





*Statement
      of Financial Accounting Standard (SFAS) No. 161 “Disclosures about Derivative
      Instruments and Hedging Activities, an amendment of FASB Statement
      No. 133"* ** **


In
      March 2008, the FASB issued SFAS No. 161. SFAS 161 applies to all
      derivative instruments and related hedged items accounted for under SFAS
      No. 133, “Accounting for Derivative Instruments and Hedging Activities,”
(SFAS 133). The Company does not currently utilize derivative instruments for
      hedging activities and therefore does not expect the adoption of the provisions
      of SFAS 161 to have a material effect on the Corporation’s financial condition
      and results of operations.





**NOTE** **F
      - GOODWILL IMPAIRMENT**


Pursuant
      to SFAS No. 142, Goodwill and Other Intangible Assets, goodwill must be tested
      for impairment each year. If certain events occur, more than one annual
      impairment test is required. An impairment test can be performed at any date,
      as
      long as it is consistently used each year. The Company has historically
      performed the test on December 31 st of
      each
      year. At June 30, 2008, management evaluated whether any of the various events
      which might require more than one annual impairment test had occurred. While
      there have been certain adverse economic developments since December 31, 2007,
      the Company continues to maintain sound asset quality, financial strength and
      enjoys positive earnings, and therefore, management does not believe an interim
      impairment test is warranted. Management will continue to assess whether events
      occur that would trigger an impairment test other than the one to be performed
      at year end.




-9-


**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of**


**Operations**





Management’s
      discussion and analysis is intended to assist readers in the understanding
      and
      evaluation of the financial condition and consolidated results of operations
      of
      Crescent Financial Corporation (the “Company”). The analysis includes detailed
      discussions for each of the factors affecting Crescent Financial Corporation’s
      operating results and financial condition for the periods ended June 30, 2008
      and 2007. It should be read in conjunction with the audited consolidated
      financial statements and accompanying notes included in this report and the
      supplemental financial data appearing throughout this discussion and analysis.
      Because the Company has no operations and conducts no business on its own other
      than owning Crescent State Bank, the discussion contained in this Management's
      Discussion and Analysis concerns primarily the business of the Bank. However,
      for ease of reading and because the financial statements are presented on a
      consolidated basis, the Company and the Bank are collectively referred to herein
      as the Company unless otherwise noted. All significant intercompany transactions
      and balances are eliminated in consolidation.





**COMPARISON
      OF FINANCIAL CONDITION AT JUNE 30, 2008 AND**


**DECEMBER
      31, 2007**





Total
      assets at June 30, 2008 are $920.6 million compared with $835.5 million at
      December 31, 2007. Earning assets are 92% of total assets at both dates with
      $847.0 million at June 30, 2008 and $773.8 million at December 31, 2007.
      Components of earning assets at June 30, 2008 are $742.9 million in gross loans,
      $103.7 million in investment securities and Federal Home Loan Bank (FHLB) stock
      and $489,000 in overnight investments and interest bearing deposits with
      correspondent banks. Earning assets at December 31, 2007 consisted of $675.9
      million in gross loans, $97.5 million in investment securities and FHLB stock
      and $309,000 in overnight investments and interest bearing deposits. Total
      deposits, borrowings and stockholders’ equity at June 30, 2008 were $653.7
      million, $169.1 million and $94.1 million, respectively, compared to $605.4
      million, $135.0 million and $91.7 million at December 31, 2007.





Gross
      loans outstanding increased by $66.9 million or 10% over the six-month period.
      All categories of loans experienced net increases with the commercial real
      estate mortgage category experiencing the most significant dollar growth
      increasing $45.7 million or 13% from $350.4 million to $396.1 million.
      Construction and development loans increased by $9.8 million or 5% to $193.4
      million, home equity loans and lines increased by $8.2 million or 18% to $53.5
      million, commercial and industrial loans increased by $2.2 million or 3% to
      $75.1 million, residential real estate loans increased $541,000 or 3% to $18.8
      million and consumer loans increased by $509,000 or 9% to $6.0 million. The
      composition of the loan portfolio, by category, as of June 30, 2008 is 53%
      commercial mortgage loans, 26% construction loans, 10% commercial loans, 7%
      home
      equity loans and lines, 3% residential mortgage loans and 1% consumer loans.
      The
      composition of the loan portfolio, by category, as of December 31, 2007 was
      55%
      commercial mortgage loans, 20% construction loans, 12% commercial loans, 8%
      home
      equity loans and lines, 4% residential real estate mortgage loans and 1%
      consumer loans.





The
      Company had an allowance for loan losses at June 30, 2008 of $8.9 million or
      1.19% of outstanding loans compared to $8.3 million or 1.24% at
      December 31, 2007. At June 30, 2008, there were six loans totaling $746,000
      in non-accrual status. There were no loans past due 90 days or more and still
      accruing interest at June 30, 2008. Non-performing loans as a percentage of
      total loans at June 30, 2008 were 0.10%. There were twelve loans totaling $2.7
      million in non accrual status at December 31, 2007. There were no loans past
      due
      90 days or more and still accruing interest at December 31, 2007. Non-performing
      loans as a percentage of total loans at December 31, 2007 were 0.40%. For a
      more
      detailed discussion, see the section entitled Non-Performing
      Assets.





-10-


The
      Company has investment securities with an amortized cost of $96.3 million at
      June 30, 2008. All investments are accounted for as available for sale and
      are
      presented at their fair market value of $96.0 million compared with $90.8
      million at year-end 2007. The Company’s investment in available for sale
      securities at June 30, 2008, consists of U.S. Government agency securities,
      collateralized mortgage obligations, mortgage-backed securities, municipal
      bonds
      and marketable equity securities. The increase during the first six months
      of
      2008 was the net result of $15.4 million in new purchases and $50,000 in net
      accretion of discounts, less $8.3 million in principal re-payments and called
      principal, the sale of $1.5 million of securities and a $425,000 decrease in
      fair value. The Company has performed an analysis at June 30 and believes all
      unrealized losses within its securities portfolio are temporary in nature.





The
      Company owns $7.7 million of Federal Home Loan Bank stock at June 30, 2008
      compared to $6.8 million at December 31, 2007.





There
      are
      $98,000 in Federal funds sold at June 30, 2008 compared to $97,000 at December
      31, 2007.





Interest-earning
      deposits held at correspondent banks increased by approximately $179,000 from
      $212,000 at December 31, 2007 to $391,000 at March 31, 2008.





Non-earning
      and other assets increased by approximately $12.4 million between December
      31,
      2007 and June 30, 2008. The Company purchased an additional $7.0 million of
      bank
      owned life insurance in May. Bank premises and equipment increased by $2.1
      million as we purchased land for a future branch location and finished the
      build-out on a branch opened in late March. The Company had three foreclosed
      properties totaling $272,000 at December 31, 2007. During 2008, we foreclosed
      on
      nine additional properties and moved $2.4 million in net realizable values
      to
      other real estate owned. Four of those properties have been disposed of, at
      a
      combined loss of $61,000, leaving a balance of other real estate owned of $1.9
      million. Non-interest bearing cash due from banks, the majority of which
      represents checks in the process of being collected through the Federal Reserve
      payment system, increased by $1.2 million. For more details regarding the
      increase in cash and cash equivalents, see the Consolidated Statements of Cash
      Flows.





Total
      deposits increased by $48.2 million between December 31, 2007 and June 30,
      2008
      from $605.4 million to $653.7 million. The largest dollar increase occurred
      in
      the money market category, which grew by $39.7 million or 82% to $88.1 million
      at June 30, 2008 from $48.4 million at year end 2007. Time deposit balances
      increases by $39.3 million or 11% to $384.5 million and interest-bearing demand
      deposit balances increased by $8.3 million or 26% to $40.2 million. Due largely
      to the expected distribution of $20.4 million from an escrow account and some
      disintermediation toward a money market special, savings account balances
      declined by $33.9 million to $76.6 million. Balances of non interest-bearing
      demand deposits decreased by $5.1 million from $69.4 million to $64.3
      million.





The
      composition of the deposit base, by category, at June 30, 2008 is as follows:
      59% time deposits, 13% money market accounts, 12% savings accounts, 10%
      non-interest-bearing demand deposits and 6% interest-bearing demand deposits.
      The composition of the deposit base, by category, at December 31, 2007 was
      57% time deposits, 18% in statement savings, 12% non-interest-bearing demand
      deposits, 8% money market and 5% in interest-bearing demand deposits. Time
      deposits of $100,000 or more totaled $306.3 million at June 30, 2008 compared
      to
      $276.6 million at December 31, 2007. The Company uses brokered certificates
      of
      deposit as an alternative funding source. Brokered deposits represent a source
      of fixed rate funds priced competitively with FHLB borrowings, but do not
      require collateralization like FHLB borrowings. Brokered deposits were $207.6
      million at June 30, 2008 compared with $166.6 million at December 31,
      2007.





-11-


The
      Company had $138.2 million of long-term debt outstanding at June 30, 2008
      compared to $121.2 million at December 31, 2007. The long-term debt is comprised
      of $128.0 million in FHLB term advances, $8.2 million in junior subordinated
      debt and $2.0 million outstanding on a line of credit. Short-term borrowings
      increased by $17.1 million during 2008 to $30.9 million. Short-term borrowings
      consist of FHLB term advances with remaining maturities of less than one year
      and Federal funds purchased from correspondent banks.





Accrued
      interest payable and other liabilities increased by $245,000 and were $3.7
      million and $3.4 million at June 30, 2008 and December 31, 2007, respectively.





Between
      December 31, 2007 and June 30, 2008, total stockholders’ equity increased by
      $2.4 million. The increase resulted primarily from net income for the first
      six
      months of $2.0 million, $672,000 in new stock issued pursuant to the exercise
      of
      stock options and $105,000 due to the recognition of certain stock award
      expense. Total stockholders’ equity decreased by $142,000 due to recording the
      cumulative effect of adopting EITF 06-04 and a decline in the net fair market
      value of available for sale securities of $261,000.





**COMPARISON
      OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2008 AND
      2007**





**Net
      Income.** **** Net
      income for the three-month period ended June 30, 2008 was $1.0 million compared
      to $1.4 million for the three-month period ended June 30, 2007. Diluted earnings
      per share for the current period was $.11 compared to $.15. Annualized return
      on
      average assets declined to 0.46% from 0.76% for the prior period. The decline
      was due to a lower net interest margin resulting from a lower interest rate
      environment, strong loan growth funded by high cost money and higher
      non-interest expenses. Return on average equity for the current period was
      4.37%
      compared to 6.73% for the prior period.





**Net
      Interest Income.**  Net
      interest income decreased by $278,000 from $6.6 million for the prior
      three-month period to $6.3 million for the three-month period ended June 30,
      2008. The additional interest income generated by a higher volume of earning
      assets was more than offset by the decline in net interest margin earned on
      those assets. Total interest expense from deposits and other borrowings
      decreased due to a reduction in cost of funds despite a sharp increase in volume
      to fund earning assets. The Company’s net interest margin decreased from 3.73%
      to 3.05% due to a greater dependency on interest-bearing liabilities and a
      lower
      interest rate environment which has reduced the average yield on earning assets
      to a greater extent than the reduction in the Company’s cost of funds.





Total
      interest income decreased by $425,000 to $13.2 million for the current
      three-month period compared to $13.6 million for the prior year period. The
      net
      decline resulted from a $2.7 million decrease due to lower yields realized
      on
      earning assets and a $2.3 million increase in interest income due to the growth
      in total average earning assets. Total interest expense for the current period
      declined by $147,000 from $7.0 million to $6.9 million. The decrease was the
      net
      result of a $1.6 million decline due to the lower cost of money and a $1.5
      million increase due to growth in interest-bearing funds.





-12-


Total
      average earning assets increased $124.4 million or 18% from an average of $705.7
      million for the prior year three-month period to an average of $830.1 million
      for the three-month period ended June 30, 2008. The average balance of loans
      outstanding during the current quarter was $724.0 million, a $124.5 million
      or
      21% increase over the $599.5 million of average outstanding loans for the prior
      year period. The average balance of the investment securities portfolio for
      the
      three-month period ended June 30, 2008 was $103.2 million, increasing by $12.0
      million or 13% compared to an average of $91.2 million at June 30, 2007. The
      average balance of federal funds sold and other earning assets decreased to
      $2.9
      million for the current three-month period compared to $14.9 million for the
      prior period.





Average
      interest-bearing liabilities increased by $128.2 million or 21% from $606.0
      million for the quarter ended June 30, 2007 to $734.2 million for the current
      quarter. Total interest-bearing deposits increased by $71.2 million or 14%
      from
      $523.1 million to $594.3 million. Time deposits experienced the largest increase
      averaging $394.0 million during the current year period compared to $322.0
      million for the prior period. Total borrowings increased by 69% or $57.0 million
      from $82.8 million to $139.8 million.





Net
      interest margin is interest income earned on loans, securities and other earning
      assets, less interest expense paid on deposits and borrowings, expressed as
      a
      percentage of total average earning assets. The net interest margin for the
      three-month period ended June 30, 2008 was 3.05% compared to 3.73% for the
      three-month period ended June 30, 2007. The average yield on earning assets
      for
      the current three-month period decreased 135 basis points to 6.38% compared
      with
      7.73% for the prior year period, while the average cost of interest-bearing
      funds decreased by only 89 basis points to 3.77% from 4.66%. The interest rate
      spread, which is the difference between the average yield on earning assets
      and
      the cost of interest-bearing funds, decreased by 47 basis points from 3.08%
      for
      the quarter ended June 30, 2007 to 2.61% for the quarter ended June 30, 2008.
      The percentage of interest earning assets to average interest-bearing
      liabilities decline from 116.45% for the prior year period to 113.06% for the
      three months ended June 30, 2008. A decrease in the ratio of average earning
      assets to average interest-bearing liabilities indicates an increased dependency
      on interest-bearing forms of funding to meet the demand of earning asset
      growth.





Between
      mid September 2007 and April 30, 2008, the Federal Reserve (the “Fed”) decreased
      short-term interest rates seven times for a total of 325 basis points. Unlike
      the slow, measured approach to increasing interest rates between July 2004
      and
      July 2006 when each increase was in 25 basis point increments, four of the
      seven
      decreases came in the 50 to 75 basis point range. The interest rate cuts were
      in
      response to weakness being experienced in the US economy. Approximately 51%
      of
      the Company’s loan portfolio has variable rate pricing based on the Prime
      lending rate or LIBOR (London Inter Bank Offering Rate). As short-term rates
      have declined, variable rate loans have repriced downward resulting in a lower
      yield on average earning assets. While the yield on the variable portion of
      existing loans was falling with rate decreases, rates on new fixed rate loans
      were experiencing significant downward pressure due to loan competition in
      our
      high growth markets. The magnitude of the total rate reduction in such a short
      period (325 basis points over eight months compared to the last rate increases
      which accounted for a 425 basis point increase over twenty-four months) did
      not
      allow the Company to reprice its time deposit portfolio to the same extent
      as
      the loan portfolio causing significant net interest margin compression. We
      are
      experiencing very strong loan demand requiring a continued reliance on higher
      cost brokered deposit. The Company expects to continue to experience net
      interest margin compression in the current stable rate environment. In rising
      or
      falling interest rate environments, the Company would expect moderate expansion
      or contraction of margin, respectively.





-13-


**Provision
      for Loan Losses.** **** The
      Company’s provision for loan losses for the three-month period ended June 30,
      2008 was $459,000 compared to $322,000 for the same period in 2007. Provision
      for loan losses is charged to income to bring the allowance for loan losses
      to a
      level deemed appropriate by management based on factors discussed under
“Analysis of Allowance for Loan Losses.” The increase in the loan loss provision
      is primarily due to higher loan growth during the second quarter of 2008 as
      compared with 2007, although the analysis discussion outlines additional factors
      impacting the provision. The allowance for loan losses was $8.9 million at
      June
      30, 2008, representing 1.19% of total outstanding loans.





**Non-Interest
      Income.** **** For
      the
      three-month period ended June 30, 2008, non-interest income increased by
      $170,000 or 26% to $817,000 compared to $647,000 for the same period in 2007.
      Categories experiencing increases over the prior period include customer service
      fees and deposit service charges, earnings on cash value of bank owned life
      insurance and mortgage loan origination fees. There was $45,000 of miscellaneous
      non-recurring fees included in other non-interest income. During the current
      three month period, the Company recorded $63,000 in loss from the disposition
      of
      other real estate owned and realized a $15,000 gain on the sale of
      securities.




**Non-Interest
      Expenses.** **** For
      the
      current three-month period, non-interest expenses increased by $470,000 or
      10%
      from $4.6 million to $5.1 million. The categories experiencing the greatest
      increases were personnel and occupancy expense reflecting the costs associated
      with branch expansion and additional lending and support staff. Salaries and
      benefits expense increased by $382,000 or 15% to $2.9 million for the current
      year period compared to $2.5 million and occupancy increased by $92,000 or
      16%
      to $656,000 from $564,000. FDIC insurance premiums increased by $85,000 during
      the current three-month period due to changes in the assessment calculation.
      The
      Company received a reimbursement of expenses previously incurred in the first
      quarter causing legal expenses to be $65,000 lower than anticipated.
      Non-recurring expenses for the second quarter of 2007 included $190,000
      primarily due to merging Port City Capital Bank into Crescent State Bank.





**Provision
      for Income Taxes.** **** The
      Company recorded income tax expense of $526,000 for the three-months ended
      June
      30, 2008 compared with $823,000 for the prior year period. The effective tax
      rate for the three-month period ended June 30, 2008 was 33.8% compared with
      36.0% for the prior year period. The decrease in the effective tax rate is
      attributable to a larger percentage of income coming from tax exempt sources
      in
      the current quarter.





**COMPARISON
      OF RESULTS OF OPERATIONS FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND
      2007**





**Net
      Income.** **** Net
      income for the six-month period ended June 30, 2008 was $2.0 million or $.21
      per
      diluted share compared to $2.9 million or $0.30 per diluted share for the
      six-month period ended June 30, 2007. Annualized return on average assets was
      0.46% and 0.79% for the two periods ended June 30, 2008 and 2007, respectively.
      The decline in return on assets was primarily attributed to a lower net interest
      margin resulting the declining rate environment, the narrowing of spread between
      the yield on earning assets and the cost to fund strong asset growth and an
      increase in non-interest expenses. Return on average equity for the current
      period was 4.35% compared to 6.89% for the prior period. Return on average
      equity decreased due to a lower return on average assets.




**Net
      Interest Income.**  Net
      interest income was $12.8 million for both comparative six-month periods.
      Increased interest income that would be expected from strong growth in earning
      assets was offset by both the lower interest rate environment and the increased
      volume of high cost deposits to fund the asset growth.





-14-


Total
      interest income was $26.9 million for the current six-month period compared
      to
      $26.4 million for the prior year period, an increase of $540,000 or 2%. The
      increase was comprised of a $5.0 million increase due to growth in average
      earning assets and a $4.4 million decrease due to the lower average yield earned
      on those assets. Total interest expense increased by $538,000 or 4% from $13.5
      million for the prior year period to $14.1 million for the current period.
      The
      increase was the result of a $3.2 million increase due to growth in
      interest-bearing liabilities and a $2.6 million decrease due to the lower
      interest rate environment.





Total
      average earning assets increased $131.0 million or 19% from an average of $685.0
      million as of June 30, 2007 to an average of $816.0 million for the six-month
      period ended June 30, 2008. The average balance of loans outstanding during
      the
      current six-month period was $710.4 million reflecting a $127.6 million or
      22%
      increase over the $582.8 million for the prior year period. The average balance
      of the investment securities portfolio for the current period was $101.5
      million, increasing by $11.4 million or 13% compared to an average of $90.1
      million at June 30, 2007. The average balance of federal funds sold and other
      earning assets decreased to $4.2 million for the six-month period ended June
      30,
      2008 compared to $12.2 million for the prior period.





Total
      average interest-bearing liabilities increased by $130.5 million or 22% from
      an
      average of $587.4 million for the period ended June 30, 2007 to $717.9 million
      for the current six-month period. Average interest-bearing deposits increased
      by
      $69.7 million or 14% growing from $511.1 million at June 30, 2007 to $580.8
      million at June 30, 2007. Total average borrowings increased by $60.8 million
      or
      80% to $137.1 million for the current six-month period from $76.3 million for
      the prior year period.





The
      net
      interest margin for the six-month period ended June 30, 2008 was 3.16% compared
      to 3.77% for the prior year six-month period. The average yield on earning
      assets for the current six-month period decline by 111 basis points to 6.65%
      compared with 7.76% for the prior year period, while the average cost of
      interest-bearing funds decreased by only 70 basis points to 3.95% from 4.65%.
      The spread between the rates paid on earning assets and the cost of
      interest-bearing funds decreased by 41 basis points from 3.11% to 2.70%. The
      Company’s reliance on interest-bearing liabilities to fund earning asset growth
      increased as the percentage of interest earning assets to interest bearing
      liabilities declined from 116.62% to 113.68%.





**Provision
      for Loan Losses.** **** The
      Company’s provision for loan losses for the six-month period ended June 30, 2008
      was $1.3 million compared to $682,000 for the same period in 2007. Provision
      for
      loan losses is charged to income to bring the allowance for loan losses to
      a
      level deemed appropriate by management based on factors discussed under
“Analysis of Allowance for Loan Losses.” The increased loan loss provision for
      the current six-month period is primarily due to the increase in net loan growth
      in the current period compared to that of the prior year period. See the section
      entitled “Non Performing Assets” for more details. The allowance for loan losses
      was $8.9 million at June 30, 2008, representing 1.19% of total outstanding
      loans.





**Non-Interest
      Income.** **** For
      the
      six-month period ended June 30, 2008, non-interest income increased by $349,000
      to $1.6 million. The largest components of non-interest income in the first
      half
      of 2008 were $640,000 in customer service fees, $323,000 in mortgage loan
      origination fees, $242,000 in earnings on cash value of bank owned life
      insurance and $123,000 in deposit service charges. For the prior six-month
      period, we recorded $546,000 in customer service fees, $251,000 in mortgage
      loan
      origination fees, $183,000 increase in cash surrender value on life insurance,
      and $123,000 in service charges and fees on deposit accounts. Other non interest
      income increased by $180,000 of which $117,000 represents non-recurring revenue.
      Non-recurring items include the $45,000 in miscellaneous fees collected in
      Q2
      and the recovery in Q1 of $72,000 in previously charged-off deposit related
      overdrafts.





-15-


**Non-Interest
      Expenses.** **** Non-interest
      expenses increased by 14% to $10.1 million for the six-month period ended June
      30, 2008 compared with $8.8 million for the same period ended June 30, 2007.
      The
      Company has added two branch locations and increased both lending and support
      staff during the past twelve months. The two components of non-interest expense
      experiencing the largest increase were personnel and occupancy expenses.
      Salaries and benefits expense was $5.7 million for the current six-month period
      compared to $4.9 million for the same period in the prior year. Management
      anticipates personnel expense to continue to increase as opportunities to hire
      quality employees present themselves and we expand into new markets. Occupancy
      and equipment expenses increased by $207,000 or 19% from $1.1 for the six-month
      period ended June 30, 2007 to $1.3 million for the current year period. Due
      to
      changes in the assessment calculation, FDIC insurance premiums increased from
      $32,000 to $192,000. Data processing costs increased by only $15,000 to
      $532,000.





Other
      non-interest expenses increased by $107,000 to $2.3 million for the first half
      of 2008 compared with $2.2 million for the first half of the prior year. The
      largest components of other non-interest expenses include professional fees
      and
      services, office supplies and printing, advertising, and loan related fees.
      Management expects that as the complexity and size of the Company increases,
      expenses associated with these categories will continue to increase.
      Approximately $218,000 of non-interest expense for the six-month period ended
      June 30, 2007 were non-recurring in nature resulting from the conversion of
      Port
      City Capital Bank into Crescent State Bank and other professional services
      performed in conjunction with a regulatory compliance review.





**Provision
      for Income Taxes** **.** The
      Company recorded income tax expense of $1.0 million during the six-months ended
      June 30, 2008 compared to $1.7 million for the prior year period. The effective
      tax rates for the two periods were 33.7% and 36.2%, respectively. The decrease
      is due to a larger percentage of income earned from tax exempt sources in the
      current six-month period.




-16-





**NET
      INTEREST INCOME**





Net
      interest income represents the difference between income derived from
      interest-earning assets and interest expense incurred on interest-bearing
      liabilities. Net interest income is affected by both (1) the difference between
      the rates of interest earned on interest-earning assets and the rates paid
      on
      interest-bearing liabilities (“interest rate spread”) and (2) the relative
      amounts of interest-earning assets and interest-bearing liabilities (“net
      interest-earning balance”). The following tables set forth information relating
      to average balances of the Company's assets and liabilities for the three-month
      periods ended June 30, 2008 and 2007. The tables reflect the average yield
      on
      interest-earning assets and the average cost of interest-bearing liabilities
      (derived by dividing income or expense by the daily average balance of
      interest-earning assets or interest-bearing liabilities, respectively) as well
      as the net interest margin. In preparing the tables, non-accrual loans are
      included, when applicable, in the average loan balance. For purposes of the
      analysis, Federal Home Loan Bank stock is included in Investment Securities
      totals.


Average
                  Balances, Interest and Average Yields/Cost(Dollars
                  in Thousands)For
                  the Three Months Ended June 30,2008
              
              
              2007Average
              
              
              
              
              
              Average
              
              
              
              Average
              
              
              
              
              
              AverageBalance
              
              
              Interest
              
              
              Yield/Cost
              
              
              
              Balance
              
              
              Interest
              
              
              Yield/CostInterest-earnings
                  assetsLoan
                  portfolio
              
              $
              724,011
              
              $
              11,936
              
              
              6.63
              %
              
              $
              599,535
              
              $
              12,331
              
              
              8.25
              %Investment
                  securities
              
              
              103,207
              
              
              1,227
              
              
              4.76
              %
              
              
              91,207
              
              
              1,096
              
              
              4.81
              %Fed
                  funds and other interest-earning assets
              
              
              2,866
              
              
              14
              
              
              1.96
              %
              
              
              14,913
              
              
              175
              
              
              4.71
              %Total
                  interest-earning assets
              
              
              830,084
              
              
              13,177
              
              
              6.38
              %
              
              
              705,655
              
              
              13,602
              
              
              7.73
              %Noninterest-bearing
                  assets
              
              
              66,570
              
              
              
              
              
              
              
              
              
              61,520Total
                  Assets
              
              $
              896,654
              
              
              
              
              
              
              
              
              $
              767,175Interest-bearing
                  liabilitiesInterest-bearing
                  NOW
              
              $
              36,703
              
              
              10
              
              
              0.11
              %
              
              $
              34,532
              
              
              99
              
              
              1.15
              %Money
                  market and savings
              
              
              163,598
              
              
              986
              
              
              2.42
              %
              
              
              156,615
              
              
              1,646
              
              
              4.22
              %Time
                  deposits
              
              
              394,050
              
              
              4,506
              
              
              4.60
              %
              
              
              332,000
              
              
              4,220
              
              
              5.10
              %Short-term
                  borrowings
              
              
              14,945
              
              
              91
              
              
              2.45
              %
              
              
              17,886
              
              
              209
              
              
              4.69
              %Long-term
                  debt
              
              
              124,874
              
              
              1,292
              
              
              4.09
              %
              
              
              64,918
              
              
              859
              
              
              5.23
              %Total
                  interest-bearing liabilities
              
              
              734,170
              
              
              6,885
              
              
              3.77
              %
              
              
              605,951
              
              
              7,033
              
              
              4.66
              %Non-interest
                  bearing deposits
              
              
              65,150
              
              
              
              
              
              
              
              
              
              71,849Other
                  liabilities
              
              
              2,716
              
              
              
              
              
              
              
              
              
              3,063Total
                  Liabilities
              
              
              802,036
              
              
              
              
              
              
              
              
              
              680,863Stockholders'
                  Equity
              
              
              94,618
              
              
              
              
              
              
              
              
              
              86,312Total
                  Liabilities & Stockholders' Equity
              
              $
              896,654
              
              
              
              
              
              
              
              
              $
              767,175Net
                  interest income
              
              
              
              
              $
              6,292
              
              
              
              
              
              
              
              
              $
              6,569Interest
                  rate spread
              
              
              
              
              
              
              
              
              2.61
              %
              
              
              
              
              
              
              
              
              3.08
              %Net
                  interest-margin
              
              
              
              
              
              
              
              
              3.05
              %
              
              
              
              
              
              
              
              
              3.73
              %Percentage
                  of average interest-earning assetsto
                  average interest-bearing liabilities
              
              
              
              
              
              
              
              
              113.06
              %
              
              
              
              
              
              
              
              
              116.45
              %





-17-


Average
                  Balances, Interest and Average Yields/Cost(Dollars
                  in Thousands)For
                  the Six Months Ended June 30,2008
              
              2007Average
              
              
              
              
              
              Average
              
              
              Average
              
              
              
              
              
              AverageBalance
              
              
              Interest
              
              
              Yield/Cost
              
              
              Balance
              
              
              Interest
              
              
              Yield/CostInterest-earnings
                  assetsLoan
                  portfolio
              
              $
              710,381
              
              $
              24,407
              
              
              6.91
              %
              $
              582,774
              
              $
              23,906
              
              
              8.27
              %Investment
                  securities
              
              
              101,487
              
              
              2,434
              
              
              4.80
              %
              
              90,060
              
              
              2,156
              
              
              4.79
              %Fed
                  funds and other interest-earning assets
              
              
              4,173
              
              
              58
              
              
              2.80
              %
              
              12,196
              
              
              297
              
              
              4.91
              %Total
                  earning assets
              
              
              816,041
              
              
              26,899
              
              
              6.65
              %
              
              685,030
              
              
              26,359
              
              
              7.76
              %Noninterest-bearing
                  assets
              
              
              64,793
              
              
              
              
              
              
              
              
              60,993Total
                  Assets
              
              $
              880,834
              
              
              
              
              
              
              
              $
              746,023Interest-bearing
                  liabilitiesInterest-bearing
                  NOW
              
              $
              34,838
              
              
              32
              
              
              0.18
              %
              $
              34,608
              
              
              197
              
              
              1.15
              %Money
                  market and savings
              
              
              159,162
              
              
              2,071
              
              
              2.62
              %
              
              153,730
              
              
              3,223
              
              
              4.23
              %Time
                  deposits
              
              
              386,788
              
              
              9,108
              
              
              4.74
              %
              
              322,801
              
              
              8,106
              
              
              5.06
              %Short-term
                  borrowings
              
              
              14,006
              
              
              208
              
              
              2.99
              %
              
              19,841
              
              
              499
              
              
              5.07
              %Long-term
                  debt
              
              
              123,061
              
              
              2,664
              
              
              4.28
              %
              
              56,408
              
              
              1,520
              
              
              5.36
              %Total
                  interest-bearing liabilities
              
              
              717,855
              
              
              14,083
              
              
              3.95
              %
              
              587,388
              
              
              13,545
              
              
              4.65
              %Non
                  interest-bearing deposits
              
              
              66,115
              
              
              
              
              
              
              
              
              70,258Other
                  liabilities
              
              
              2,959
              
              
              
              
              
              
              
              
              3,093Total
                  Liabilities
              
              
              786,929
              
              
              
              
              
              
              
              
              660,739Stockholders'
                  Equity
              
              
              93,905
              
              
              
              
              
              
              
              
              85,284Total
                  Liabilities & Stockholders' Equity
              
              $
              880,834
              
              
              
              
              
              
              
              $
              746,023Net
                  interest income
              
              
              
              
              $
              12,816
              
              
              
              
              
              
              
              $
              12,814Interest
                  rate spread
              
              
              
              
              
              
              
              
              2.70
              %
              
              
              
              
              
              
              
              3.11
              %Net
                  margin
              
              
              
              
              
              
              
              
              3.16
              %
              
              
              
              
              
              
              
              3.77
              %Percentage
                  of average interest-earningassets
                  to average interest bearingliabilities
              
              
              
              
              
              
              
              
              113.68
              %
              
              
              
              
              
              
              
              116.62
              %





**VOLUME/RATE
      VARIANCE ANALYSIS**





The
      following tables analyze the dollar amount of changes in interest income and
      interest expense for major components of interest-earning assets and
      interest-bearing liabilities for the three and six-month periods ended June
      30,
      2008 and 2007. 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.





-18-


Rate/Volume
                  AnalysisThree
                  Months Ended June 30,2008
                  vs. 2007(in
                  Thousands)Increase
                  (Decrease) Due toVolume
              
              
              Rate
              
              
              Total**Interest
                  Income**Loan
                  portfolio
              
              
              2,286
              
              
              (2,681
              )
              
              (395
              )Investment
                  Securities
              
              
              142
              
              
              (12
              )
              
              131Fed
                  funds and other interest-earning assets
              
              
              (100
              )
              
              (61
              )
              
              (161
              )Total
                  interest-earning assets
              
              
              2,328
              
              
              (2,753
              )
              
              (425
              )**Interest
                  Expense**Interest-bearing
                  NOW
              
              
              3
              
              
              (92
              )
              
              (89
              )Money
                  market and savings
              
              
              56
              
              
              (716
              )
              
              (660
              )Time
                  deposits
              
              
              743
              
              
              (457
              )
              
              286Short-term
                  borrowings
              
              
              (26
              )
              
              (92
              )
              
              (118
              )Long-term
                  debt
              
              
              699
              
              
              (266
              )
              
              433Total
                  interest-bearing liabilities
              
              
              1,475
              
              
              (1,623
              )
              
              (148
              )**Net
                  interest income**
              
              
              853
              
              
              (1,130
              )
              
              (277
              )




Rate/Volume
                  AnalysisSix
                  Months Ended June 30,2008
                  vs. 2007(in
                  Thousands)Increase
                  (Decrease) Due toVolume
              
              
              Rate
              
              
              Total**Interest
                  Income**Loan
                  portfolio
              
              
              4,850
              
              
              (4,349
              )
              
              501Investment
                  Securities
              
              
              273
              
              
              5
              
              
              278Fed
                  funds and other interest-earning assets
              
              
              (153
              )
              
              (86
              )
              
              (239
              )Total
                  interest-earning assets
              
              
              4,970
              
              
              (4,430
              )
              
              540**Interest
                  Expense**Interest-bearing
                  NOW
              
              
              1
              
              
              (166
              )
              
              (165
              )Money
                  market and savings
              
              
              97
              
              
              (1,249
              )
              
              (1,152
              )Time
                  deposits
              
              
              1,570
              
              
              (568
              )
              
              1,002Short-term
                  borrowings
              
              
              (116
              )
              
              (175
              )
              
              (291
              )Long-term
                  debt
              
              
              1,611
              
              
              (467
              )
              
              1,144Total
                  interest-bearing liabilities
              
              
              3,163
              
              
              (2,625
              )
              
              538**Net
                  interest income**
              
              
              1,807
              
              
              (1,805
              )
              
              2




-19-


**NONPERFORMING
      ASSETS**





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


At
                  June 30,
              
              At
                  December 31,2008
              
              
              2007
              
              
              2007
              
              
              2006(Dollars
                  in thousands)Nonaccrual
                  loans
              
              $
              746
              
              $
              599
              
              $
              2,726
              
              $
              135Restructured
                  loans
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  nonperforming loans
              
              
              746
              
              
              599
              
              
              2,726
              
              
              135Real
                  estate owned
              
              
              1,865
              
              
              98
              
              
              272
              
              
              98Repossessed
                  assets
              
              
              25
              
              
              14
              
              
              -
              
              
              -Total
                  nonperforming assets
              
              $
              2,636
              
              $
              711
              
              $
              2,998
              
              $
              233Accruing
                  loans past due90
                  days or more
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Allowance
                  for loan losses
              
              
              8,855
              
              
              7,536
              
              
              8,273
              
              
              6,945Nonperforming
                  loans toperiod
                  end loans
              
              
              0.10
              %
              
              0.10
              %
              
              0.40
              %
              
              0.02
              %Allowance
                  for loan lossesto
                  period end loans
              
              
              1.19
              %
              
              1.24
              %
              
              1.22
              %
              
              1.26
              %Allowance
                  for loan lossesto
                  nonperforming loans
              
              
              1,187
              %
              
              1,059
              %
              
              303
              %
              
              5,145
              %Nonperforming
                  assetsto
                  total assets
              
              
              0.29
              %
              
              0.09
              %
              
              0.36
              %
              
              0.03
              %Nonperforming
                  assets and loanspast
                  due 90 days or more tototal
                  assets
              
              
              0.29
              %
              
              0.09
              %
              
              0.36
              %
              
              0.03
              %


Our
      financial statements are prepared on the accrual basis of accounting, including
      the recognition of interest income on loans, unless we place a loan on
      nonaccrual basis. We account for loans on a nonaccrual basis when we have
      serious doubts about the collectability of principal or interest. Generally,
      our
      policy is to place a loan on nonaccrual status when the loan becomes past due
      90
      days. We also place loans on nonaccrual status in cases where we are uncertain
      whether the borrower can satisfy the contractual terms of the loan agreement.
      Amounts received on nonaccrual loans generally are applied first to principal
      and then to interest only after all principal has been collected. Restructured
      loans are those for which concessions, including the reduction of interest
      rates
      below a rate otherwise available to that borrower or the deferral of interest
      or
      principal have been granted due to the borrower’s weakened financial condition.
      We accrue interest on restructured loans at the restructured rates when we
      anticipate that no loss of original principal will occur. Potential problem
      loans are loans which are currently performing and are not included as
      nonaccrual or restructured loans above, but about which we have serious doubts
      as to the borrower’s ability to comply with present repayment terms. These loans
      are likely to be included later in nonaccrual, past due or restructured loans,
      so they are considered by our management in assessing the adequacy of our
      allowance for loan losses. At June 30, 2008, we identified eight loans totaling
      $3.7 million as potential problems loans.





-20-


At
      June
      30, 2008, there were seven foreclosed properties valued at a total of $1.9
      million and six nonaccrual loans totaling $746,000. Foreclosed property is
      valued at the lower of appraised value or the outstanding loan balance. Interest
      foregone on nonaccrual loans for the six-month period ended June 30, 2008 was
      $64,000. At June 30, 2007, there were four foreclosed properties valued at
      $98,000 and five nonaccrual loans totaling $599,000. Interest foregone on
      nonaccrual loans for the six-month period ended June 30, 2007 was approximately
      $21,400.





**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 our history
      of
      operations. Additionally, as an important component of their periodic
      examination process, regulatory agencies review our allowance for loan losses
      and may require additional provisions for estimated losses based on judgments
      that differ from those of management.





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





Management
      has developed a model for evaluating the adequacy of the allowance for loan
      losses. The model uses the Company’s internal loan grading system to segment
      each category of loans by risk class. The Company’s internal grading system is
      compromised of nine different risk classifications. Loans possessing a risk
      class of 1 through 6 demonstrate various degrees of risk, but each is considered
      to have the capacity to perform in accordance with the terms of the loan. Loans
      possessing a risk class of 7 to 9 are considered impaired and are individually
      evaluated for impairment.





Using
      the
      various evaluation factors mentioned above, management predetermined allowance
      percentages for all risk classes 1 through 6 for each loan category. The total
      aggregate balance of loans in the group is multiplied by the associated
      allowance percentage to determine an adequate level of allowance for loan losses
      for unimpaired loans. Those loans that are identified through the Company’s
      internal loan grading system as impaired are evaluated individually in
      accordance with *Statement
      of Financial Accounting Standards (SFAS) 114, “Accounting by Creditors for
      Impairment of a Loan.”* Each
      loan is analyzed to determine the net value of collateral, probability of
      charge-off and finally a potential estimate of loss. Loans meeting the criteria
      for individual evaluation are specifically reserved for based on management’s
      analysis.





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.





-21-


The
      primary reason for increases to the allowance for loan losses has been growth
      in
      total outstanding loans; however, there were other factors influencing the
      provision. For the six-month period ended June 30, 2008, there were net loan
      charge-offs of $684,000 compared with $91,000 for the prior year. The allowance
      for loan losses at June 30, 2008 was $8.9 million, which represents 1.19% of
      total loans outstanding compared to $7.5 million or 1.24% for the prior year.





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




-22-





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




Allocation
                    of Allowance for Loan LossesAt
                    June 30,
                
                At
                    December 31,2008
                
                2007%
                    of Total
                
                
                
                
                
                %
                    of TotalAmount
                
                
                Loans
                    (1)
                
                
                Amount
                
                
                Loans
                    (1)(Dollars
                    in thousands)Residential
                    real estate loans
                
                $
                79
                
                
                2.53
                %
                $
                130
                
                
                2.70
                %Home
                    equity loans and lines
                
                
                368
                
                
                7.19
                %
                
                334
                
                
                6.69
                %Commercial
                    mortgage loans
                
                
                4,265
                
                
                53.51
                %
                
                3,771
                
                
                51.85
                %Construction
                    loans
                
                
                2,404
                
                
                25.86
                %
                
                2,362
                
                
                27.18
                %Commercial
                    and industrial loans
                
                
                1,590
                
                
                10.10
                %
                
                1,536
                
                
                10.77
                %Loans
                    to individuals
                
                
                149
                
                
                0.81
                %
                
                140
                
                
                0.81
                %Total
                    allowance
                
                $
                8,855
                
                
                100.00
                %
                $
                8,273
                
                
                100.00
                %(1)
                    Represents total of all outstanding loans in each category as
                    a percent of
                    total loans outstanding
  -23-




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


Changes
                  in Allowance for Loan Losses**For
                  the Six-Month Period Ended**
                **June
                  30,**2008
              
              
              2007(Dollars
                  in thousands)Balance
                  at the beginning of the period
              
              $
              8,273
              
              $
              6,945Charge-offs:Commercial
                  and industrial loans
              
              
              12
              
              
              88Commercial
                  real estate loans
              
              
              91
              
              
              -Construction,
                  acquisition and development
              
              
              569
              
              
              -Consumer
                  loans
              
              
              13
              
              
              4Total
                  charge-offs
              
              
              685
              
              
              92Recoveries
              
              
              1
              
              
              1Net
                  charge-offs
              
              
              684
              
              
              91Provision
                  for loan losses
              
              
              1,266
              
              
              682Balance
                  at the end of the period
              
              $
              8,855
              
              $
              7,536Total
                  loans outstanding at period-end
              
              $
              742,855
              
              $
              608,319Average
                  loans outstanding for the period
              
              $
              710,381
              
              $
              582,774Allowance
                  for loan losses tototal
                  loans outstanding
              
              
              1.19
              %
              
              1.24
              %Ratio
                  of net charge-offs to average loans outstanding
              
              
              0.10
              %
              
              0.02
              %





**LIQUIDITY
      AND CAPITAL RESOURCES**





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





As
      of
      June 30, 2008, liquid assets (cash and due from banks, interest-earning deposits
      with banks and investment securities available for sale) were approximately
      $117.4 million, which represents 13% of total assets and 18% of total deposits.
      Supplementing this liquidity, the Company has available lines of credit from
      various correspondent banks of approximately $249.0 million of which $150.9
      million is outstanding at June 30, 2008. At June 30, 2008, outstanding
      commitments for undisbursed lines of credit, letters of credit and undisbursed
      investment commitments amounted to approximately $184.5 million. Management
      intends to fund anticipated loan closings and operational needs through cash
      and
      cash equivalents on hand, brokered deposits, scheduled principal repayments
      from
      the loan and securities portfolios, and anticipated increases in deposits and
      borrowings. Certificates of deposits represented 59% of the Company’s total
      deposits at June 30, 2008 compared with 57% at December 31, 2007. The Company’s
      growth strategy will include marketing efforts focused at increasing the
      relative volume of low cost transaction deposit accounts; however, time deposits
      will continue to play an important role in the Company’s funding strategy.
      Certificates of deposit of $100,000 or more represented 47% and 42% of the
      Company’s total deposits at June 30, 2008 and December 31, 2007, respectively.
      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.





-24-


Under
      federal capital regulations, Crescent Financial Corporation must satisfy certain
      minimum leverage ratio requirements and risk-based capital requirements. At
      June
      30, 2008, the Company’s equity to asset ratio is 10.22%. The Company’s ratios of
      Tier 1 capital to risk-weighted assets and total capital to risk-based assets
      are 8.81% and 9.90%, respectively. The bank subsidiary is required to maintain
      capital adequacy ratios. Crescent State Bank has Tier I capital to
      risk-weighted assets and total capital to risk-based assets ratios of 8.99%
      and
      10.09%, respectively.





**IMPACT
      OF INFLATION AND CHANGING PRICES**





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





**FORWARD-LOOKING
      INFORMATION**





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





-25-


**Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk**





The
      Company’s primary market risk is interest rate risk. Interest rate risk is the
      result of differing maturities or repricing intervals of interest earning assets
      and interest bearing liabilities and the fact that rates on these financial
      instruments do not change uniformly. These conditions may impact the earnings
      generated by the Company’s interest earning assets or the cost of its interest
      bearing liabilities, thus directly impacting the Company’s overall earnings. The
      Company’s management actively monitors and manages interest rate risk. One way
      this is accomplished is through the development of and adherence to the
      Company’s asset/liability policy. This policy sets forth management’s strategy
      for matching the risk characteristics of the Company’s interest earning assets
      and liabilities so as to mitigate the effect of changes in the rate environment.
      The Company’s market risk profile has not changed significantly since December
      31, 2007.





**Item
      4. Controls and Procedures**





Crescent
      Financial Corporation’s management, with the participation of the Chief
      Executive Officer and Principal Financial Officer, has evaluated the
      effectiveness of the Company’s disclosure controls and procedures as of June 30,
      2008. Based on that evaluation, the Company’s Chief Executive Officer and
      Principal Financial Officer concluded that the Company’s disclosure controls and
      procedures were effective, as of June 30, 2008, to provide reasonable assurance
      that information required to be disclosed by the Company in the reports filed
      or
      submitted by it under the Exchange Act is recorded, processed, summarized and
      reported within the time periods specified in the SEC’s rules and forms, and to
      provide reasonable assurance that information required to be disclosed by the
      Company in such reports is accumulated and communicated to the Company’s
      management, including its principal executive officer and principal financial
      officer, as appropriate to allow timely decisions regarding required disclosure.





The
      Company assesses the adequacy of its internal control over financial reporting
      quarterly and enhances its controls in response to internal control assessments
      and internal and external audit and regulatory recommendations. There have
      been
      no changes in the Company’s internal controls during the quarter ended June 30,
      2008 or through the date of this Quarterly Report on Form 10-Q that have
      materially affected, or are reasonably likely to materially affect, the
      Company’s internal control over financial reporting.




-26-


**Part
              II.**
            **OTHER
                INFORMATION**  **Item
              1.**
            **Legal
              Proceedings.** None.  **Item
              1a.**
            **Risk
              Factors.** There have been no material changes
              in our
              risk factors from those disclosed in our Annual Report on Form 10-K
              for
              the year ended December 31, 2007.  **Item
              2.**
            **Unregistered Sales of Equity
              Securities and Use of Proceeds.** None.  **Item
              3.**
            **Defaults Upon Senior
              Debt.** None.  **Item
              4.**
            **Submission of Matters to a
              Vote of
              Security Holders** The Annual Meeting of the Stockholders
              was
              held on May 20, 2008. Of 9,496,531 shares entitled to vote at the meeting,
              7,575,687 shares voted. The following matters were voted on at the
              meeting:  1.Election
                of Directors
              
              The following individuals were
                elected to various terms:





Nominee
            Term
            For
            Against
            WithheldWilliam
                H. Cameron
            Three
                Years
            7,517,034
            -
            58,653Michael
                G. Carlton
            Three
                Years
            7,482,460
            -
            93,227Bruce
                I. Howell
            Three
                Years
            7,516,409
            -
            59,278James
                A. Lucas, Jr.
            Three
                Years
            7,507,856
            -
            67,831





The
      following directors continue in office after the meeting: Brent D. Barringer,
      Kenneth A. Lucas, Sheila Hale Ogle, Charles A. Paul, III, Jon S. Rufty, Francis
      R. Quis, Jr., Jon T. Vincent and Stephen K. Zaytoun.





2.  Ratification
      of Appointment of Independent Public Accountants





Management’s
      appointment of Dixon Hughes PLLC as the Company’s independent public accountants
      for 2008 was approved with 7,533,717 shares voting for, 28,129 shares voting
      against, and 13,841 shares abstaining.





**Item
              5.**
            **Other
                Information.** None.




-27-




**Item
      6.**  **Exhibits**





(a)  Exhibits.




31.1
      Certification of Principal Executive Officer pursuant to Rule 13a -
      14(a)





31.2
      Certification of Principal Financial Officer pursuant to Rule 13a -
      14(a)





32.1
      Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





32.2  Certification
      of Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant
      to
      Section 906 of the Sarbanes-Oxley Act of 2002




-28-





**SIGNATURES**





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





**CRESCENT
              FINANCIAL CORPORATION**Date:
              August 7, 2008
            By:
            /s/ Michael
              G. CarltonMichael
              G. CarltonPresident
                and Chief Executive Officer




Date:
                August 7, 2008
              By:
              /s/ Bruce
                W.
                ElderBruce
                W. ElderPrincipal
                  Financial Officer




-29-