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 March 31,
      2009





 ̈ 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
                (IRS
      Employer Identification Number)or
      organization)





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
 ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).  Yes  ̈        No
 ̈





Indicate
by check mark whetherthe 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  ̈
                
                Accelerated
      filer  ̈Non-accelerated
      filer  ̈
                
                Smaller
      reporting company x





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


Yes ̈                  Nox





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 9,626,559 shares outstanding as of May 14,
2009.









Page No.Part
      I.
                      FINANCIAL
      INFORMATIONItem
      1 -
                      Financial
      Statements (Unaudited)Consolidated
      Balance SheetsMarch 31, 2009 (unaudited) and December 31,
      2008
                      3Consolidated
      Statements of OperationsThree Months Ended March 31, 2009 and 2008
      (unaudited)
                      4Consolidated
      Statement of Stockholders’ EquityThree Months Ended March 31, 2009
      (unaudited)
                      5Consolidated
      Statements of Cash FlowsThree Months Ended March 31, 2009 and 2008
      (unaudited)
                      6Notes
      to Consolidated Financial Statements
                      7 – 13Item
      2 -
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      14 – 26Item
      3 -
                      Quantitative
      and Qualitative Disclosures about Market Risk
                      27Item
      4T -
                      Controls
      and Procedures
                      27Part
      II.
                      Other
      InformationItem
      1 -
                      Legal
      Proceedings
                      28Item
      1a -
                      Risk
      Factors
                      28Item
      2 -
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      28Item
      3 -
                      Defaults
      Upon Senior Debt
                      28Item
      4 -
                      Submission
      of Matters to a Vote of Security Holders
                      28Item
      5 -
                      Other
      Information
                      28Item
      6 -
                      Exhibits
                      28




- 2
-


Part
I. FINANCIAL INFORMATION


Item 1 - Financial
Statements





CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 CONSOLIDATED
BALANCE SHEETS





March 31, 2009
                                  
                                  
                                  December 31,(Unaudited)
                                  
                                  
                                  
                                  2008*ASSETSCash
      and due from banks
                                  
                                  $
                                  10,373,010
                                  
                                  
                                  $
                                  9,917,277Interest-earning
      deposits with banks
                                  
                                  
                                  24,236,356
                                  
                                  
                                  
                                  266,512Federal
      funds sold
                                  
                                  
                                  99,000
                                  
                                  
                                  
                                  99,000Investment
      securities available for sale, at fair value
                                  
                                  
                                  197,957,068
                                  
                                  
                                  
                                  105,648,618Loans
                                  
                                  
                                  787,656,893
                                  
                                  
                                  
                                  785,377,283Allowance
      for loan losses
                                  
                                  
                                  (13,855,000
                                  )
                                  
                                  
                                  (12,585,000
                                  )NET
      LOANS
                                  
                                  
                                  773,801,893
                                  
                                  
                                  
                                  772,792,283Accrued
      interest receivable
                                  
                                  
                                  4,206,731
                                  
                                  
                                  
                                  3,341,258Federal
      Home Loan Bank stock, at cost
                                  
                                  
                                  11,910,400
                                  
                                  
                                  
                                  7,264,000Bank
      premises and equipment, net
                                  
                                  
                                  11,841,899
                                  
                                  
                                  
                                  10,845,049Investment
      in life insurance
                                  
                                  
                                  17,010,932
                                  
                                  
                                  
                                  16,811,918Goodwill
                                  
                                  
                                  30,233,049
                                  
                                  
                                  
                                  30,233,049Other
      assets
                                  
                                  
                                  10,674,471
                                  
                                  
                                  
                                  11,091,784TOTAL
      ASSETS
                                  
                                  $
                                  1,092,344,809
                                  
                                  
                                  $
                                  968,310,748LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIESDepositsDemand
                                  
                                  $
                                  64,985,201
                                  
                                  
                                  $
                                  63,945,717Savings
                                  
                                  
                                  59,392,686
                                  
                                  
                                  
                                  58,833,876Money
      market and NOW
                                  
                                  
                                  134,159,836
                                  
                                  
                                  
                                  130,542,569Time
                                  
                                  
                                  473,065,896
                                  
                                  
                                  
                                  461,560,593TOTAL
      DEPOSITS
                                  
                                  
                                  731,603,619
                                  
                                  
                                  
                                  714,882,755Short-term
      borrowings
                                  
                                  
                                  114,758,000
                                  
                                  
                                  
                                  37,706,000Long-term
      borrowings
                                  
                                  
                                  121,748,000
                                  
                                  
                                  
                                  116,748,000Accrued
      expenses and other liabilities
                                  
                                  
                                  3,761,782
                                  
                                  
                                  
                                  3,882,385TOTAL
      LIABILITIES
                                  
                                  
                                  971,871,401
                                  
                                  
                                  
                                  873,219,140STOCKHOLDERS’
      EQUITYPreferred
      stock, no par value, 5,000,000 shares authorized, 24,900 shares issued and
      outstanding on March 31, 2009
                                  
                                  
                                  22,576,237
                                  
                                  
                                  
                                  -Common
      stock, $1 par value, 20,000,000 shares authorized; 9,626,559 shares
      outstanding March 31, 2009 and December 31, 2008
                                  
                                  
                                  9,626,559
                                  
                                  
                                  
                                  9,626,559Additional
      paid-in capital
                                  
                                  
                                  74,394,060
                                  
                                  
                                  
                                  74,349,299Warrants
                                  
                                  
                                  2,367,368
                                  
                                  
                                  
                                  -Retained
      earnings
                                  
                                  
                                  10,931,504
                                  
                                  
                                  
                                  10,488,628Accumulated
      other comprehensive income (Note D)
                                  
                                  
                                  577,680
                                  
                                  
                                  
                                  627,122TOTAL
      STOCKHOLDERS’ EQUITY
                                  
                                  
                                  120,473,408
                                  
                                  
                                  
                                  95,091,608COMMITMENTS
      (Note B)TOTAL
      LIABILITIES ANDSTOCKHOLDERS’ EQUITY
                                  
                                  $
                                  1,092,344,809
                                  
                                  
                                  $
                                  968,310,748




* Derived
from audited consolidated financial statements.




See
accompanying notes.




- 3
-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
 Three
Months Ended March 31, 2009 and 2008





2009
                          
                          
                          2008INTEREST
      INCOMELoans
                          
                          $
                          12,077,058
                          
                          
                          $
                          12,471,592Investment
      securities available for sale
                          
                          
                          1,999,023
                          
                          
                          
                          1,206,442Federal
      funds sold and interest-earning deposits
                          
                          
                          2,037
                          
                          
                          
                          43,634TOTAL
      INTEREST INCOME
                          
                          
                          14,078,118
                          
                          
                          
                          13,721,668INTEREST
      EXPENSEDeposits
                          
                          
                          5,242,936
                          
                          
                          
                          5,708,860Short-term
      borrowings
                          
                          
                          463,332
                          
                          
                          
                          116,679Long-term
      borrowings
                          
                          
                          1,140,459
                          
                          
                          
                          1,372,173TOTAL
      INTEREST EXPENSE
                          
                          
                          6,846,727
                          
                          
                          
                          7,197,712NET
      INTEREST INCOME
                          
                          
                          7,231,391
                          
                          
                          
                          6,523,956PROVISION
      FOR LOAN LOSSES
                          
                          
                          1,696,685
                          
                          
                          
                          806,395NET
      INTEREST INCOME AFTERPROVISION
      FOR LOAN LOSSES
                          
                          
                          5,534,706
                          
                          
                          
                          5,717,561NON-INTEREST
      INCOMEMortgage
      origination revenue and other loan fees
                          
                          
                          296,472
                          
                          
                          
                          171,908Fees
      on deposit accounts
                          
                          
                          388,002
                          
                          
                          
                          381,670Earnings
      on life insurance
                          
                          
                          207,455
                          
                          
                          
                          98,732Loss
      on disposal of assets
                          
                          
                          (25,500
                          )
                          
                          
                          (9,047
                          )Loss
      on impairment of nonmarketable equity security
                          
                          
                          (188,040
                          )
                          
                          
                          -Other
                          
                          
                          84,786
                          
                          
                          
                          165,286TOTAL
      NON-INTEREST INCOME
                          
                          
                          763,175
                          
                          
                          
                          808,549NON-INTEREST
      EXPENSESalaries
      and employee benefits
                          
                          
                          2,971,098
                          
                          
                          
                          2,804,130Occupancy
      and equipment
                          
                          
                          750,960
                          
                          
                          
                          662,716Data
      processing
                          
                          
                          449,500
                          
                          
                          
                          271,093Other
                          
                          
                          1,421,242
                          
                          
                          
                          1,283,239TOTAL
      NON-INTEREST EXPENSE
                          
                          
                          5,592,800
                          
                          
                          
                          5,021,178INCOME
      BEFORE INCOME TAXES
                          
                          
                          705,081
                          
                          
                          
                          1,504,932INCOME
      TAX EXPENSE
                          
                          
                          94,100
                          
                          
                          
                          504,600NET
      INCOME
                          
                          
                          610,981
                          
                          
                          
                          1,000,332Effective
      dividend on preferred stock (Note F)
                          
                          
                          168,105
                          
                          
                          
                          -Net
      income available to common shareholders
                          
                          $
                          442,876
                          
                          
                          $
                          1,000,332NET
      INCOME PER COMMON SHARE (Note C)Basic
                          
                          $
                          .05
                          
                          
                          $
                          .11Diluted
                          
                          $
                          .05
                          
                          
                          $
                          .10WEIGHTED
      AVERAGE COMMONSHARES
      OUTSTANDING (Note C)Basic
                          
                          
                          9,569,290
                          
                          
                          
                          9,417,694Diluted
                          
                          
                          9,581,873
                          
                          
                          
                          9,678,841


See
accompanying notes.
  - 4
-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)





AccumulatedAdditional
                                        
                                        
                                        
                                        
                                        
                                        otherPreferred stock
                                        
                                        
                                        Common stock
                                        
                                        
                                        
                                        
                                        
                                        paid-in
                                        
                                        
                                        Retained
                                        
                                        
                                        comprehensive
                                        
                                        
                                        TotalShares
                                        
                                        
                                        Amount
                                        
                                        
                                        Shares
                                        
                                        
                                        Amount
                                        
                                        
                                        Warrant
                                        
                                        
                                        capital
                                        
                                        
                                        earnings
                                        
                                        
                                        income (loss)
                                        
                                        
                                        equityBalance
      at December 31, 2008
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        
                                        9,626,559
                                        
                                        
                                        $
                                        9,626,559
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        74,349,299
                                        
                                        
                                        $
                                        10,488,628
                                        
                                        
                                        $
                                        627,122
                                        
                                        
                                        $
                                        95,091,608Comprehensive
      income:Net
      income
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        610,981
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        610,981Net
      unrealized holding loss on available for sale securities
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (49,442
                                        )
                                        
                                        
                                        (49,442
                                        )Total
      comprehensive income
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        561,539Expense
      recognized in connection with stock options and restricted
      stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        44,761
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        44,761Preferred
      stock transaction:Issuance
      of preferred stock
                                        
                                        
                                        24,900,000
                                        
                                        
                                        
                                        24,900,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        24,900,000Discount
      on preferred stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (2,367,368
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,367,368
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Accretion
      of discount
                                        
                                        
                                        -
                                        
                                        
                                        
                                        43,605
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (43,605
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Preferred
      stock dividend
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (124,500
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (124,500
                                        )Balance
      at March 31, 2009
                                        
                                        
                                        24,900,000
                                        
                                        
                                        $
                                        22,576,237
                                        
                                        
                                        
                                        9,626,559
                                        
                                        
                                        $
                                        9,626,559
                                        
                                        
                                        $
                                        2,367,368
                                        
                                        
                                        $
                                        74,394,060
                                        
                                        
                                        $
                                        10,931,504
                                        
                                        
                                        $
                                        577,680
                                        
                                        
                                        $
                                        120,473,408


See
accompanying notes.
 - 5
-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
 Three
Months Ended March 31, 2009 and 2008





2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                
                $
                610,981
                
                
                $
                1,000,332Adjustments
      to reconcile net income to net cash provided (used) by operating
      activities:Depreciation
                
                
                198,703
                
                
                
                177,511Provision
      for loan losses
                
                
                1,696,685
                
                
                
                806,395Amortization
      of core deposit premium
                
                
                33,337
                
                
                
                33,337Deferred
      income taxes
                
                
                169,812
                
                
                
                -Loss
      on impairment of nonmarketable equity security
                
                
                188,040
                
                
                
                -Loss
      on disposal of assets
                
                
                25,500
                
                
                
                -Net
      amortization (accretion) of premiums/discounts on
    securities
                
                
                174,807
                
                
                
                (30,657
                )Accretion
      of loan discount
                
                
                (109,955
                )
                
                
                (109,955
                )Amortization
      of deposit premium
                
                
                27,433
                
                
                
                46,387Net
      increase in cash value of life insurance
                
                
                (199,014
                )
                
                
                (87,439
                )Stock
      based compensation
                
                
                44,761
                
                
                
                49,087Change
      in assets and liabilities:(Increase)
      decrease in accrued interest receivable
                
                
                (865,473
                )
                
                
                494,077(Increase)
      decrease in other assets
                
                
                227,141
                
                
                
                (1,058,641
                )Increase
      (decrease) in accrued interest payable
                
                
                (200,578
                )
                
                
                18,567Increase
      (decrease) in other liabilities
                
                
                79,973
                
                
                
                (321,704
                )TOTAL
      ADJUSTMENTS
                
                
                1,491,172
                
                
                
                26,012NET
      CASH PROVIDED BY OPERATING ACTIVITIES
                
                
                2,102,153
                
                
                
                1,026,344CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of investment securities available for sale
                
                
                (99,722,331
                )
                
                
                (7,293,615
                )Principal
      repayments of investment securities available for sale
                
                
                7,158,615
                
                
                
                4,247,188Purchase
      of Federal Home Loan Bank stock
                
                
                (4,646,400
                )
                
                
                (248,300
                )Net
      increase in loans
                
                
                (2,791,339
                )
                
                
                (37,221,230
                )Purchases
      of bank premises and equipment
                
                
                (1,196,053
                )
                
                
                (2,058,031
                )NET
      CASH USED BY INVESTING ACTIVITIES
                
                
                (101,197,508
                )
                
                
                (42,573,988
                )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      increase (decrease) in deposits:Demand
                
                
                1,039,484
                
                
                
                (3,477,589
                )Savings
                
                
                558,810
                
                
                
                (21,534,545
                )Money
      market and NOW
                
                
                3,617,267
                
                
                
                25,792,897Time
      deposits
                
                
                11,477,871
                
                
                
                46,963,044Net
      increase (decrease) in short-term borrowings
                
                
                77,052,000
                
                
                
                (3,755,000
                )Net
      increase in long-term borrowings
                
                
                5,000,000
                
                
                
                -Proceeds
      from stock options exercised
                
                
                -
                
                
                
                127,787Proceeds
      from issuance of preferred stock
                
                
                24,900,000
                
                
                
                -Dividends
      paid on preferred stock
                
                
                (124,500
                )
                
                
                -Excess
      tax benefits from stock options exercised
                
                
                -
                
                
                
                17,400NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                
                
                123,520,932
                
                
                
                44,133,994NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                24,425,577
                
                
                
                2,586,350CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                
                
                10,282,789
                
                
                
                12,356,404CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                34,708,366
                
                
                $
                14,942,754




- 6
-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
A - BASIS OF PRESENTATION


In
management’s opinion, the financial information, which is unaudited, reflects
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the financial information as of and for the
three-month periods ended March 31, 2009 and 2008, in conformity with accounting
principles generally accepted in the United States of America. The financial
statements include the accounts of Crescent Financial Corporation (the
“Company”) and its wholly owned subsidiary, Crescent State Bank (the
“Bank”).  All significant inter-company transactions and balances are
eliminated in consolidation.  Operating results for the three-month
period ended March 31, 2009 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 2009.





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 2008 annual report on Form
10-K. This quarterly report should be read in conjunction with such annual
report.





NOTE
B - COMMITMENTS


At March
31, 2009, commitments are as follows:





Undisbursed
      lines of credit
                    
                    $
                    139,534,000Stand-by
      letters of credit
                    
                    
                    1,488,000Undisbursed
      commitment to purchase additionalinvestment
      in Small Business Investment Corporation
                    
                    
                    363,000Commitment
      to purchase when issued investment securities
                    
                    
                    1,066,000





NOTE
C - PER SHARE RESULTS


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, restricted stock and the common stock
warrant issued to the US Treasury and are determined using the treasury stock
method.




Three Months EndedMarch 31,2009
                
                
                2008Weighted
      average number of shares used in computing basic net income per
      share
                
                
                9,569,290
                
                
                
                9,417,694Effect
      of dilutive stock options and restricted stock
                
                
                12,583
                
                
                
                261,147Weighted
      average number of shares used in computing diluted net income per
      share
                
                
                9,581,873
                
                
                
                9,678,841


- 7
-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
C - PER SHARE RESULTS (Continued)


For the
three month period ended March 31, 2009, there were 542,527 options and the
warrant for 833,705 shares that were anti-dilutive.  For the three
month period ended March 31, 2008, there were 65,720 options that were
anti-dilutive.




NOTE
D - COMPREHENSIVE INCOME


For the
three months ended March 31, 2009 and 2008, total comprehensive income,
consisting of net income and unrealized gains (losses) on securities available
for sale, net of taxes, was approximately $561,000 and $1,627,000,
respectively.





NOTE
E - FAIR VALUE MEASUREMENT


The
Company records securities available for sale at fair value on a recurring
basis. Fair value is a market-based measurement and is defined as the price that
would be received to sell an asset, or paid to transfer a liability, in an
orderly transaction between market participants at the measurement date. See
NOTE F for discussion concerning new guidance for transactions that are not
orderly. The transaction to sell the asset or transfer the liability is a
hypothetical transaction at the measurement date, considered from the
perspective of a market participant that holds the assets or owes the liability.
In general, the transaction price will equal the exit price and, therefore,
represent the fair value of the asset or liability at initial recognition. In
determining whether a transaction price represents the fair value of the asset
or liability at initial recognition, each reporting entity is required to
consider factors specific to the transaction and the asset or liability, the
principal or most advantageous market for the asset or liability, and market
participants with whom the entity would transact in the market. In order to
determine the fair value or the exit price, entities must determine the unit of
account, highest and best use, principal market, and market participants. These
determinations allow the reporting entity to define the inputs for fair value
and level of hierarchy.





Outlined
below is the application of the fair value hierarchy to the Company’s financial
assets that are carried at fair value.





Level 1 –
inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets. An active market for the
asset or liability is a market in which the transactions for the asset or
liability occur with sufficient frequency and volume to provide pricing
information on an ongoing basis. As of March 31, 2009, the Company carried
certain marketable equity securities at fair value hierarchy Level
1.





Level 2 –
inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the
financial instrument. As of March 31, 2009, the types of financial assets and
liabilities the Company carried at fair value hierarchy Level 2 included
securities available for sale and impaired loans secured by real
estate.





Level 3 –
inputs to the valuation methodology are unobservable and significant to the fair
value measurement. Unobservable inputs are supported by little or no market
activity or by the entity’s own assumptions. As of March 31, 2009, while the
Company did not carry any financial assets or liabilities, measured on a
recurring basis, at fair value hierarchy Level 3, the Company did value certain
financial assets, measured on a non-recurring basis, at fair value hierarchy
Level 3.




- 8
-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
E - FAIR VALUE MEASUREMENT (Continued)


Fair
Value on a Recurring Basis.  The Company measures certain assets at
fair value on a recurring basis, as described below.





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.





The
Company utilizes valuation techniques that maximize the use of observable inputs
and minimize the use of unobservable inputs.





Fair
Value on a Nonrecurring Basis.  The Company measures certain assets at
fair value on a nonrecurring basis, as described below.





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.  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 March 31, 2009, substantially all of the total
impaired loans were evaluated based on the fair value of the collateral.
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 Company records the impaired loan or asset as nonrecurring
Level 2. When current 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 Company records the impaired loan
or asset as nonrecurring Level 3.   Of such loans, $20.1 million
had specific loss allowances aggregating $5.4 million at that
date.  Impaired loans totaled $16.7 million at December 31,
2008.  Of such loans, $11.6 million had specific loss allowances
aggregating $4.1 million at that date.





- 9
-





CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
E - FAIR VALUE MEASUREMENT (Continued)


Foreclosed
Real Estate


Foreclosed
assets are adjusted to fair value upon transfer of the loans to foreclosed
assets. Subsequently, foreclosed 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 Company 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 Company records
the foreclosed asset as nonrecurring Level 3.





Below is
a table that presents information about assets measured at fair value at March
31, 2009 and December 31, 2008:





Fair Value Measurements atMarch 31, 2009, UsingTotal CarryingAmount in The
                
                
                
                
                
                Quoted Prices
                
                
                SignificantConsolidated
                
                
                Assets/Liabilities
                
                
                in Active
                
                
                Other
                
                
                SignificantBalance
                
                
                Measured at
                
                
                Markets for
                
                
                Observable
                
                
                UnobservableSheet
                
                
                Fair Value
                
                
                Identical Assets
                
                
                Inputs
                
                
                InputsDescription
                
                3/31/2009
                
                
                3/31/2009
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)Securities
      available for sale
                
                $
                197,957,068
                
                
                $
                197,957,068
                
                
                $
                303,732
                
                
                $
                197,653,336
                
                
                $
                -Foreclosed
      real estate
                
                
                1,911,207
                
                
                
                1,911,207
                
                
                
                -
                
                
                
                -
                
                
                
                1,911,207Impaired
      loans
                
                
                14,680,246
                
                
                
                14,680,246
                
                
                
                -
                
                
                
                14,546,455
                
                
                
                133,791





Fair Value Measurements atDecember 31, 2008, UsingTotal CarryingAmount in The
                
                
                
                
                
                Quoted Prices
                
                
                SignificantConsolidated
                
                
                Assets/Liabilities
                
                
                in Active
                
                
                Other
                
                
                SignificantBalance
                
                
                Measured at
                
                
                Markets for
                
                
                Observable
                
                
                UnobservableSheet
                
                
                Fair Value
                
                
                Identical Assets
                
                
                Inputs
                
                
                InputsDescription
                
                3/31/2009
                
                
                3/31/2009
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)Securities
      available for sale
                
                $
                105,648,618
                
                
                $
                105,648,618
                
                
                $
                490,753
                
                
                $
                105,157,865
                
                
                $
                -Foreclosed
      real estate
                
                
                1,716,207
                
                
                
                1,716,207
                
                
                
                -
                
                
                
                -
                
                
                
                1,716,207Impaired
      loans
                
                
                7,556,644
                
                
                
                7,556,644
                
                
                
                -
                
                
                
                6,787,739
                
                
                
                768,905




- 10
-





CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
F - CUMULATIVE PERPETUAL PREFERRED STOCK


Under the
United States Treasury’s Capital Purchase Program (CPP), the Company issued
$24.9 million in Fixed Rate Cumulative Perpetual Preferred Stock, Series A, on
January 9, 2009.  In addition, the Company provided a warrant to the
Treasury to purchase 833,705 shares of the Company’s common stock at an exercise
price of $4.48 per share.  These warrants are immediately exercisable
and expire ten years from the date of issuance.  The preferred stock
is non-voting, other than having class voting rights on certain matters, and
pays cumulative dividends quarterly at a rate of 5% per annum for the first five
years and 9% per annum thereafter.  The preferred shares are
redeemable at the option of the Company subject to regulatory
approval.





Based on
a Black-Scholes options pricing model, the common stock warrants have been
assigned a fair value of $2.28 per share or $2.4 million in the aggregate as of
January 9, 2009.  Based on relative fair value, $2.4 million has been
recorded as the discount on the preferred stock and will be accreted as a
reduction in net income available for common shareholders over the next five
years at approximately $0.5 million per year.  Correspondingly, $22.5
million has been assigned to the preferred stock.  Through the
discount accretion over the next five years, the preferred stock will be
accreted up to the redemption amount of $24.9 million.  For purposes
of these calculations, the fair value of the common stock warrant as of January
9, 2009 was estimated using the Black-Scholes option pricing model and the
following assumptions:





Risk-free
      interest rate
                  
                  
                  2.49
                  %Expected
      life of warrants
                  
                  10 yearsExpected
      dividend yield
                  
                  
                  0.00
                  %Expected
      volatility
                  
                  
                  37.27
                  %





The
Company’s computation of expected volatility is based on daily historical
volatility since January 1999.  The risk-free interest rate is based
on the market yield for ten year U.S. Treasury securities as of January 9,
2009.





As a
condition of the CPP, the Company must obtain consent from the United States
Department of the Treasury to repurchase its common stock or to pay a cash
dividend on its common stock.  Furthermore, the Company has agreed to
certain restrictions on executive compensation and corporate
governance.





NOTE
G - RECENT ACCOUNTING PRONOUNCEMENTS


In
December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combinations, (“SFAS
No. 141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes
principles and requirements for recognition and measurement of assets,
liabilities and any noncontrolling interest acquired due to a business
combination. SFAS No. 141(R) expands the definitions of a business and a
business combination, resulting in an increased number of transactions or other
events that will qualify as business combinations. Under SFAS No. 141(R) the
entity that acquires the business (the “acquirer”) will record 100 percent
of all assets and liabilities of the acquired business, including goodwill,
generally at their fair values. As such, an acquirer will not be permitted to
recognize the allowance for loan losses of the acquiree. SFAS No. 141(R)
requires the acquirer to recognize goodwill as of the acquisition date, measured
as a residual.


In most
business combinations, goodwill will be recognized to the extent that the
consideration transferred plus the fair value of any noncontrolling interests in
the acquiree at the acquisition date exceeds the fair values of the identifiable
net assets acquired. Under SFAS No. 141(R), acquisition-related transaction and
restructuring costs will be expensed as incurred rather than treated as part of
the cost of the acquisition and included in the amount recorded for assets
acquired. SFAS No. 141(R) is effective for fiscal years beginning after
December 15, 2008. The adoption of SFAS No. 141(R) on January 1, 2009, had
no effect on the Company’s consolidated financial statements.


- 11
-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
G - RECENT ACCOUNTING PRONOUNCEMENTS (continued)


In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51, which defines
noncontrolling interest as the portion of equity in a subsidiary not
attributable, directly or indirectly, to the parent. SFAS No. 160 requires the
ownership interests in subsidiaries held by parties other than the parent
(previously referred to as minority interest) to be clearly presented in the
consolidated statement of financial position within equity, but separate from
the parent’s equity. The amount of consolidated net income attributable to the
parent and to any noncontrolling interest must be clearly presented on the face
of the consolidated statement of income. Changes in the parent’s ownership
interest while the parent retains its controlling financial interest (greater
than 50 percent ownership) are to be accounted for as equity transactions. Upon
a loss of control, any gain or loss on the interest sold will be recognized in
earnings. Additionally, any ownership interest retained will be remeasured at
fair value on the date control is lost, with any gain or loss recognized in
earnings. SFAS No. 160 is effective for fiscal years beginning after
December 15, 2008. Accordingly, the Company will adopt the provisions of
SFAS No. 160 in the first quarter C2009.
The adoption of SFAS No. 160 on January 1, 2009, had no effect on the Company’s
consolidated financial statements.





In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133.  SFAS No. 161 applies to all derivative
instruments and related hedged items accounted for under SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 161 requires entities to
provide greater transparency about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under SFAS No. 133 and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, results of operations and cash flows. To meet those
objectives, SFAS No. 161 requires (1) qualitative disclosures about
objectives for using derivatives by primary underlying risk exposure (e.g.,
interest rate, credit or foreign exchange rate) and by purpose or strategy (fair
value hedge, cash flow hedge, net investment hedge, and non-hedges),
(2) information about the volume of derivative activity in a flexible
format that the preparer believes is the most relevant and practicable,
(3) tabular disclosures about balance sheet
location and gross fair value amounts of derivative instruments, income
statement and other comprehensive income location of gain and loss amounts on
derivative instruments by type of contract, and (4) disclosures about
credit-risk related contingent features in derivative agreements. SFAS No. 161
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. Accordingly, the Company adopted
the provisions of SFAS No. 161 in the first quarter 2009. The adoption of SFAS
No. 161 on January





In
April 2009, the FASB issued the following three FSPs intended to provide
additional application guidance and enhance disclosures regarding fair value
measurements and impairments of securities:




- 12
-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
G - RECENT ACCOUNTING PRONOUNCEMENTS (continued)


FSP FAS
157-4, Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly, provides additional guidance for estimating fair value in
accordance with SFAS No. 157 when the volume and level of activity for the
asset or liability have decreased significantly.  FSP FAS 157-4 also
provides guidance on identifying circumstances that indicate a transaction is
not orderly.  The provisions of FSP FAS 157-4 are effective for the
Company’s interim period ending on June 30, 2009.  Management is
currently evaluating the effect that the provisions of FSP FAS 157-4 may have on
the Company’s consolidated financial statements.





FSP FAS
107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments, requires
disclosures about fair value of financial instruments in interim reporting
periods of publicly traded companies that were previously only required to be
disclosed in annual financial statements.  The provisions of FSP FAS 107-1
and APB 28-1 are effective for the Company’s interim period ending on
June 30, 2009.  As FSP FAS 107-1 and APB 28-1 amends only the
disclosure requirements about fair value of financial instruments in interim
periods, the adoption of FSP FAS 107-1 and APB 28-1 is not expected to affect
the Company’s statement of operations and balance sheet.





FSP FAS
115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, amends current other-than-temporary
impairment guidance in GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements.  This FSP does not amend existing recognition and measurement
guidance related to other-than-temporary impairments of equity securities. 
The provisions of FSP FAS 115-2 and FAS 124-2 are effective for the Company’s
interim period ending on June 30, 2009.





Management
is currently evaluating the effect that the provisions of FSP FAS 115-2 and FAS
124-2 may have on the Company’s consolidated financial statements.




Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies are not expected to have a material impact on the
Company’s financial position, results of operations and cash flows.





NOTE
H - GOODWILL IMPAIRMENT


Pursuant
to SFAS No. 142, Goodwill and Other Intangible Assets, goodwill must be tested
for impairment each year.  An impairment test can be performed at any
date, as long as it is consistently used each year.  In 2008, the
Company changed its annual testing date from December 31 to October
31.  If certain events occur prior to the annual impairment date,
interim impairment tests are required to be performed.  Due to a
further deterioration in stock price and economic conditions between October 31
and December 31, 2008, additional impairment testing was performed and goodwill
was determined to not be impaired.  Given the continued trading range
of the Company’s stock price during the first three months of 2009, management
re-evaluated and updated the goodwill impairment test performed at December 31,
2008, concluding that sufficient evidence existed where goodwill remained not
impaired as of March 31, 2009.  The Company will continue to monitor
stock price, financial performance and general economic conditions and perform
additional testing to evaluate the possible impairment of goodwill as
necessary.




- 13
-


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





Management’s
discussion and analysis is intended to assist readers in the understanding and
evaluation of the financial condition and consolidated results of operations of
Crescent Financial Corporation (the “Company”). The analysis includes detailed
discussions for each of the factors affecting Crescent Financial Corporation’s
operating results and financial condition for the periods ended March 31, 2009
and 2008. It should be read in conjunction with the audited consolidated
financial statements and accompanying notes included in this report and the
supplemental financial data appearing throughout this discussion and analysis.
Because the Company has no operations and conducts no business on its own other
than owning Crescent State Bank, the discussion contained in this Management's
Discussion and Analysis concerns primarily the business of the Bank. However,
for ease of reading and because the financial statements are presented on a
consolidated basis, the Company and the Bank are collectively referred to herein
as the Company unless otherwise noted.  All significant intercompany
transactions and balances are eliminated in consolidation.





COMPARISON
OF FINANCIAL CONDITION AT MARCH 31, 2009 AND


DECEMBER
31, 2008





Total
assets increased by $124.0 million to $1.1 billion at March 31, 2009 from $968.3
million at December 31, 2008.  At March 31, 2009, earning assets are
$1.0 billion or 94% of total assets compared to $898.7 million or 92% at
December 31, 2008.   Components of earning assets at March 31,
2009 are $787.7 million in gross loans, $209.9 million in investment securities
and Federal Home Loan Bank (FHLB) stock and $24.3 in overnight investments and
interest bearing deposits with correspondent banks.  Earning assets at
December 31, 2008 consisted of $785.4 million in gross loans, $112.9 million in
investment securities and FHLB stock and $366,000 in overnight investments and
interest bearing deposits. Total deposits and stockholders’ equity at March 31,
2009 were $731.6 million and $120.5 million, respectively, compared to $714.9
million and $95.1 million at December 31, 2008.





During
the first quarter of 2009, gross loans outstanding increased by $2.3 million or
0.29%. In conjunction with a core data processing conversion occurring in early
March, we have reclassified certain loans within our portfolio so that reporting
is more consistent with the collateral of a particular loan rather than the
purpose.  For instance, loans secured by homes purchased as investment
property were previously reported as commercial real estate whereas they are now
reported as residential real estate mortgages.  Loans secured by
commercial building lots were previously reported as commercial real estate and
are now reported as construction and land development.  As a result,
the comparison of the loan compositions at March 31, 2009 and December 31, 2008
can be misleading.    Reclassifications of loan types
through the conversion process resulted in $164.6 million of commercial real
estate loans and $2.1 million consumer loans being shifted to $81.8 million of
construction and land development, $70.7 million residential mortgages, $9.3
million home equity loans and $4.9 million commercial and
industrial.  When considering these reclassifications, the net growth
in the portfolio for the quarter by category was as follows: increases in
commercial real estate, residential mortgage, home equity lines and loans and
consumer loans of $8.4 million, $3.6 million, $1.2 million and $1.5 million,
respectively, and a decrease in construction and land development of $12.4
million. The composition of the loan portfolio, by category, as of March 31,
2009 is 40% commercial mortgage loans, 29% construction loans, 12% residential
mortgage loans. 10% commercial loans, 8% home equity loans and lines, and 1%
consumer loans.  The composition of the loan portfolio, by category,
as of December 31, 2008 and before conversion was 60% commercial mortgage loans,
20% construction loans, 10% commercial loans, 7% home equity loans and lines, 2%
residential real estate mortgage loans and 1% consumer loans.




- 14
-


The
Company had an allowance for loan losses at March 31, 2009 of $13.9 million or
1.76% of outstanding loans compared to $12.6 million or 1.60% at
December 31, 2008.  At March 31, 2009, there were fifty-five
loans totaling $16.4 million in non-accrual status.  Thirty-one loans
totaling $5.4 million represent one borrowing relationship.  Of the
$16.4 million in non-accrual loans, $5.8 million are one-to-four family
residential.  There were two loans past due 90 days or more totaling
$4,000 that were still accruing interest at March 31,
2009.  Non-performing loans as a percentage of total loans at March
31, 2009 were 2.08%.  At December 31, 2008, there were fifty loans
totaling approximately $13.1 million in non-accrual
status.  Thirty-five of those loans totaling approximately $5.7
million represent one borrowing relationship. Of the remaining $7.4 million, an
additional $4.5 million of loans were to land developers or residential
builders.  The remaining $2.9 million of non-accrual loans were spread
between commercial loans and residential investment properties.  The
percentage of non-performing loans to total loans at December 31, 2008 was
1.67%.  For a more detailed discussion, see the section entitled
Non-Performing Assets.





The
Company has investment securities with an amortized cost of $197.0 million at
March 31, 2009.  All investments are accounted for as available for
sale and are presented at their fair market value of $198.0 million compared
with $105.6 million at year-end 2008.    The Company’s
investment securities at March 31, 2009, consist of U.S. Government agency
securities, collateralized mortgage obligations, mortgage-backed securities,
municipal bonds and marketable equity securities.  The increase during
the first three months of 2009 was the net result of $99.7 million in new
purchases, a $128,000 decrease in the fair value of the portfolio and $175,000
in net amortization of premiums, less $7.2 million in principal re-payments and
called principal.  The Company implemented a leverage strategy to
offset the impact on earnings per share anticipated as a result of having to pay
dividends on the investment made by the US Treasury pursuant to the Capital
Purchase Plan (CPP).  While the funds received through the CPP has
been allocated for the purpose of making loans to purchasers of completed
properties held in inventory by our residential construction customers, an
amount equal to the CPP funds was leveraged four times and used to purchase
investment securities. The additional spread earned on the strategy will offset
reduction in earnings per share for common shareholders due to payment of the
preferred dividend.





The
Company owns $11.9 million of Federal Home Loan Bank stock at March 31, 2009
compared to $7.3 million at December 31, 2008.  The increase was
required due to the increased level of borrowing necessitated by the leverage
strategy discussed above.





There
were $99,000 in Federal funds sold at both March 31, 2009 and December 31,
2008.  These funds are required as a compensating balance with one of
our correspondent banking relationships.





Interest-earning
deposits held at correspondent banks increased by approximately $24.0 million
from $267,000 at December 31, 2008 to $24.2 million at March 31,
2009.  In conjunction with its actions designed to stabilize the
banking industry, the Federal Reserve Bank begin to pay interest on excess funds
on deposit.  This rate is 0.25% as opposed to the Fed funds rate from
correspondent banks that fluctuates based on demand.  These funds were
parked in overnight investments as opposed to being invested in more permanent
earning assets due to the maturity of certain deposit obligations expected in
early second quarter.





Non-earning
and other assets increased by approximately $2.1 million between December 31,
2008 and March 31, 2009.  Bank premises and equipment increased by
$1.0 million as we completed building construction and finished the build-out on
a branch opened in early April 2009.  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
$456,000.  For more details regarding the increase in cash and cash
equivalents, see the Consolidated Statement of Cash Flows.  There was
a net increase in other real estate owned of $195,000 which was comprised of a
new foreclosed property of $220,000 less a write-down on an existing property of
$25,000.  Additionally, The Company recorded a write-down of $188,000
on a non-marketable equity security due to other than temporarily
impairment.




- 15
-


Total
deposits increased by $16.7 million between December 31, 2008 and March 31, 2009
from $714.9 million to $731.6 million.  The largest dollar increase
occurred in the time deposit category, which grew by $11.5 million or 3% to
$473.1 million at March 31, 2009 from $461.6 million at year end
2008.  Interest-bearing demand deposit balances increased by $11.3
million or 26% to $53.9 million, non-interest bearing demand deposits increased
by $1.0 million or 1% to $65.0 million and savings deposits increased by
$559,000 or 1% to $59.4 million.   During January, we lost one
account with a $14.0 million balance which contributed to a quarterly decline in
money market of $7.6 million from $87.9 million to $80.3 million.





The
composition of the deposit base, by category, at March 31, 2009 is as follows:
65% time deposits, 11% money market, 9% non-interest-bearing demand deposits, 8%
statement savings accounts and 7% interest-bearing demand
deposits.  The composition of the deposit base, by category, at
December 31, 2008 was 65% time deposits, 12% money market, 9%
non-interest-bearing demand deposits, 8% in statement savings and 6% in
interest-bearing demand deposits.  Time deposits of $100,000 or more
totaled $378.1 million at March 31, 2009 compared to $359.3 million at December
31, 2008.  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 $251.2
million at March 31, 2009 compared with $256.1 million at December 31,
2008.





The
Company had total borrowings of $236.5 million at March 31, 2009 compared with
$154.5 million at December 31, 2008.  The composition of borrowings at
March 31, 2009 is $106.0 million in long-term advances and $114.0 million in
short-term advances from the Federal Home Loan Bank of Atlanta (FHLB), $8.2
million in junior subordinated debt issued to an unconsolidated subsidiary, $7.5
million in a subordinated term loan issued to a non-affiliated financial
institution and $758,000 in federal funds purchased from a correspondent
bank.  Borrowings at December 31, 2008 included $99.0 million in
long-term FHLB advances, $29.0 million in short-term FHLB advances, $8.2 million
in junior subordinated debt, $7.5 million in a subordinated term loan, $2.0
million outstanding on a holding company line of credit and $8.7 million in
federal funds purchased.  Of the $82.0 million increase in total
borrowings, $75.0 million in short-term advances were attributable to the
leverage strategy previously discussed.





Accrued
interest payable and other liabilities decreased by $121,000 and were $3.8
million and $3.9 million at March 31, 2000 and December 31, 2008,
respectively.





Between
December 31, 2008 and March 31, 2009, total stockholders’ equity increased by
$25.4 million. On January 9, 2009, the Company issued $24.9 million in Fixed
Rate Cumulative Perpetual Preferred Stock, Series A under the US Treasury’s
Capital Purchase Program.  In addition, the Company provided warrants
to purchase 833,705 shares of the Company’s common stock at an exercise price of
$4.48 per share.  The warrant is immediately exercisable and expire
ten years from the date of issuance.  The preferred stock is
non-voting, other than having class voting rights on certain matters, and pays
cumulative dividends quarterly at a rate of 5% per annum for the first five
years and 9% thereafter.  The preferred shares are redeemable at the
option of the Company subject to regulatory approval.




- 16
-


COMPARISON
OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2009 AND
2008





Net Income.Net
income available to common shareholders for the three-month period ended March
31, 2009 was $443,000 or $0.05 per diluted share compared with $1.0 million or
$0.10 per diluted share for the three-month period ended March 31,
2008.  Net income before the preferred dividend was
$611,000.  Annualized return on average assets and equity for the
current period were 0.24% and 2.08%, respectively, compared with 0.47% and 3.97%
for the prior period.  Despite significant balance sheet growth over
the past 12 months, the performance ratios have been impacted by net interest
margin compression and increases in both loan loss provision and non-interest
expenses.





Net Interest
Income.  Net interest income increased by almost $707,000 or
11% from $6.5 million to $7.2 million for the three-month period ended March 31,
2009.  Total interest income benefited from a higher volume of earning
assets despite a lower yield earned on those assets. Total interest expense from
deposits and other borrowings decreased despite the higher volume of
interest-bearing liabilities due to the steady repricing of fixed rated time
deposits and borrowings in response to the 400 basis point drop in short-term
interest rates during 2008.  The decline in short-term rates over the
past twelve months resulted in the contraction of the net interest
margin.  Lower margins and the overhead costs associated with branch
expansion and personnel growth led to a decline in earnings.





Total
average earning assets increased by more than $183.8 million or 23% from an
average of $802.0 million for the prior year three-month period to an average of
$985.8 million for the three-month period ended March 31, 2009. The average
balance of loans outstanding increased by $92.1 million to $788.8 million at
March 31, 2009, a 13% increase over the $696.7 million of average outstanding
loans for the prior period.  The average balance of the investment
securities portfolio for the current period was $191.9 million, increasing by
$92.1 million or 92% compared to an average of $99.8 million at March 31,
2008.  The significant increase in average balances for investment
securities was due to the leverage strategy previously discussed. The average
balance of federal funds sold and other earning assets decreased from $5.5
million for the prior three-month period to $5.0 million for the current
period.





Average
interest-bearing liabilities increased by $170.5 million or 24% from $701.5
million for the quarter ended March 31, 2008 to $872.0 million for the current
quarter.  The total increase is comprised of a $77.4 million increase
in interest bearing deposits and a $93.1 million increase in borrowed
funds.   Time deposits experienced the largest increase of the
interest-bearing deposit group increasing $82.0 million to $461.5 million during
the current year period compared to $379.5 million for the prior
period.  Short-term borrowings increased by $93.2 million from $13.1
million to $106.3 million due to the leverage strategy discussed
earlier.





Total
interest income increased by $356,000 million or 3%.  The increase is
comprised of $2.5 million due to the growth in total average earning assets and
a $2.1 million decrease due to lower yields realized on earning
assets.  Total interest expense for the current period declined by
$351,000.  The decrease is the net result of a $1.4 million increase
due to growth in interest-bearing funds and a $1.8 million decrease due to the
lower interest rate environment.





Net
interest margin is interest income earned on loans, securities and other earning
assets, less interest expense paid on deposits and borrowings, expressed as a
percentage of total average earning assets.  The net interest margin
for the three-month period ended March 31, 2009 was 2.98% compared to 3.27% for
the three-month period ended March 31, 2008.  The average yield on
earning assets for the current three-month period declined 109 basis points to
5.79% compared with 6.88% for the prior year period, while the average cost of
interest-bearing funds decreased by 95 basis points to 3.18% from
4.13%.  The interest rate spread, which is the difference between the
average yield on earning assets and the cost of interest-bearing liabilities,
decreased by 14 basis points from 2.75% for the quarter ended March 31, 2008 to
2.61% for the quarter ended March 31, 2009.  The percentage of
interest earning assets to average interest-bearing liabilities declined to
113.04% from 114.32%.




- 17
-


Between
September 1, 2007 and December 17, 2008, the Federal Reserve (the “Fed”) reduced
short-term interest rates ten times for a total of 500 basis
points.  Prior to September 2007, rates had been stable since July
2006.  The Fed’s rate reductions were more pronounced than the
“measured” 25 basis point increments used when increasing the Federal funds rate
from 1% to 5.25% back in 2004 to 2005 and have been directed toward addressing
the poor economic conditions being experienced throughout the
country.





Approximately
49% 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 fallen, variable rate loans have repriced downward
resulting in a lower yield on average earning assets.  The Company has
shifted its strategic focus from a growth orientation to a more
performance-related orientation.  While loan demand remains good, we
are being more disciplined with our loan pricing and as a result, the loan
portfolio growth will not match the prior growth rates in the foreseeable
future.  This should result in better yields on earning assets and
less reliance on supporting that growth with wholesale forms of
funding.  While we attempt to focus on local market relationships, we
will not lose sight that, from time to time, wholesale forms of funding make
more sense from an economic standpoint.





Many
economists believe that we will continue to be in a stable rate environment for
some extended period of time.  The Company expects that net interest
margin will continue to expand in the coming months as approximately 57% of our
time deposit portfolio carrying a weighted average rate of 3.69% matures and is
subject to being renewed at lower rates.  We believe there is very
little probability that rates will fall further.  In the spring of
2008, we began to implement interest rate floors on many of our new and renewing
variable rate loans.  Short-term interest rates must increase by 250
to 300 basis points before the calculated rate of the variable loans surpasses
the current floor.





Provision for Loan Losses.The
Company’s provision for loan losses for the three-month period ended March 31,
2009 was $1.7 million compared to $806,000 for the prior year
period.  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 continuing credit
quality issues resulting from the current economic conditions in our markets.
The allowance for loan losses was $13.9 million at March 31, 2009, representing
1.76% of total outstanding loans.  See the sections on Nonperforming
Assets and Analysis of Allowance for Loan Losses for additional
details.





Non-Interest Income.For the
three-month period ended March 31, 2009, non-interest income decreased by
$46,000 to $763,000 compared to $809,000 for the same period in
2008.





The
Company recorded increases of $125,000 in brokered mortgage loan origination
fees, $109,000 in earnings on life insurance and $6,000 in customer service fees
and service charges on deposit accounts.  Other non-interest income
fell by $80,000 due primarily to $72,000 of non-recurring income recorded in the
first quarter of 2008 related to a recovery of a previously charged-off deposit
account.  Due to the volatility in the stock market, revenue from
brokerage referrals declined by $15,000.  For the quarter ended March
31, 2009, the Company recorded a $25,500 write-down of other real estate owned
and a $188,000 loss on the impairment of a non-marketable equity
security.


- 18
-


Non-Interest Expenses.Non-interest expenses were $5.6 million for the three-month period ended
March 31, 2009 compared with $5.0 million for the same period ended March 31,
2008.  The major categories of non-interest expense experiencing
increases include personnel, occupancy, data processing and FDIC deposit
insurance assessments.





The
largest component of non-interest expense for the current period was personnel
expense.  Salaries and benefits expense increased by $167,000 or 6% to
$3.0 million for the current year period compared to $2.8 million for the same
period in the prior year.  We have added personnel for one branch
office opened on March 31, 2008 and hired additional people in several
operational support departments.





Occupancy
and equipment expenses increased by $88,000 or 13% from $663,000 for the
three-month period ended March 31, 2008 to $751,000 for the current year
period.   Data processing expenses increased by $178,000 or 66%
from $271,000 to $449,000.  During the first quarter of 2009, the
Company converted all core and ancillary data processing systems to a new
provider.  The non-recurring, one-time costs associated with the
conversion were approximately $235,000 of which $156,000 was recorded in data
processing, $40,000 was consulting, $26,000 was printing and postage for various
communications to customers and $13,000 was employee travel and training
expense.  The after-tax impact of the conversion was approximately
$144,000. Deposit insurance assessments from the Federal Deposit Insurance
Corporation increased by $153,000 or 159% over insurance expense for the prior
year.





Other
non-interest expenses increased by $138,000 to $1.4 million for the first
quarter of 2009 compared with $1.3 million for the prior year
quarter.  The $153,000 increase of FDIC deposit insurance premiums
discussed above is included in other non-interest expenses on the face of the
income statement.  The remainder of other non-interest expenses, the
largest of which include professional fees and services, office supplies and
printing, advertising, and loan related fees, declined by
$15,000.  Management will continue to emphasize cost control over
non-interest expenses.





Provision for Income Taxes.The Company recorded income tax expense of $94,000 for the three-months
ended March 31, 2009 compared with $505,000 for the prior year
period.  The effective tax rate for the three-month period ended March
31, 2009 was 13% compared with 34% for the prior year period.  The
decrease in the effective tax rate is attributable to the larger percentage of
income coming from tax exempt sources.




- 19
-




NET
INTEREST INCOME





Net
interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (1) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities (“interest rate spread”) and (2) the relative
amounts of interest-earning assets and interest-bearing liabilities (“net
interest-earning balance”). The following tables set forth information relating
to average balances of the Company's assets and liabilities for the three-month
periods ended March 31, 2009 and 2008. 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 March 31,2009
                                                                      
                                                                      
                                                                      2008Average
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      Average
                                                                      
                                                                      
                                                                      Average
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      AverageBalance
                                                                      
                                                                      
                                                                      Interest
                                                                      
                                                                      
                                                                      Yield/Cost
                                                                      
                                                                      
                                                                      Balance
                                                                      
                                                                      
                                                                      Interest
                                                                      
                                                                      
                                                                      Yield/Cost(Dollars
      in thousands)Interest-earnings assetsLoan
      portfolio
                                                                      
                                                                      $
                                                                      788,810
                                                                      
                                                                      
                                                                      $
                                                                      12,077
                                                                      
                                                                      
                                                                      
                                                                      6.21
                                                                      %
                                                                      
                                                                      $
                                                                      696,751
                                                                      
                                                                      
                                                                      $
                                                                      12,472
                                                                      
                                                                      
                                                                      
                                                                      7.20
                                                                      %Investment
      securities
                                                                      
                                                                      
                                                                      191,909
                                                                      
                                                                      
                                                                      
                                                                      1,999
                                                                      
                                                                      
                                                                      
                                                                      4.17
                                                                      %
                                                                      
                                                                      
                                                                      99,768
                                                                      
                                                                      
                                                                      
                                                                      1,206
                                                                      
                                                                      
                                                                      
                                                                      4.84
                                                                      %Fed
      funds and other interest-earning assets
                                                                      
                                                                      
                                                                      5,036
                                                                      
                                                                      
                                                                      
                                                                      2
                                                                      
                                                                      
                                                                      
                                                                      0.16
                                                                      %
                                                                      
                                                                      
                                                                      5,479
                                                                      
                                                                      
                                                                      
                                                                      44
                                                                      
                                                                      
                                                                      
                                                                      3.23
                                                                      %Total
      interest-earning assets
                                                                      
                                                                      
                                                                      985,755
                                                                      
                                                                      
                                                                      
                                                                      14,078
                                                                      
                                                                      
                                                                      
                                                                      5.79
                                                                      %
                                                                      
                                                                      
                                                                      801,998
                                                                      
                                                                      
                                                                      
                                                                      13,722
                                                                      
                                                                      
                                                                      
                                                                      6.88
                                                                      %Noninterest-earning
      assets
                                                                      
                                                                      
                                                                      67,692
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      63,016Total
      Assets
                                                                      
                                                                      $
                                                                      1,053,447
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      $
                                                                      865,014Interest-bearing
liabilitiesInterest-bearing
      NOW
                                                                      
                                                                      $
                                                                      42,771
                                                                      
                                                                      
                                                                      
                                                                      96
                                                                      
                                                                      
                                                                      
                                                                      0.91
                                                                      %
                                                                      
                                                                      $
                                                                      32,973
                                                                      
                                                                      
                                                                      
                                                                      21
                                                                      
                                                                      
                                                                      
                                                                      0.26
                                                                      %Money
      market and savings
                                                                      
                                                                      
                                                                      140,333
                                                                      
                                                                      
                                                                      
                                                                      495
                                                                      
                                                                      
                                                                      
                                                                      1.43
                                                                      %
                                                                      
                                                                      
                                                                      154,726
                                                                      
                                                                      
                                                                      
                                                                      1,086
                                                                      
                                                                      
                                                                      
                                                                      2.82
                                                                      %Time
      deposits
                                                                      
                                                                      
                                                                      461,539
                                                                      
                                                                      
                                                                      
                                                                      4,652
                                                                      
                                                                      
                                                                      
                                                                      4.09
                                                                      %
                                                                      
                                                                      
                                                                      379,526
                                                                      
                                                                      
                                                                      
                                                                      4,602
                                                                      
                                                                      
                                                                      
                                                                      4.88
                                                                      %Short-term
      borrowings
                                                                      
                                                                      
                                                                      106,254
                                                                      
                                                                      
                                                                      
                                                                      463
                                                                      
                                                                      
                                                                      
                                                                      1.74
                                                                      %
                                                                      
                                                                      
                                                                      13,067
                                                                      
                                                                      
                                                                      
                                                                      117
                                                                      
                                                                      
                                                                      
                                                                      3.58
                                                                      %Long-term
      borrowings
                                                                      
                                                                      
                                                                      121,159
                                                                      
                                                                      
                                                                      
                                                                      1,141
                                                                      
                                                                      
                                                                      
                                                                      3.77
                                                                      %
                                                                      
                                                                      
                                                                      121,248
                                                                      
                                                                      
                                                                      
                                                                      1,372
                                                                      
                                                                      
                                                                      
                                                                      4.53
                                                                      %Total
      interest-bearing liabilities
                                                                      
                                                                      
                                                                      872,056
                                                                      
                                                                      
                                                                      
                                                                      6,847
                                                                      
                                                                      
                                                                      
                                                                      3.18
                                                                      %
                                                                      
                                                                      
                                                                      701,540
                                                                      
                                                                      
                                                                      
                                                                      7,198
                                                                      
                                                                      
                                                                      
                                                                      4.13
                                                                      %Noninterest-bearing
      deposits
                                                                      
                                                                      
                                                                      59,229
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      67,080Other
      liabilities
                                                                      
                                                                      
                                                                      3,092
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      3,202Total
      Liabilities
                                                                      
                                                                      
                                                                      934,377
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      771,822Stockholders'
      Equity
                                                                      
                                                                      
                                                                      119,070
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      93,192Total
      Liabilities & Stockholders' Equity
                                                                      
                                                                      $
                                                                      1,053,447
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      $
                                                                      865,014Net
      interest income
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      $
                                                                      7,231
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      $
                                                                      6,524Interest
      rate spread
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      2.61
                                                                      %
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      2.75
                                                                      %Net
      interest-margin
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      2.98
                                                                      %
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      3.27
                                                                      %Percentage of average
      interest-earning assetsto average
      interest-bearing liabilities
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      113.04
                                                                      %
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      114.32
                                                                      %




- 20
-





VOLUME/RATE
VARIANCE ANALYSIS





The
following tables analyze the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities for the three-month periods ended March 31, 2009
and 2008.  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 proportionately to both the changes attributable to
volume and the changes attributable to rate.





Rate/Volume
      AnalysisThree
      Months Ended March 31,2009
      vs. 2008(in
      Thousands)Increase
      (Decrease) Due toVolume
                            
                            
                            Rate
                            
                            
                            TotalInterest IncomeLoan
      portfolio
                            
                            $
                            1,470
                            
                            
                            $
                            (1,865
                            )
                            
                            $
                            (395
                            )Investment
      Securities
                            
                            
                            1,028
                            
                            
                            
                            (235
                            )
                            
                            
                            793Fed
      funds and other interest-earning assets
                            
                            
                            (2
                            )
                            
                            
                            (40
                            )
                            
                            
                            (42
                            )Total
      interest-earning assets
                            
                            
                            2,496
                            
                            
                            
                            (2,140
                            )
                            
                            
                            356Interest ExpenseInterest-bearing
      NOW
                            
                            
                            14
                            
                            
                            
                            61
                            
                            
                            
                            75Money
      market and savings
                            
                            
                            (80
                            )
                            
                            
                            (511
                            )
                            
                            
                            (591
                            )Time
      deposits
                            
                            
                            888
                            
                            
                            
                            (837
                            )
                            
                            
                            51Short-term
      borrowings
                            
                            
                            614
                            
                            
                            
                            (268
                            )
                            
                            
                            346Long-term
      debt
                            
                            
                            (3
                            )
                            
                            
                            (229
                            )
                            
                            
                            (232
                            )Total
      interest-bearing liabilities
                            
                            
                            1,433
                            
                            
                            
                            (1,784
                            )
                            
                            
                            (351
                            )Net
      interest income
                            
                            $
                            1,063
                            
                            
                            $
                            (356
                            )
                            
                            $
                            707




- 21
-




NONPERFORMING
ASSETS





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





At
      March 31,
                                                                  
                                                                  
                                                                  At
      December 31,2009
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  2007(Dollars
      in thousands)Nonaccrual
      loans
                                                                  
                                                                  $
                                                                  16,421
                                                                  
                                                                  
                                                                  $
                                                                  257
                                                                  
                                                                  
                                                                  $
                                                                  13,094
                                                                  
                                                                  
                                                                  $
                                                                  2,726Restructured
      loans
                                                                  
                                                                  
                                                                  89
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -Total
      nonperforming loans
                                                                  
                                                                  
                                                                  16,510
                                                                  
                                                                  
                                                                  
                                                                  257
                                                                  
                                                                  
                                                                  
                                                                  13,094
                                                                  
                                                                  
                                                                  
                                                                  2,726Real
      estate owned
                                                                  
                                                                  
                                                                  1,911
                                                                  
                                                                  
                                                                  
                                                                  2,320
                                                                  
                                                                  
                                                                  
                                                                  1,716
                                                                  
                                                                  
                                                                  
                                                                  272Repossessed
      assets
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  10
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -Total
      nonperforming assets
                                                                  
                                                                  $
                                                                  18,421
                                                                  
                                                                  
                                                                  $
                                                                  2,587
                                                                  
                                                                  
                                                                  $
                                                                  14,810
                                                                  
                                                                  
                                                                  $
                                                                  2,998Accruing
      loans past due90 days or more
                                                                  
                                                                  $
                                                                  4
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  -Allowance
      for loan losses
                                                                  
                                                                  
                                                                  13,855
                                                                  
                                                                  
                                                                  
                                                                  8,425
                                                                  
                                                                  
                                                                  
                                                                  12,585
                                                                  
                                                                  
                                                                  
                                                                  8,273Nonperforming
      loans toperiod end loans
                                                                  
                                                                  
                                                                  2.08
                                                                  %
                                                                  
                                                                  
                                                                  0.04
                                                                  %
                                                                  
                                                                  
                                                                  1.53
                                                                  %
                                                                  
                                                                  
                                                                  0.40
                                                                  %Allowance
      for loan lossesto
      period end loans
                                                                  
                                                                  
                                                                  1.76
                                                                  %
                                                                  
                                                                  
                                                                  1.19
                                                                  %
                                                                  
                                                                  
                                                                  1.60
                                                                  %
                                                                  
                                                                  
                                                                  1.22
                                                                  %Allowance
      for loan lossesto
      nonperforming loans
                                                                  
                                                                  
                                                                  84.37
                                                                  %
                                                                  
                                                                  
                                                                  3,276.23
                                                                  %
                                                                  
                                                                  
                                                                  96.12
                                                                  %
                                                                  
                                                                  
                                                                  303.45
                                                                  %Nonperforming
      assetsto
      total assets
                                                                  
                                                                  
                                                                  1.68
                                                                  %
                                                                  
                                                                  
                                                                  0.29
                                                                  %
                                                                  
                                                                  
                                                                  1.67
                                                                  %
                                                                  
                                                                  
                                                                  0.36
                                                                  %Nonperforming
      assets and loans past
      due 90 days or more tototal
      assets
                                                                  
                                                                  
                                                                  1.68
                                                                  %
                                                                  
                                                                  
                                                                  0.29
                                                                  %
                                                                  
                                                                  
                                                                  1.67
                                                                  %
                                                                  
                                                                  
                                                                  0.36
                                                                  %





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 March 31, 2009, we identified thirty-one loans totaling
$8.1 million as potential problems loans.  Of the $8.1 million in
potential problem loans, $4.9 million are concentrated in the residential
construction and land acquisition and development sectors.





There
were nine foreclosed properties valued at a total of $1.9 million and fifty-six
nonaccrual loans totaling $16.4 million.  Foreclosed property is
valued at the lower of appraised value or the outstanding loan balance. Interest
foregone on nonaccrual loans for the three-month period ended March 31, 2009 was
$297,000.




- 22
-




At March
31, 2008, we identified eight loans totaling $991,000 as potential problems
loans. There were nine foreclosed properties valued at a total of $2.3 million
and five nonaccrual loans totaling $257,000.  Foreclosed property is
valued at the lower of appraised value or the outstanding loan balance. Interest
foregone on nonaccrual loans for the three-month period ended March 31, 2008 was
$44,000.





ANALYSIS
OF ALLOWANCE FOR LOAN LOSSES





The
allowance for loan losses is established through periodic charges to earnings in
the form of a provision for loan losses.  Increases to the allowance
for loan losses occur as a result of provisions charged to operations and
recoveries of amounts previously charged-off, and decreases to the allowance
occur when loans are charged-off.  Management evaluates the adequacy
of our allowance for loan losses on a monthly basis.  The evaluation
of the adequacy of the allowance for loan losses involves the consideration of
loan growth, loan portfolio composition and industry diversification, historical
loan loss experience, current delinquency levels, adverse conditions that might
affect a borrower’s ability to repay the loan, estimated value of underlying
collateral, prevailing economic conditions and all other relevant factors
derived from 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.  Additionally,
we are evaluating loans that migrate to a risk class 6 status and provide for
possible losses if the loan is unsecured or secured by a General Security
Agreement on business assets.





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 SFAS 114.  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.




- 23
-




Using the
data gathered during the monthly evaluation process, the model calculates an
acceptable range for allowance for loan losses.  Management and the
Board of Directors are responsible for determining the appropriate level of the
allowance for loan losses within that range.





The
provision for the first quarter of 2009 was primarily the result of credit
quality deterioration due to the current economic conditions in our
markets.  The sectors of the loan portfolio being impacted most by the
economic climate are residential construction and land acquisition and
development. Other factors influencing the provision include net loan
charge-offs.  For the three-month period ended March 31, 2009, there
were net loan charge-offs of $427,000 compared with $654,000 at March 31,
2008.  The allowance for loan losses at March 31, 2009 was $13.9
million, which represents 1.76% of total loans outstanding compared to $8.4
million or 1.19% as of March 31, 2008.





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.





The
following table describes the allocation of the allowance for loan losses among
various categories of loans for the dates indicated.  The changes in
percentage of total loans reflects the reclassifications of loans during the
conversion previously discussed.





At
      March 31,
                
                
                At
      December 31,2009
                
                
                2008%
      of Total
                
                
                
                
                
                %
      of TotalAmount
                
                
                Loans
      (1)
                
                
                Amount
                
                
                Loans
      (1)(Dollars
      in thousands)Residential
      real estate loans
                
                $
                503
                
                
                
                11.85
                %
                
                $
                103
                
                
                
                2.43
                %Home
      equity loans and lines
                
                
                682
                
                
                
                8.24
                %
                
                
                469
                
                
                
                6.91
                %Commercial
      mortgage loans
                
                
                5,466
                
                
                
                39.84
                %
                
                
                6,003
                
                
                
                59.82
                %Construction
      loans
                
                
                4,736
                
                
                
                29.21
                %
                
                
                3,694
                
                
                
                20.47
                %Commercial
      and industrial loans
                
                
                2,110
                
                
                
                10.27
                %
                
                
                1,953
                
                
                
                9.68
                %Loans
      to individuals
                
                
                358
                
                
                
                0.59
                %
                
                
                363
                
                
                
                0.69
                %Total
      allowance
                
                $
                13,855
                
                
                
                100.00
                %
                
                $
                12,585
                
                
                
                100.00
                %





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




- 24
-




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 Three-Month Period Ended March 31,2009
                    
                    
                    2008(Dollars
      in thousands)Balance
      at the beginning of the year
                    
                    $
                    12,585
                    
                    
                    $
                    8,273Charge-offs:Commercial
      and industrial loans
                    
                    
                    363
                    
                    
                    
                    -Commercial
      real estate loans
                    
                    
                    -
                    
                    
                    
                    91Construction,
      acquisition and development
                    
                    
                    39
                    
                    
                    
                    564Residential
      mortgage loans
                    
                    
                    47
                    
                    
                    
                    -Consumer
      loans
                    
                    
                    1
                    
                    
                    
                    -Total
      charge-offs
                    
                    
                    450
                    
                    
                    
                    655RecoveriesCommercial
      and industrial loans
                    
                    
                    23
                    
                    
                    
                    -Consumer
      loans
                    
                    
                    -
                    
                    
                    
                    1Total
      recoveries
                    
                    
                    23
                    
                    
                    
                    1Net
      charge-offs
                    
                    
                    427
                    
                    
                    
                    654Provision
      for loan losses
                    
                    
                    1,697
                    
                    
                    
                    806Balance
      at the end of the period
                    
                    $
                    13,855
                    
                    
                    $
                    8,425Total
      loans outstanding at period-end
                    
                    $
                    787,657
                    
                    
                    $
                    710,545Average
      loans outstanding for the period
                    
                    $
                    788,810
                    
                    
                    $
                    696,751Allowance
      for loan losses tototal loans outstanding
                    
                    
                    1.76
                    %
                    
                    
                    1.19
                    %Annualized
      ratio of net charge-offs to average loans outstanding
                    
                    
                    0.22
                    %
                    
                    
                    0.38
                    %




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.




- 25
-




As of
March 31, 2009, liquid assets (cash and due from banks, interest-earning
deposits with banks and investment securities available for sale) were
approximately $232.7 million, which represents 21% of total assets and 32% of
total deposits. Supplementing this liquidity, the Company has available lines of
credit from various correspondent banks of approximately $609.1 million of which
$220.8 million is outstanding at March 31, 2009.  At March 31, 2009,
outstanding commitments for undisbursed lines of credit, letters of credit and
undisbursed investment commitments amounted to approximately $142.5
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
deposit represented 65% of the Company’s total deposits at both March 31, 2009
and December 31, 2008. The Company’s growth strategy will include marketing
efforts focused at increasing the relative volume of 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 49% and 50% of the Company’s total deposits at March 31, 2009 and
December 31, 2008, 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.





Under
federal capital regulations, Crescent Financial Corporation must satisfy certain
minimum leverage ratio requirements and risk-based capital requirements. At
March 31, 2009, the Company’s equity to asset ratio is 11.03%.  The
Company’s ratios of Tier 1 capital to risk-weighted assets and total capital to
risk-based assets are 10.35% and 13.45%, 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 10.09% and 12.22%, 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.




- 26
-




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, 2008.





Item 4T. 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 March
31, 2009. 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 March 31, 2009, 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 March 31,
2009 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.




- 27
-




Part
      II.
            OTHER
      INFORMATION





Item
      1.
            Legal
      Proceedings.


None that
are material.





Item
      1a.
            Risk
      Factors.


Not
Applicable.





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


None.





Item
      3.
            Defaults
      Upon Senior Debt.


None.





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


None.





Item
      5.
            Other
      Information.


None.





Item
      6.
            Exhibits





(a)Exhibits.31.1
                              Certification
      of Principal Executive Officer pursuant to Rule 13a –
  14(a)31.2
                              Certification
      of Principal Financial Officer pursuant to Rule 13a –
  14(a)32.1
                              Certification
      of Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant
      to Section 906 of the  Sarbanes-Oxley Act of
  200232.2
                              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 CORPORATIONDate:
                    May
      14, 2009
                    By:
                    /s/
      Michael G. CarltonMichael
      G. CarltonPresident
      and Chief Executive OfficerDate:
                    May
      14, 2009
                    By:
                    /s/
      Bruce W. ElderBruce
      W. ElderPrincipal
      Financial
Officer




- 29
-