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, 2008**





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





Commission
      File Number 000-32951





**CRESCENT
      FINANCIAL CORPORATION**


(Exact
      name of registrant as specified in its charter)





**NORTH
                CAROLINA**
            **56-2259050**(State
                or other jurisdiction of Incorporation
            (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
      o





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


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





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


Yes o No
x





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





**Common
      Stock, $1.00 par value**


**9,520,631
      shares outstanding as of April 29, 2008**








Page No.**Part
                I. FINANCIAL INFORMATION****Item
                1 - Financial Statements (Unaudited)**Consolidated
                Balance Sheets
              March
                31, 2008 (unaudited) and December 31, 2007
            3Consolidated
                Statements of Operations
              Three
                Months Ended March 31, 2008 and 2007 (unaudited)
            4Consolidated
                Statements of Cash Flows
              Three
                Months Ended March 31, 2008 and 2007 (unaudited)
            5Notes
                to Consolidated Financial Statements
            6
                -
                9**Item
                2 - Management’s Discussion and Analysis of Financial Condition and
                Results of Operations**
            10
                – 22**Item
                3 - Quantitative and Qualitative Disclosures about Market
                Risk**
            23**Item
                4 - Controls and Procedures**
            23**Part
                II. Other Information****Item
                1 – Legal Proceedings**
            24**Item
                1a – Risk Factors**
            24**Item
                2 – Unregistered Sales of Equity Securities and Use of
                Proceeds**
            24**Item
                3 – Defaults Upon Senior Debt**
            24**Item
                4 – Submission of Matters to a Vote of Security
                Holders**
            24**Item
                5 – Other Information**
            24**Item
                6 - Exhibits**
            24





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          2
          -


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


**Item
      1 - Financial Statements**




***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


***CONSOLIDATED
      BALANCE SHEETS***




March 31, 2008
              (Unaudited)
            
            December 31,
              2007***ASSETS**Cash
                and due from banks
            
            $
            14,088,431
            
            $
            12,047,600Interest-earning
                deposits with banks
            
            
            387,323
            
            
            211,804Federal
                funds sold
            
            
            467,000
            
            
            97,000Investment
                securities available for sale at fair value
            
            
            94,854,874
            
            
            90,758,467Loans
            
            
            710,544,547
            
            
            675,916,228Allowance
                for loan losses
            
            
            (8,425,000
            )
            
            (8,273,000
            )NET
                LOANS
            
            
            702,119,547
            
            
            667,643,228Accrued
                interest receivable
            
            
            3,267,523
            
            
            3,761,600Federal
                Home Loan Bank stock, at cost
            
            
            7,039,000
            
            
            6,790,700Bank
                premises and equipment, net
            
            
            9,965,995
            
            
            8,094,521Investment
                in life insurance
            
            
            9,210,136
            
            
            9,122,697Goodwill
            
            
            30,233,049
            
            
            30,233,049Other
                assets
            
            
            9,460,216
            
            
            6,779,390TOTAL
                ASSETS
            
            $
            881,093,094
            
            $
            835,540,056**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**LIABILITIESDepositsDemand
            
            $
            65,890,041
            
            $
            69,367,630Savings
            
            
            88,981,672
            
            
            110,516,217Money
                market and NOW
            
            
            106,109,148
            
            
            80,316,251Time
            
            
            392,240,647
            
            
            345,231,215TOTAL
                DEPOSITS
            
            
            653,221,508
            
            
            605,431,313Short-term
                borrowings
            
            
            10,000,000
            
            
            13,755,000Long-term
                borrowings
            
            
            121,248,000
            
            
            121,248,000Accrued
                expenses and other liabilities
            
            
            3,285,602
            
            
            3,446,931TOTAL
                LIABILITIES
            
            
            787,755,110
            
            
            743,881,244STOCKHOLDERS’
                EQUITYPreferred
                stock, no par value, 5,000,000 shares authorized, none
                outstanding;
            
            
            -
            
            
            -Common
                stock, $1 par value, 20,000,000 shares authorized; 9,496,555 shares
                outstanding March 31, 2008; 9,404,579 shares outstanding December
                31,
                2007
            
            
            9,496,555
            
            
            9,404,579Additional
                paid-in capital
            
            
            73,698,725
            
            
            73,596,427Retained
                earnings
            
            
            9,478,141
            
            
            8,619,617Accumulated
                other comprehensive income (Note D)
            
            
            664,563
            
            
            38,189TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            93,337,984
            
            
            91,658,812COMMITMENTS
                (Note B)TOTAL
                LIABILITIES AND
              STOCKHOLDERS’
                EQUITY
            
            $
            881,093,094
            
            $
            835,540,056




*
      Derived
      from audited consolidated financial statements.


See
        accompanying notes.





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          3
          -


***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


***CONSOLIDATED
      STATEMENTS OF OPERATIONS (Unaudited)***


***Three
      Months Ended March 31, 2008 and 2007***








2008
            
            2007INTEREST
                INCOMELoans
            
            $
            12,471,592
            
            $
            11,575,394Investment
                securities available for sale
            
            
            1,206,442
            
            
            1,060,455Federal
                funds sold and interest-earning deposits
            
            
            43,634
            
            
            121,396TOTAL
                INTEREST INCOME
            
            
            13,721,668
            
            
            12,757,245INTEREST
                EXPENSEDeposits
            
            
            5,708,860
            
            
            5,561,000Short-term
                borrowings
            
            
            116,679
            
            
            290,135Long-term
                borrowings
            
            
            1,372,173
            
            
            661,935TOTAL
                INTEREST EXPENSE
            
            
            7,197,712
            
            
            6,513,070NET
                INTEREST INCOME
            
            
            6,523,956
            
            
            6,244,175PROVISION
                FOR LOAN LOSSES
            
            
            806,395
            
            
            359,147NET
                INTEREST INCOME AFTERPROVISION
                FOR LOAN LOSSES
            
            
            5,717,561
            
            
            5,885,028NON-INTEREST
                INCOMEMortgage
                origination revenue and other loan fees
            
            
            171,908
            
            
            115,007Fees
                on deposit accounts
            
            
            381,670
            
            
            347,654Earnings
                on life insurance
            
            
            98,732
            
            
            83,470Loss
                on disposal of assets
            
            
            (9,047
            )
            
            (941
            )Other
            
            
            165,286
            
            
            83,690TOTAL
                NON-INTEREST INCOME
            
            
            808,549
            
            
            628,880NON-INTEREST
                EXPENSESalaries
                and employee benefits
            
            
            2,804,130
            
            
            2,404,298Occupancy
                and equipment
            
            
            662,716
            
            
            547,937Data
                processing
            
            
            271,093
            
            
            260,725Other
            
            
            1,283,239
            
            
            1,007,438TOTAL
                NON-INTEREST EXPENSE
            
            
            5,021,178
            
            
            4,220,398INCOME
                BEFORE INCOME TAXES
            
            
            1,504,932
            
            
            2,293,510INCOME
                TAX EXPENSE
            
            
            504,600
            
            
            827,900NET
                INCOME
            
            $
            1,000,332
            
            $
            1,465,610NET
                INCOME PER COMMON SHARE (Note C)Basic
            
            $
            .11
            
            $
            .16Diluted
            
            $
            .10
            
            $
            .15WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING (Note C)Basic
            
            
            9,417,694
            
            
            9,093,392Diluted
            
            
            9,678,841
            
            
            9,611,833




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          4
          -




***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


***CONSOLIDATED
      STATEMENTS OF CASH FLOWS (Unaudited)***


***Three
      Months Ended March 31, 2008 and 2007***








2008
            
            2007CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                income
            
            $
            1,000,332
            
            $
            1,465,610Adjustments
                to reconcile net income to net cash provided (used) by operating
                activities:Depreciation
            
            
            177,511
            
            
            178,961Provision
                for loan losses
            
            
            806,395
            
            
            359,147Amortization
                of core deposit premium
            
            
            33,337
            
            
            33,337Loss
                on disposal of assets
            
            
            9,047
            
            
            941Net
                amortization (accretion) of premiums/discounts on
                securities
            
            
            (30,657
            )
            
            (19,827
            )Accretion
                of loan discount
            
            
            (109,955
            )
            
            (109,955
            )Amortization
                of deposit premium
            
            
            46,387
            
            
            101,569Net
                increase in cash value of life insurance
            
            
            (87,439
            )
            
            (74,375
            )Stock
                based compensation
            
            
            49,087
            
            
            41,812Change
                in assets and liabilities:(Increase)
                decrease in accrued interest receivable
            
            
            494,077
            
            
            (216,810
            )Increase
                in other assets
            
            
            (1,058,641
            )
            
            (439,825
            )Increase
                in accrued interest payable
            
            
            18,567
            
            
            53,775Decrease
                in other liabilities
            
            
            (321,704
            )
            
            (169,448
            )TOTAL
                ADJUSTMENTS
            
            
            26,012
            
            
            (260,698
            )NET
                CASH PROVIDED (USED) BY OPERATING ACTIVITIES
            
            
            1,026,344
            
            
            1,204,912CASH
                FLOWS FROM INVESTING ACTIVITIESPurchases
                of investment securities available for sale
            
            
            (7,293,615
            )
            
            (3,446,358
            )Principal
                repayments of investment securities available for sale
            
            
            4,247,188
            
            
            2,372,779Purchase
                of Federal Home Loan Bank stock
            
            
            (248,300
            )
            
            (597,900
            )Net
                increase in loans
            
            
            (37,221,230
            )
            
            (36,247,116
            )Investment
                in life insurance
            
            
            -
            
            
            (3,100,000
            )Purchases
                of bank premises and equipment
            
            
            (2,058,031
            )
            
            (981,745
            )NET
                CASH USED BY INVESTING ACTIVITIES
            
            
            (42,573,988
            )
            
            (42,000,340
            )CASH
                FLOWS FROM FINANCING ACTIVITIESNet
                increase (decrease) in deposits:Demand
            
            
            (3,477,589
            )
            
            3,706,424Savings
            
            
            (21,534,545
            )
            
            17,365,031Money
                market and NOW
            
            
            25,792,897
            
            
            3,744,458Time
                deposits
            
            
            46,963,044
            
            
            23,210,123Net
                decrease in short-term borrowings
            
            
            (3,755,000
            )
            
            (6,451,000
            )Net
                increase in long-term borrowings
            
            
            -
            
            
            10,000,000Proceeds
                from stock options exercised
            
            
            127,787
            
            
            106,492Excess
                tax benefits from stock options exercised
            
            
            17,400
            
            
            61,700NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            44,133,994
            
            
            51,743,228NET
                INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            2,586,350
            
            
            10,947,800CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            12,356,404
            
            
            15,150,110CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            14,942,754
            
            $
            26,097,910




See
      accompanying notes.




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          5
          -





***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


***Notes
      to Consolidated Financial Statements***








**NOTE
      A - BASIS OF PRESENTATION**


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





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





**NOTE
      B – COMMITMENTS**


At
      March
      31, 2008, commitments are as follows:





Undisbursed
                lines of credit
            
            $
            175,349,000Stand-by
                letters of credit
            
            
            6,372,000Undisbursed
                commitment to purchase additional investment in Small Business Investment
                Corporation
            
            
            413,000





**NOTE
      C – PER SHARE RESULTS**


Basic
      and
      diluted net income per common share have been computed by dividing net income
      for each period by the weighted average number of shares of common stock
      outstanding during each period after retroactively adjusting for this stock
      split.




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




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          6
          -


***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


***Notes
      to Consolidated Financial Statements***







Three months ended
              March
                31,2008
            
            2007Weighted
                average number of shares used in computing basic net income per share
            
            
            9,417,694
            
            
            9,093,392Effect
                of dilutive stock options
            
            
            261,147
            
            
            518,441Weighted
                average number of shares used in computing diluted net income per
                share
            
            
            9,678,841
            
            
            9,611,833




For
      the
      three month period ended March 31, 2008, there were 65,720 options that were
      anti-dilutive. For the three month period ended March 31, 2007, there were 1,725
      options that were anti-dilutive.




**NOTE
      D - COMPREHENSIVE INCOME**


For
      the
      three months ended March 31, 2008 and 2007, total comprehensive income,
      consisting of net income and unrealized securities gains, net of taxes, was
      approximately $1,627,000 and $1,797,000, respectively.





**NOTE** **E
      – RECENT ACCOUNTING PRONOUNCEMENTS**


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


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





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


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





*Fair
      Value Hierarchy*


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





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


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






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          7
          -




·
            Level
                3 – Valuation is generated from model-based techniques that use at least
                one significant assumption not observable in the market. These unobservable
                assumptions reflect estimates of assumptions that market participants
                would use in pricing the asset or liability. Valuation techniques
                include
                use of option pricing models, discounted cash flows models and similar
                techniques.





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





*Investment
      Securities Available-for-Sale*


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





*Loans*


The
      Company does not record loans at fair value on a recurring basis. However,
      from
      time to time, a loan is considered impaired and an allowance for loan losses
      is
      established. Loans for which it is probable that payment of interest and
      principal will not be made in accordance with the contractual terms of the
      loan
      agreement are considered impaired. Once a loan is identified as individually
      impaired, management measures impairment in accordance with SFAS 114,
“Accounting by Creditors for Impairment of a Loan,” (SFAS 114). The fair value
      of impaired loans is estimated using one of several methods, including
      collateral value, market value of similar debt, enterprise value, liquidation
      value and discounted cash flows. Those impaired loans not requiring an allowance
      represent loans for which the fair value of the expected repayments or
      collateral exceed the recorded investments in such loans. At March 31,
      2008, substantially all of the total impaired loans were evaluated based on
      the
      fair value of the collateral. In accordance with SFAS 157, impaired loans where
      an allowance is established based on the fair value of collateral require
      classification in the fair value hierarchy. When the fair value of the
      collateral is based on an observable market price or a current appraised value,
      the Corporation records the impaired loan as nonrecurring Level 2. When an
      appraised value is not available or management determines the fair value of
      the
      collateral is further impaired below the appraised value and there is no
      observable market price, the Corporation records the impaired loan as
      nonrecurring Level 3.





*Foreclosed
      Assets*


Foreclosed
      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 Corporation records the
      foreclosed asset as nonrecurring Level 2. When an appraised value is not
      available or management determines the fair value of the collateral is further
      impaired below the appraised value and there is no observable market price,
      the
      Corporation records the foreclosed asset as nonrecurring Level 3.




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          8
          -




*Goodwill
      and Other Intangible Assets*


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





The
      following table summarizes quantitative disclosures about the fair value
      measurement for each category of assets carried at fair value as of March 31,
      2008:




Description
            
            March 31,
              2008
            
            Quoted Prices in
              Active Markets
              for Identical
              Assets
              (Level 1)
            
            Significant
              Other
              Observable
              Inputs
              (Level 2)
            
            Significant
              Unobservable
              Inputs
              (Level 3)Available
                for sale securities
            
            $
            94,854,874
            
            $
            466,182
            
            $
            94,388,692
            
            $
            -Impaired
                loans
            
            $
            2,416,997
            
            $
            -
            
            $
            1,963,149
            
            $
            453,848Other
                assets
            
            $
            2,320,352
            
            $
            -
            
            $
            2,320,352
            
            $
            -





As
      of
      March 31, 2008, the Bank identified $4.6 million in impaired loans. Of these
      impaired loans, $3.2 million had specific loss allowance aggregating $807,000.





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


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





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


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




-
          9
          -





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





Management’s
      discussion and analysis is intended to assist readers in the understanding
      and
      evaluation of the financial condition and consolidated results of operations
      of
      Crescent Financial Corporation (the “Company”). The analysis includes detailed
      discussions for each of the factors affecting Crescent Financial Corporation’s
      operating results and financial condition for the periods ended March 31, 2008
      and 2007. It should be read in conjunction with the audited consolidated
      financial statements and accompanying notes included in this report and the
      supplemental financial data appearing throughout this discussion and analysis.
      Because the Company has no operations and conducts no business on its own other
      than owning Crescent State Bank, the discussion contained in this Management's
      Discussion and Analysis concerns primarily the business of the Bank. However,
      for ease of reading and because the financial statements are presented on a
      consolidated basis, the Company and the Bank are collectively referred to herein
      as the Company unless otherwise noted. All significant intercompany transactions
      and balances are eliminated in consolidation.





**COMPARISON
      OF FINANCIAL CONDITION AT MARCH 31, 2008 AND**


**DECEMBER
      31, 2007**





Total
      assets at March 31, 2008 are $881.1 million compared with $835.5 million at
      December 31, 2007. Earning assets are 92% of total assets at both dates with
      $813.3 million at March 31, 2008 and $773.8 million at December 31, 2007.
      Components of earning assets at March 31, 2008 are $710.5 million in gross
      loans, $101.9 million in investment securities and Federal Home Loan Bank (FHLB)
      stock and $854,000 in overnight investments and interest bearing deposits with
      correspondent banks. Earning assets at December 31, 2007 consisted of $675.9
      million in gross loans, $97.5 million in investment securities and FHLB stock
      and $309,000 in overnight investments and interest bearing deposits. Total
      deposits and stockholders’ equity at March 31, 2008 were $653.2 million and
      $93.3 million, respectively, compared to $605.4 million and $91.7 million at
      December 31, 2007.





During
      the first quarter of 2008, gross loans outstanding increased by $34.5 million
      or
      5%. The commercial real estate mortgage category experienced the most
      significant dollar growth during the three-month period increasing $35.8 million
      or 10% from $350.4 million to $386.2 million. Home equity loans and lines
      outstanding increased by $2.7 million or 6% growing from $45.3 million to $48.0
      million. Residential mortgage loans, consumer loans and construction and
      development loans increased by $882,000, $616,000 and $558,000, respectively.
      The commercial and industrial loan portfolio experienced a $5.9 million decline
      during the first quarter. The composition of the loan portfolio, by category,
      as
      of March 31, 2008 is 54% commercial mortgage loans, 26% construction loans,
      9%
      commercial loans, 7% home equity loans and lines, 3% residential mortgage loans
      and 1% consumer loans. The composition of the loan portfolio, by category,
      as of
      December 31, 2007 was 55% commercial mortgage loans, 20% construction loans,
      12%
      commercial loans, 8% home equity loans and lines, 4% residential real estate
      mortgage loans and 1% consumer loans.





The
      Company had an allowance for loan losses at March 31, 2008 of $8.4 million
      or
      1.19% of outstanding loans compared to $8.3 million or 1.24% at
      December 31, 2007. At March 31, 2008, there were five loans totaling
      $257,000 in non-accrual status. There were no loans past due 90 days or more
      and
      still accruing interest at March 31, 2008. Non-performing loans as a percentage
      of total loans at March 31, 2008 were 0.04%. There were twelve loans totaling
      $2.7 million in non accrual status at December 31, 2007. During the first
      quarter, we foreclosed on the property securing six of the twelve loans, one
      loan demonstrated the ability to be returned to accrual status and one loan
      was
      paid in full. There were no loans past due 90 days or more and still accruing
      interest at December 31, 2007. Non-performing loans as a percentage of total
      loans at December 31, 2007 were 0.40%. For a more detailed discussion, see
      the
      section entitled Non-Performing Assets.





-
          10
          -




The
      Company has investment securities with an amortized cost of $93.8 million at
      March 31, 2008. All investments are accounted for as available for sale under
      Financial Accounting Standards Board (FASB) No. 115 and are presented at their
      fair market value of $94.9 million compared with $90.8 million at year-end
      2007.
      The Company’s investment securities at March 31, 2008, consists of U.S.
      Government agency securities, collateralized mortgage obligations,
      mortgage-backed securities, municipal bonds and marketable equity securities.
      The increase during the first three months of 2008 was the net result of $7.3
      million in new purchases, a $1.0 million increase in the fair value of the
      portfolio and $30,000 in net amortization of premiums, less $4.2 million in
      principal re-payments and called principal.





The
      Company owns $7.0 million of Federal Home Loan Bank stock at March 31, 2008
      compared to $6.8 million at December 31, 2007.





There
      were $467,000 in Federal funds sold at March 31, 2008 compared to $97,000 at
      December 31, 2007.





Interest-earning
      deposits held at correspondent banks increased by approximately $175,000 from
      $212,000 at December 31, 2007 to $387,000 at March 31, 2008.





Non-earning
      and other assets increased by approximately $6.2 million between December 31,
      2007 and March 31, 2008. 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 $2.0 million. For more details regarding
      the increase in cash and cash equivalents, see the Consolidated Statement of
      Cash Flows. We foreclosed on six properties securing loans and moved $2.0
      million in net realizable values to other real estate owned. Bank premises
      and
      equipment increased by $1.9 million as we purchased land for a future branch
      location and finished the build-out on a branch opened in the first
      quarter.





Total
      deposits increased by $47.8 million between December 31, 2007 and March 31,
      2008
      from $605.4 million to $653.2 million. The largest dollar increase occurred
      in
      the time deposit category, which grew by $47.0 million or 14% to $392.2 million
      at March 31, 2008 from $345.2 million at year end 2007. Money market account
      balances increases by $17.7 million or 37% to $66.1 million and interest-bearing
      demand deposit balances increased by $8.1 million or 25% to $40.0 million.
      Due
      largely to the expected distribution of $20.4 million from an escrow account,
      savings account balances declined by $21.5 million to $89.0 million. Balances
      of
      non interest-bearing demand deposits decreased by $3.5 million to $65.9
      million.





The
      composition of the deposit base, by category, at March 31, 2008 is as follows:
      60% time deposits, 14% statement savings accounts, 10% non-interest-bearing
      demand deposits, 10% money market and 6% interest-bearing demand deposits.
      The
      composition of the deposit base, by category, at December 31, 2007 was 57%
      time deposits, 18% in statement savings, 12% non-interest-bearing demand
      deposits, 8% money market and 5% in interest-bearing demand deposits. Time
      deposits of $100,000 or more totaled $315.0 million at March 31, 2008 compared
      to $276.6 million at December 31, 2007. The Company uses brokered certificates
      of deposit as an alternative funding source. Brokered deposits represent a
      source of fixed rate funds priced competitively with FHLB borrowings, but do
      not
      require collateralization like FHLB borrowings. Brokered deposits were $214.2
      million at March 31, 2008 compared with $166.6 million at December 31,
      2007.





-
          11
          -




The
      Company had $121.2 million of long-term debt outstanding at both March 31,
      2008
      and December 31, 2007. The long-term debt is comprised of $113.0 million in
      FHLB
      term advances and $8.2 million in junior subordinated debt. Short-term
      borrowings declined by $3.8 million during the first quarter of 2008 to $10.0
      million. Short-term borrowings consist of FHLB term advances with remaining
      maturities of less than one year and Federal funds purchased from correspondent
      banks.





Accrued
      interest payable and other liabilities decreased by $161,000 and were $3.3
      million and $3.4 million at March 31, 2008 and December 31, 2007, respectively.





Between
      December 31, 2007 and March 31, 2008, total stockholders’ equity increased by
      $1.7 million. The increase resulted primarily from net income for the first
      three months of $1.0 million, net of tax improvement in the fair value of
      available for sale securities of $626,000, and $128,000 in new stock issued
      pursuant to the exercise of stock options. Total stockholders’ equity decreased
      by $142,000 due to recording the cumulative effect of adopting EITF 06-04.





**COMPARISON
      OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2008 AND
      2007**





**Net
      Income.** **** Net
      income for the three-month period ended March 31, 2008 was $1.0 million or
      $0.10
      per diluted share compared with $1.5 million or $0.15 per diluted share for
      the
      three-month period ended March 31, 2007. Annualized return on average assets
      and
      equity for the current period were 0.47% and 3.97%, respectively, compared
      with
      0.82% and 7.06% 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 $280,000 or 4% from $6.2 million to $6.5
      million for the three-month period ended March 31, 2008. 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
      increased due to growth in interest-bearing liabilities needed to fund the
      higher volume of assets. The sharp decline in short-term rates over the past
      twelve months and in particular since December 31, 2007, coupled with the
      continued high cost of wholesale funds has caused a contraction of the net
      interest margin. Lower margins and the overhead costs associated with growing
      the branch network have lead to a decline in earnings.





Total
      average earning assets increased by more than $137.8 million or 21% from an
      average of $664.2 million for the prior year three-month period to an average
      of
      $802.0 million for the three-month period ended March 31, 2008. The average
      balance of loans outstanding increased by $130.9 million to $696.7 million
      at
      March 31, 2008, a 23% increase over the $565.8 million of average outstanding
      loans for the prior period. The average balance of the investment securities
      portfolio for the current period was $99.8 million, increasing by $10.9 million
      or 12% compared to an average of $88.9 million at March 31, 2007. The average
      balance of federal funds sold and other earning assets decreased from $9.4
      million for the prior three-month period to $5.5 million for the current period.





-
          12
          -




Average
      interest-bearing liabilities increased by $132.9 million or 23% from $568.6
      million for the quarter ended March 31, 2007 to $701.5 million for the current
      quarter. The total increase is comprised of a $68.2 million increase in interest
      bearing deposits and a $64.7 million increase in borrowed funds. Time deposits
      experienced the largest increase averaging $379.5 million during the current
      year period compared to $313.5 million for the prior period.





Total
      interest income increased by $1.0 million or 8%. The increase is comprised
      of
      $2.7 million due to the growth in total average earning assets and a $1.7
      decrease due to lower yields realized on earning assets. Total interest expense
      for the current period rose by $685,000. The increase is the result of a $1.7
      million increase due to growth in interest-bearing funds and a $1.0 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, 2008 was 3.27% compared to 3.81% for the
      three-month period ended March 31, 2007. The average yield on earning assets
      for
      the current three-month period declined 91 basis points to 6.88% compared with
      7.79% for the prior year period, while the average cost of interest-bearing
      funds decreased by only 52 basis points to 4.13% from 4.65%. The interest rate
      spread, which is the difference between the average yield on earning assets
      and
      the cost of interest-bearing liabilities, decreased by 39 basis points from
      3.14% for the quarter ended March 31, 2007 to 2.75% for the quarter ended March
      31, 2008. The percentage of interest earning assets to average interest-bearing
      liabilities declined to 114.32% from 116.81%.





Between
      September 1, 2007 and March 31, 2008, the Federal Reserve (the “Fed”) reduced
      short-term interest rates six times for a total of 300 basis points. Prior
      to
      September 2007, rates had been stable since July 2006. The Fed’s rate
      reductions, the most recent of which have been 50 to 75 basis points each,
      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
      are
      directed toward minimizing the effects of the national housing crisis, sub-prime
      lending and the collapse of the commercial paper market.





Approximately
      51% of the Company’s loan portfolio has variable rate pricing based on the Prime
      lending rate or LIBOR (London Inter Bank Offering Rate). As short-term rates
      have fallen, variable rate loans have repriced downward resulting in a lower
      yield on average earning assets. Loan demand has continued to be brisk and
      the
      volume of new loan originations outpaced the generation of lower cost core
      deposits causing the Company to rely more heavily on brokered certificates
      of
      deposit and borrowings.





In
      August
      2007, sub-prime mortgage lending issues virtually eliminated the commercial
      paper market long used by large mortgage companies to fund their operations.
      The
      impact on corporate liquidity and credit markets has been significant as large
      banks and mortgage companies now rely on the brokered time deposit market.
      The
      demand has caused interest rates on brokered funds to be 100 basis points more
      expensive than borrowed money at the Federal Home Loan Bank (FHLB). We shifted
      our funding strategy in August to utilize the FHLB rather than the brokered
      market, but those borrowings must be collateralized. Due to the current unstable
      environment of corporate debt, we choose to not completely exhaust our FHLB
      capability and returned to the brokered market in January 2008. The Company
      expects to continue to experience net interest margin compression in the current
      falling rate environment. In stable or rising interest rate environments, the
      Company would expect a small to moderate expansion of margin,
      respectively.





-
          13
          -




**Provision
      for Loan Losses.** The
      Company’s provision for loan losses for the three-month period ended March 31,
      2008 was $806,000 compared to $359,000 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 loan growth, although the analysis discussion outlines
      additional factors impacting the provision. The allowance for loan losses was
      $8.4 million at March 31, 2008, representing 1.19% of total outstanding loans.





**Non-Interest
      Income.** For
      the
      three-month period ended March 31, 2008, non-interest income increased by more
      than $180,000 to $809,000 compared to $629,000 for the same period in 2007.





Revenue
      earned on brokered mortgage loan originations increased by $57,000 from $115,000
      during the prior period to $172,000 for the current period. Residential mortgage
      loan refinancing activity increased in the first half of the quarter in response
      to the initial Fed rate reductions. Customer service fees on deposit accounts
      increased by $34,000 from $348,000 to $382,000. Earnings on cash value of life
      insurance increased by $15,000 and fees from brokerage referrals increased
      by
      $10,000. We recorded $72,000 of miscellaneous income in the first quarter due
      to
      the recovery of amounts written off on a deposit account during 2007.





**Non-Interest
      Expenses.** Non-interest
      expenses were $5.0 million for the three-month period ended March 31, 2008
      compared with $4.2 million for the same period ended March 31, 2007. We have
      opened two new offices during the past twelve months and the increase in
      non-interest expenses are concentrated in those areas most impacted by
      expansion; personnel and occupancy.





The
      largest component of non-interest expense for the current period was personnel
      expense. Salaries and benefits expense increased by $400,000 or 17% to $2.8
      million for the current year period compared to $2.4 million for the same period
      in the prior year. Management anticipates personnel expense to continue to
      increase as we identify new opportunities for expansion.





Occupancy
      and equipment expenses increased by $115,000 or 21% from $548,000 for the
      three-month period ended March 31, 2007 to $663,000 for the current year period
      and data
      processing costs increased by $10,000 or 4% to $271,000 from $261,000. The
      Federal Deposit Insurance Corporation implemented new insurance assessment
      guidelines during 2007 causing our premium expense to increase by $75,000 to
      $96,000 for the current quarter. As the Company continues to grow in accordance
      with its strategic plan, management expects occupancy, data processing costs
      and
      insurance premiums to increase.





Other
      non-interest expenses increased by $200,000 to $1.2 million for the first
      quarter of 2008 compared with $986,000 for the prior year quarter. The increase
      was primarily a result of the Company’s continued growth and expansion. The
      largest components of other non-interest expenses include professional fees
      and
      services, office supplies and printing, advertising, and loan related fees.
      Management expects that as the complexity and size of the Company increases,
      expenses associated with these categories will continue to increase.





**Provision
      for Income Taxes.** The
      Company recorded income tax expense of $505,000 for the three-months ended
      March
      31, 2008 compared with $828,000 for the prior year period. The
      effective tax rate for the three-month period ended March 31, 2008 was 34%
      compared with 36% for the prior year period. The decrease in the effective
      tax
      rate is attributable to a larger percentage of income coming from tax exempt
      sources.




-
          14
          -


**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, 2008 and 2007. The tables reflect the average yield
      on
      interest-earning assets and the average cost of interest-bearing liabilities
      (derived by dividing income or expense by the daily average balance of
      interest-earning assets or interest-bearing liabilities, respectively) as well
      as the net interest margin. In preparing the tables, non-accrual loans are
      included, when applicable, in the average loan balance. For purposes of the
      analysis, Federal Home Loan Bank stock is included in Investment Securities
      totals.




2008
            
            2007Average
            
            
            
            Average
            
            Average
            
            
            
            AverageBalance
            
            Interest
            
            Yield/Cost
            
            Balance
            
            Interest
            
            Yield/Cost(Dollars
                in thousands)Interest-earnings
                assetsLoan
                portfolio
            
            $
            696,751
            
            $
            12,472
            
            
            7.20
            %
            $
            565,827
            
            $
            11,575
            
            
            8.30
            %Investment
                securities
            
            
            99,768
            
            
            1,206
            
            
            4.84
            %
            
            88,901
            
            
            1,061
            
            
            4.77
            %Fed
                funds and other interest-earning assets
            
            
            5,479
            
            
            44
            
            
            3.23
            %
            
            9,449
            
            
            121
            
            
            5.19
            %Total
                interest-earning assets
            
            
            801,998
            
            
            13,722
            
            
            6.88
            %
            
            664,177
            
            
            12,757
            
            
            7.79
            %Noninterest-earning
                assets
            
            
            63,016
            
            
            
            
            
            
            
            
            60,459Total
                Assets
            
            $
            865,014
            
            
            
            
            
            
            
            $
            724,636Interest-bearing
                liabilitiesInterest-bearing
                NOW
            
            $
            32,973
            
            
            21
            
            
            0.26
            %
            $
            34,684
            
            
            98
            
            
            1.15
            %Money
                market and savings
            
            
            154,726
            
            
            1,086
            
            
            2.82
            %
            
            150,813
            
            
            1,577
            
            
            4.24
            %Time
                deposits
            
            
            379,526
            
            
            4,602
            
            
            4.88
            %
            
            313,499
            
            
            3,886
            
            
            5.03
            %Short-term
                borrowings
            
            
            13,067
            
            
            117
            
            
            3.58
            %
            
            21,818
            
            
            290
            
            
            5.32
            %Long-term
                borrowings
            
            
            121,248
            
            
            1,372
            
            
            4.53
            %
            
            47,803
            
            
            662
            
            
            5.54
            %Total
                interest-bearing liabilities
            
            
            701,540
            
            
            7,198
            
            
            4.13
            %
            
            568,617
            
            
            6,513
            
            
            4.65
            %Noninterest-bearing
                deposits
            
            
            67,080
            
            
            
            
            
            
            
            
            68,649Other
                liabilities
            
            
            3,202
            
            
            
            
            
            
            
            
            3,125Total
                Liabilities
            
            
            771,822
            
            
            
            
            
            
            
            
            640,391Stockholders'
                Equity
            
            
            93,192
            
            
            
            
            
            
            
            
            84,245Total
                Liabilities & Stockholders' Equity
            
            $
            865,014
            
            
            
            
            
            
            
            $
            724,636Net
                interest income
            
            
            
            
            $
            6,524
            
            
            
            
            
            
            
            $
            6,244Interest
                rate spread
            
            
            
            
            
            
            
            
            2.75
            %
            
            
            
            
            
            
            
            3.14
            %Net
                interest-margin
            
            
            
            
            
            
            
            
            3.27
            %
            
            
            
            
            
            
            
            3.81
            %Percentage
                of average interest-earning assets to average interest-bearing
                liabilities
            
            
            
            
            
            
            
            
            114.32
            %
            
            
            
            
            
            
            
            116.81
            %




-
          15
          -




**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, 2008
      and 2007. The table distinguishes between (i) changes attributable to volume
      (changes in volume multiplied by the prior period’s rate), (ii) changes
      attributable to rate (changes in rate multiplied by the prior period’s volume),
      and (iii) net change (the sum of the previous columns). The change attributable
      to both rate and volume (changes in rate multiplied by changes in volume) has
      been allocated proportionately to both the changes attributable to volume and
      the changes attributable to rate.




Rate/Volume
      Analysis




Three Months Ended March 31,2008 vs. 2007(in Thousands)Increase (Decrease) Due toVolume
            
            Rate
            
            Total**Interest
                Income**Loan
                portfolio
            
            $
            2,571
            
            $
            (1,674
            )
            $
            897Investment
                Securities
            
            
            130
            
            
            15
            
            
            145Fed
                funds and other interest-earning assets
            
            
            (41
            )
            
            (36
            )
            
            (77
            )Total
                interest-earning assets
            
            
            2,660
            
            
            (1,695
            )
            
            965**Interest
                Expense**Interest-bearing
                NOW
            
            
            (2
            )
            
            (75
            )
            
            (77
            )Money
                market and savings
            
            
            41
            
            
            (532
            )
            
            (491
            )Time
                deposits
            
            
            829
            
            
            (113
            )
            
            716Short-term
                borrowings
            
            
            (96
            )
            
            (77
            )
            
            (173
            )Long-term
                debt
            
            
            914
            
            
            (204
            )
            
            710Total
                interest-bearing liabilities
            
            
            1,686
            
            
            (1,001
            )
            
            685**Net
                interest income**
            
            $
            974
            
            $
            (694
            )
            $
            280




-
          16
          -


**NONPERFORMING
      ASSETS**





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




At March 31,
            
            At December 31,2008
            
            2007
            
            2007
            
            2006(Dollars in thousands)Nonaccrual
                loans
            
            $
            257
            
            $
            604
            
            $
            2,726
            
            $
            135Restructured
                loans
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                nonperforming loans
            
            
            257
            
            
            604
            
            
            2,726
            
            
            135Real
                estate owned
            
            
            2,320
            
            
            98
            
            
            272
            
            
            98Repossessed
                assets
            
            
            10
            
            
            14
            
            
            -
            
            
            -Total
                nonperforming assets
            
            $
            2,587
            
            $
            716
            
            $
            2,998
            
            $
            233Accruing
                loans past due 90 days or more
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Allowance
                for loan losses
            
            
            8,425
            
            
            7,277
            
            
            8,273
            
            
            6,945Nonperforming
                loans to period end loans
            
            
            0.04
            %
            
            0.10
            %
            
            0.40
            %
            
            0.02
            %Allowance
                for loan losses to period end loans
            
            
            1.19
            %
            
            1.24
            %
            
            1.22
            %
            
            1.26
            %Allowance
                for loan losses to nonperforming loans
            
            
            3,276.23
            %
            
            1,204.61
            %
            
            303.45
            %
            
            5,144.96
            %Nonperforming
                assets to total assets
            
            
            0.29
            %
            
            0.10
            %
            
            0.36
            %
            
            0.03
            %Nonperforming
                assets and loans past due 90 days or more to total assets
            
            
            0.29
            %
            
            0.10
            %
            
            0.36
            %
            
            0.03
            %




Our
      financial statements are prepared on the accrual basis of accounting, including
      the recognition of interest income on loans, unless we place a loan on
      nonaccrual basis. We account for loans on a nonaccrual basis when we have
      serious doubts about the collectability of principal or interest. Generally,
      our
      policy is to place a loan on nonaccrual status when the loan becomes past due
      90
      days. We also place loans on nonaccrual status in cases where we are uncertain
      whether the borrower can satisfy the contractual terms of the loan agreement.
      Amounts received on nonaccrual loans generally are applied first to principal
      and then to interest only after all principal has been collected. Restructured
      loans are those for which concessions, including the reduction of interest
      rates
      below a rate otherwise available to that borrower or the deferral of interest
      or
      principal have been granted due to the borrower’s weakened financial condition.
      We accrue interest on restructured loans at the restructured rates when we
      anticipate that no loss of original principal will occur. Potential problem
      loans are loans which are currently performing and are not included as
      nonaccrual or restructured loans above, but about which we have serious doubts
      as to the borrower’s ability to comply with present repayment terms. These loans
      are likely to be included later in nonaccrual, past due or restructured loans,
      so they are considered by our management in assessing the adequacy of our
      allowance for loan losses. At March 31, 2008, we identified eight loans totaling
      $991,000 as potential problems loans.




-
          17
          -




At
      March
      31, 2008, 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. At March 31, 2007, there were four foreclosed properties valued at
      a
      total of $98,000 and four nonaccrual loans totaling $604,000. Interest foregone
      on nonaccrual loans for the three-month period ended March 31, 2007 was
      $10,000.




**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.





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





-
          18
          -




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





The
      primary reason for increases to the allowance for loan losses has been growth
      in
      total outstanding loans; however, there were other factors influencing the
      provision. For the three-month period ended March 31, 2008, there were net
      loan
      charge-offs of $654,000 compared with $27,000 at March 31, 2007. The allowance
      for loan losses at March 31, 2008 was $8.4 million, which represents 1.19%
      of
      total loans outstanding compared to $7.3 million or 1.24% for the prior year.





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


-
          19
          -




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





Allocation
      of Allowance for Loan Losses





At March 31,
            
            At December 31,2008
            
            2007% of Total
            
            
            
            % of TotalAmount
            
            Loans (1)
            
            Amount
            
            Loans (1)(Dollars
                in thousands)Residential
                real estate loans
            
            $
            80
            
            
            2.65
            %
            $
            130
            
            
            2.70
            %Home
                equity loans and lines
            
            
            307
            
            
            6.74
            %
            
            334
            
            
            6.69
            %Commercial
                mortgage loans
            
            
            4,205
            
            
            54.37
            %
            
            3,771
            
            
            51.85
            %Construction
                loans
            
            
            2,245
            
            
            25.90
            %
            
            2,362
            
            
            27.18
            %Commercial
                and industrial loans
            
            
            1,449
            
            
            9.45
            %
            
            1,536
            
            
            10.77
            %Loans
                to individuals
            
            
            139
            
            
            0.89
            %
            
            140
            
            
            0.81
            %Total
                allowance
            
            $
            8,425
            
            
            100.00
            %
            $
            8,273
            
            
            100.00
            %





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


-
          20
          -


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 31,2008
            
            2007(Dollars in thousands)Balance
                at the beginning of the year
            
            $
            8,273
            
            $
            6,945Charge-offs:Commercial
                and industrial loans
            
            
            -
            
            
            28Commercial
                real estate loans
            
            
            91
            
            
            -Construction,
                acquisition and development
            
            
            564
            
            
            -Consumer
                loans
            
            
            -
            
            
            -Total
                charge-offs
            
            
            655
            
            
            28Recoveries
            
            
            1
            
            
            1Net
                charge-offs
            
            
            654
            
            
            27Provision
                for loan losses
            
            
            806
            
            
            359Balance
                at the end of the year
            
            $
            8,425
            
            $
            7,277Total
                loans outstanding at period-end
            
            $
            710,545
            
            $
            586,149Average
                loans outstanding for the period
            
            $
            696,751
            
            $
            565,827Allowance
                          for loan losses to total loans
                          outstanding
            
            
            1.19
            %
            
            1.24
            %Ratio
                of net charge-offs to average loans outstanding
            
            
            0.09
            %
            
            0.00
            %





**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.


-
          21
          -





As
      of
      March 31, 2008, liquid assets (cash and due from banks, interest-earning
      deposits with banks and investment securities available for sale) were
      approximately $116.8 million, which represents 13% of total assets and 18%
      of
      total deposits. Supplementing this liquidity, the Company has available lines
      of
      credit from various correspondent banks of approximately $229.1 million of
      which
      $131.2 million is outstanding at March 31, 2008. At March 31, 2008, outstanding
      commitments for undisbursed lines of credit, letters of credit and undisbursed
      investment commitments amounted to approximately $182.3 million. Management
      intends to fund anticipated loan closings and operational needs through cash
      and
      cash equivalents on hand, brokered deposits, scheduled principal repayments
      from
      the loan and securities portfolios, and anticipated increases in deposits and
      borrowings. Certificates of deposits represented 60% of the Company’s total
      deposits at March 31, 2008 compared with 57% at December 31, 2007. The Company’s
      growth strategy will include marketing efforts focused at increasing the
      relative volume of low cost transaction deposit accounts; however, time deposits
      will continue to play an important role in the Company’s funding strategy.
      Certificates of deposit of $100,000 or more represented 48% and 42% of the
      Company’s total deposits at March 31, 2008 and December 31, 2007, respectively.
      While these deposits are generally considered rate sensitive and the Company
      will need to pay competitive rates to retain these deposits at maturity, there
      are other subjective factors that will determine the Company’s continued
      retention of those deposits.





Under
      federal capital regulations, Crescent Financial Corporation must satisfy certain
      minimum leverage ratio requirements and risk-based capital requirements. At
      March 31, 2008, the Company’s equity to asset ratio is 10.59%. The Company’s
      ratios of Tier 1 capital to risk-weighted assets and total capital to risk-based
      assets are 9.04% and 10.14%, 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 9.03%
      and
      10.13%, 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.




-
          22
          -


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





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





**Item
      4. Controls and Procedures**





Crescent
      Financial Corporation’s management, with the participation of the Chief
      Executive Officer and Principal Financial Officer, has evaluated the
      effectiveness of the Company’s disclosure controls and procedures as of March
      31, 2008. Based on that evaluation, the Company’s Chief Executive Officer and
      Principal Financial Officer concluded that the Company’s disclosure controls and
      procedures were effective, as of March 31, 2008, to provide reasonable assurance
      that information required to be disclosed by the Company in the reports filed
      or
      submitted by it under the Exchange Act is recorded, processed, summarized and
      reported within the time periods specified in the SEC’s rules and forms, and to
      provide reasonable assurance that information required to be disclosed by the
      Company in such reports is accumulated and communicated to the Company’s
      management, including its principal executive officer and principal financial
      officer, as appropriate to allow timely decisions regarding required disclosure.





The
      Company assesses the adequacy of its internal control over financial reporting
      quarterly and enhances its controls in response to internal control assessments
      and internal and external audit and regulatory recommendations. There have
      been
      no changes in the Company’s internal controls during the quarter ended March 31,
      2008 or through the date of this Quarterly Report on Form 10-Q that have
      materially affected, or are reasonably likely to materially affect, the
      Company’s internal control over financial reporting.


-
          23
          -


**Part
              II.**
            **OTHER
                INFORMATION**





**Item
              1.**
            **Legal
                Proceedings.**


None.




**Item
              1a.**
            **Risk
                Factors.**


There
      have been no material changes in our risk factors from those disclosed in our
      Annual Report on Form 10-K for the year ended December 31, 2007.




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


None.





**Item
              3.**
            **Defaults
                Upon Senior Debt.**


None.





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


None.





**Item
              5.**
            **Other
                Information.**


None.





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





(a)
            Exhibits.




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





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





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





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




-
          24
          -





**SIGNATURES**





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




**CRESCENT
              FINANCIAL CORPORATION**Date:
                May 6, 2008
            By:
            /s/
                Michael G. CarltonMichael
                G. CarltonPresident
                and Chief Executive OfficerDate:
                May 6, 2008
            By:
            /s/
                Bruce W. ElderBruce
                W. ElderPrincipal
                Financial Officer




-
          25
          -