UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      DC 20549





**FORM
      10-Q**





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





For
      the
      Quarterly Period Ended **September
      30, 2007**





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





Commission
      File Number 000-32951





**CRESCENT
      FINANCIAL CORPORATION**


(Exact
      name of registrant as specified in its charter)





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




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


**27513**


(Address
      of principal executive offices)


(Zip
      Code)





**(919)
      460-7770**


(Registrant’s
      telephone number, including area code)








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


Yes
x No
o





Indicate
      by check mark whether **** the
      registrant is a large accelerated filer, an accelerated filer, or a
      non-accelerated filer (as defined in Rule 12b-2 of the Exchange
      Act).




Large
      accelerated filer o Accelerated
      filer o Non-accelerated
      filer  x




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**


**9,385,669
      shares outstanding as of October 30, 2007**









**Part
        I. Financial Information**


**Item
                  1 -**
              **Financial
                  Statements (Unaudited)**
              Page
                  No.Consolidated
                  Balance Sheets September 30, 2007 (unaudited) and December 31,
                  2006
              3Consolidated
                  Statements of Operations Three and Nine Month Periods Ended September
                  30,
                  2007 and 2006 (unaudited)
              4Consolidated
                  Statements of Cash Flows Nine Months Ended September 30, 2007 and
                  2006
                  (unaudited)
              5
                  -
                  6Notes
                  to Consolidated Financial Statements
              7
                  -
                  9**Item
                  2**
              **Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations**
              10
                  - 24**Item
                  3**-****
              **Quantitative
                  and Qualitative Disclosures about Market Risk**
              25**Item
                  4T**-
              **Controls
                  and Procedures**
              25**Part
                  II.**
              **Other
                  Information****Item
                  1 -**
              **Legal
                  Proceedings**
              26**Item
                  1a -**
              **Risk
                  Factors**
              26**Item
                  2 -**
              **Unregistered
                  Sales of Equity Securities and Use of Proceeds**
              26**Item
                  3 -**
              **Defaults
                  Upon Senior Debt**
              26**Item
                  4 -**
              **Submission
                  of Matters to a Vote of Security Holders**
              26**Item
                  5****-******
              **Other
                  Information**
              26**Item
                  6 -**
              **Exhibits**
              26
  -2-


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


**Item
      1 - Financial Statements**





***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


***CONSOLIDATED
      BALANCE SHEETS***


September
                  30,
                2007
              
              
              December
                  31,
                  2006*(Unaudited)**ASSETS**Cash
                  and due from banks
              $
              13,127,459
              
              $
              14,295,053Interest-earning
                  deposits with banks
              
              364,465
              
              
              763,057Federal
                  funds sold
              
              4,054,000
              
              
              92,000Investment
                  securities available for sale at fair value
              
              89,799,359
              
              
              84,722,892Loans
              
              651,652,142
              
              
              549,818,548Allowance
                  for loan losses
              
              (8,190,000
              )
              
              (6,945,000
              )NET
                  LOANS
              
              643,462,142
              
              
              542,873,548Accrued
                  interest receivable
              
              3,720,751
              
              
              3,045,840Federal
                  Home Loan Bank stock
              
              6,565,700
              
              
              3,582,800Bank
                  premises and equipment
              
              6,920,921
              
              
              5,907,664Investment
                  in life insurance
              
              9,034,531
              
              
              5,683,493Goodwill
              
              30,233,049
              
              
              30,225,549Other
                  assets
              
              6,968,137
              
              
              6,717,324TOTAL
                  ASSETS
              $
              814,250,514
              
              $
              697,909,220LIABILITIES
                  AND STOCKHOLDERS’ EQUITYLIABILITIESDepositsDemand
              $
              72,653,401
              
              $
              70,420,392Savings
              
              122,358,826
              
              
              78,379,431Money
                  market and NOW
              
              88,294,992
              
              
              97,343,128Time
              
              312,319,812
              
              
              295,738,729TOTAL
                  DEPOSITS
              
              595,627,031
              
              
              541,881,680Short-term
                  borrowings
              
              10,000,000
              
              
              24,451,000Long-term
                  borrowings
              
              116,248,000
              
              
              45,248,000Accrued
                  expenses and other liabilities
              
              3,272,737
              
              
              3,294,562TOTAL
                  LIABILITIES
              
              725,147,768
              
              
              614,875,242STOCKHOLDERS’
                  EQUITYPreferred
                  stock, no par value, 5,000,000 shares authorized, noneoutstanding;
              
              -
              
              
              -Common
                  stock, $1 par value, 20,000,000 shares authorized;
                  9,335,755shares
                  outstanding September 30, 2007; 8,265,136 shares
                  outstandingDecember
                  31, 2006
              
              9,335,755
              
              
              8,265,136Additional
                  paid-in capital
              
              73,393,757
              
              
              62,659,201Retained
                  earnings
              
              6,847,347
              
              
              12,610,588Accumulated
                  other comprehensive loss (Note D)
              
              (474,113
              )
              
              (500,947
              )TOTAL
                  STOCKHOLDERS’ EQUITY
              
              89,102,746
              
              
              83,033,978COMMITMENTS
                  (Note B)TOTAL
                    LIABILITIES AND STOCKHOLDERS’ EQUITY
              $
              814,250,514
              
              $
              697,909,220





*
      Derived
      from audited consolidated financial statements.





See
      accompanying notes to consolidated financial statements




-3-




***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


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


***Three
      and Nine Month Periods Ended September 30, 2007 and
      2006***




Three-month
                    Periods
                  Ended
                    September 30,
            
            
            Nine-month
                    Periods
                  Ended
                    September 30,2007
            
            
            2006
            
            
            2007
            
            
            2006INTEREST
                INCOMELoans
            
            $
            12,867,174
            
            $
            8,516,336
            
            $
            36,773,484
            
            $
            21,968,600Investment
                securities available for sale
            
            
            1,142,247
            
            
            877,182
            
            
            3,298,657
            
            
            2,264,809Federal
                funds sold and interest-bearing deposits
            
            
            85,491
            
            
            128,799
            
            
            381,944
            
            
            184,644TOTAL
                INTEREST INCOME
            
            
            14,094,912
            
            
            9,522,317
            
            
            40,454,085
            
            
            24,418,053INTEREST
                EXPENSEDeposits
            
            
            6,120,881
            
            
            3,823,924
            
            
            17,646,841
            
            
            9,046,063Short-term
                borrowings
            
            
            148,877
            
            
            164,532
            
            
            647,883
            
            
            609,976Long-term
                borrowings
            
            
            1,016,751
            
            
            619,665
            
            
            2,537,350
            
            
            1,556,933TOTAL
                INTEREST EXPENSE
            
            
            7,286,509
            
            
            4,608,121
            
            
            20,832,074
            
            
            11,212,972NET
                INTEREST INCOME
            
            
            6,808,403
            
            
            4,914,196
            
            
            19,622,011
            
            
            13,205,081PROVISION
                FOR LOAN LOSSES
            
            
            665,588
            
            
            181,983
            
            
            1,347,184
            
            
            616,624NET
                INTEREST INCOME AFTERPROVISION
                FOR LOAN LOSSES
            
            
            6,142,815
            
            
            4,732,213
            
            
            18,274,827
            
            
            12,588,457NON-INTEREST
                INCOMEMortgage
                loan origination revenue
            
            
            145,344
            
            
            193,334
            
            
            395,845
            
            
            503,801Fees
                on deposit accounts
            
            
            336,021
            
            
            320,578
            
            
            1,005,665
            
            
            946,121Earnings
                on life insurance
            
            
            97,755
            
            
            57,413
            
            
            281,134
            
            
            170,674Gain
                (loss) on sale or disposal of assets
            
            
            1
            
            
            (500
            )
            
            (941
            )
            
            (627
            )Other
            
            
            110,365
            
            
            124,382
            
            
            283,975
            
            
            290,380TOTAL
                NON-INTEREST INCOME
            
            
            689,486
            
            
            695,207
            
            
            1,965,678
            
            
            1,910,349NON-INTEREST
                EXPENSESalaries
                and employee benefits
            
            
            2,476,210
            
            
            1,899,145
            
            
            7,415,795
            
            
            5,138,194Occupancy
                and equipment
            
            
            581,815
            
            
            512,227
            
            
            1,693,700
            
            
            1,470,758Data
                processing
            
            
            277,736
            
            
            205,318
            
            
            794,992
            
            
            573,763Other
            
            
            1,066,330
            
            
            815,548
            
            
            3,341,132
            
            
            2,224,395TOTAL
                NON-INTEREST EXPENSE
            
            
            4,402,091
            
            
            3,432,238
            
            
            13,245,619
            
            
            9,407,110INCOME
                BEFORE INCOME TAXES
            
            
            2,430,210
            
            
            1,995,182
            
            
            6,994,886
            
            
            5,091,696INCOME
                TAXES
            
            
            867,600
            
            
            720,900
            
            
            2,518,400
            
            
            1,831,500NET
                INCOME
            
            $
            1,562,610
            
            $
            1,274,282
            
            $
            4,476,486
            
            $
            3,260,196NET
                INCOME PER COMMON SHAREBasic
            
            $
            .17
            
            $
            .17
            
            $
            .49
            
            $
            .49Diluted
            
            $
            .16
            
            $
            .16
            
            $
            .47
            
            $
            .45WEIGHTED
                AVERAGE COMMONSHARES
                OUTSTANDING (Note C)Basic
            
            
            9,246,318
            
            
            7,282,417
            
            
            9,160,582
            
            
            6,676,558Diluted
            
            
            9,642,429
            
            
            7,788,370
            
            
            9,623,399
            
            
            7,186,466


See
      accompanying notes to consolidated financial statements




-4-





***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


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


***Nine
      Months Ended September 30, 2007 and 2006***


2007
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  income
              
              $
              4,476,486
              
              $
              3,260,196Adjustments
                  to reconcile net income to net cash used by operating
                  activitiesDepreciation
              
              
              526,628
              
              
              520,233Provision
                  for loan losses
              
              
              1,347,184
              
              
              616,624Deferred
                  income taxes
              
              
              (308,000
              )
              
              (138,351
              )Loss
                  on sale or disposal of assets
              
              
              941
              
              
              627Net
                  amortization (accretion) on securities
              
              
              (74,866
              )
              
              1,022Increase
                  in cash value of life insurance
              
              
              (251,038
              )
              
              (149,700
              )Stock
                  based compensation
              
              
              132,930
              
              
              109,238Change
                  in assets and liabilities(Increase)
                  in accrued interest receivable
              
              
              (674,912
              )
              
              (1,181,916
              )Decrease
                  in other assets
              
              
              35,948
              
              
              134Increase
                  in accrued interest payable
              
              
              423,027
              
              
              222,655(Decrease)
                  in other liabilities
              
              
              (444,853
              )
              
              (386,097
              )TOTAL
                  ADJUSTMENTS
              
              
              712,989
              
              
              (385,531
              )NET
                  CASH PROVIDED BY OPERATING ACTIVITIES
              
              
              5,189,475
              
              
              2,874,665CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchases
                  of securities available for sale
              
              
              (12,329,358
              )
              
              (22,405,817
              )Proceeds
                  from sales of securities available for sale
              
              
              -
              
              
              6,106,354Principal
                  repayments of securities available for sale
              
              
              7,375,831
              
              
              4,704,029Proceeds
                  from sale of foreclosed assets
              
              
              -
              
              
              32,629Purchase
                  of Federal Home Loan Bank stock
              
              
              (2,982,900
              )
              
              (713,300
              )Net
                  increase in loans
              
              
              (101,935,778
              )
              
              (69,423,033
              )Investment
                  in life insurance
              
              
              (3,100,000
              )
              
              -Net
                  cash provided in business combination
              
              
              (7,500
              )
              
              8,246,427Purchases
                  of bank premises and equipment
              
              
              (1,540,825
              )
              
              (1,409,373
              )NET
                  CASH USED BY INVESTING ACTIVITIES
              
              
              (114,520,530
              )
              
              (74,862,084
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESNet
                  increase in deposits:Non-interest
                  bearing demand
              
              
              2,233,009
              
              
              13,270,138Savings
              
              
              43,979,395
              
              
              64,836,812Money
                  market and NOW
              
              
              (9,048,137
              )
              
              (11,524,214
              )Time
                  deposits
              
              
              16,581,083
              
              
              7,379,747Net
                  (decrease) in short-term borrowings
              
              
              (14,451,000
              )
              
              (223,153
              )Net
                  increase in long-term borrowings
              
              
              71,000,000
              
              
              15,000,000Proceeds
                  from the issuance of stock
              
              
              1,050,106
              
              
              180,131Cash
                  paid in lieu of fractional shares
              
              
              (7,687
              )
              
              (9,477
              )Excess
                  tax benefits from stock options exercised
              
              
              390,100
              
              
              20,100NET
                  CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              111,726,869
              
              
              88,930,084NET
                  INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              2,395,814
              
              
              16,942,665CASH
                  AND CASH EQUIVALENTS, BEGINNING OF PERIOD
              
              
              15,150,110
              
              
              9,471,507CASH
                  AND CASH EQUIVALENTS, END OF PERIOD
              
              $
              17,545,924
              
              $
              26,414,172


See
      accompanying notes to consolidated financial statements




-5-





***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


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


***Nine
      Months Ended September 30, 2007 and 2006***





SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION





2007
              
              2006Purchase
                  of Port City Capital BankLoans,
                  net of reserves
              
              
              -
              
              
              (126,715,970
              )Stock
                  in FHLB
              
              
              -
              
              
              (16,366,192
              )Investment
                  securities available for sale
              
              
              -
              
              
              (286,100
              )Bank
                  premises and equipment
              
              
              -
              
              
              (84,775
              )Other
                  assets acquired
              
              
              -
              
              
              (1,104,933
              )Goodwill
              
              
              (7,500
              )
              
              (26,684,020
              )Core
                  deposit intangible
              
              
              -
              
              
              (1,124,481
              )Deposits
              
              
              -
              
              
              144,187,695Other
                  liabilities assumed
              
              
              -
              
              
              819,011Issuance
                  of stock
              
              
              -
              
              
              35,998,375Net
                  cash disbursed in business combination
              
              
              (7,500
              )
              $
              8,246,427Increase
                  in accrued interest payable


-6-





***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


***Notes
      to Consolidated Financial Statements***





**NOTE
      A - BASIS OF PRESENTATION**




In
      management’s opinion, the financial information, which is unaudited, reflects
      all adjustments (consisting solely of normal recurring adjustments) necessary
      for a fair presentation of the financial information as of and for the three
      and
      nine-month periods ended September 30, 2007 and 2006, in conformity with
      accounting principles generally accepted in the United States of America. The
      financial statements include the accounts of Crescent Financial Corporation
      (the
“Company”) and its wholly owned subsidiary, Crescent State Bank (the “Bank”).
      All significant inter-company transactions and balances are eliminated in
      consolidation. Operating results for the three and nine-month periods ended
      September 30, 2007 are not necessarily indicative of the results that may be
      expected for the fiscal year ending December 31, 2007.





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 2006 annual report on Form
      10-K. This quarterly report should be read in conjunction with such annual
      report.





**NOTE
      B - COMMITMENTS**




At
        September 30, 2007, commitments are as follows
  Undisbursed
                  lines of credit
              
              $
              167,817,000Stand-by
                  letters of credit
              
              
              5,981,000Undisbursed
                  commitment to purchase additionalinvestment
                  in Small Business Investment Corporation
              
              
              413,000




**NOTE
      C - PER SHARE RESULTS**




On
      April
      18, 2007, the Company declared an 11-for-10 stock split payable on May 22,
      2007
      to stockholders of record May 11, 2007. Weighted average share and per share
      data for the periods presented have been adjusted to reflect the effects of
      the
      stock split. Basic and diluted net income 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 dividend.




Basic
      earnings per share represent 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, which are determined using the treasury stock method, and restricted
      stock awards.




-7-




***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


***Notes
      to Consolidated Financial Statements***


Three
                  months ended
              
              Nine
                  months endedSeptember
                  30,
              
              September
                  30,2007
              
              2006
              
              2007
              
              2006Weighted
                  average number of sharesused
                  in computing basic net incomeper
                  share
              
              
              9,246,318
              
              
              7,282,417
              
              
              9,160,582
              
              
              6,676,558Effect
                  of dilutive stock options andrestricted
                  stock awards
              
              
              396,111
              
              
              505,953
              
              
              462,817
              
              
              509,908Weighted
                  average number of sharesused
                  in computing diluted net incomeper
                  share
              
              
              9,642,429
              
              
              7,788,370
              
              
              9,623,399
              
              
              7,186,466





As
      of
      September 30, 2007, there were 45,727 options that were anti-dilutive. As of
      September 30, 2006, there were 1,898 options that were anti-dilutive.




**NOTE
      D - COMPREHENSIVE INCOME**




For
      the
      three months ended September 30, 2007 and 2006, total comprehensive income,
      consisting of net income and unrealized securities gains and losses, net of
      taxes, was approximately $2,072,000 and $2,147,000, respectively. For
      the
      nine months ended September 30, 2007 and 2006, total comprehensive income was
      approximately $4,503,000 and $3,458,000, respectively.





**NOTE
      E - INCOME TAXES**




Effective
      January 1, 2007, the Company adopted Financial Accounting Standards Board
      Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
      interpretation of FASB Statement 109 (FIN 48). FIN 48 provides guidance on
      financial statement recognition and measurements of tax positions taken, or
      expected to be taken, in tax returns. The initial adoption of FIN 48 had no
      impact on the Company’s financial statements. As of January 1, 2007, there were
      no unrecognized tax benefits.





The
      amount of unrecognized tax benefits may increase or decrease for various reasons
      including adding amounts for current year tax positions, expiration of open
      income tax returns due to statue of limitations, changes in management’s
      judgment about the level of uncertainty, status of examinations, litigation
      and
      legislative activity and the addition or elimination of uncertain tax
      positions.





Crescent’s
      policy is to report interest and penalties, if any, related to unrecognized
      tax
      benefits in other non-interest expense in the Consolidated Statement of
      Operations.





Crescent’s
      federal and state income tax returns are open and subject to examination from
      the 2004 tax return year and forward.





**NOTE
      F - RECENT ACCOUNTING PRONOUNCEMENTS**




The
      provisions of SFAS No. 156, Accounting for Servicing of Financial Assets—an
      amendment of FASB Statement No. 140, were effective beginning January 1, 2007.
      The adoption of the provisions of SFAS No. 156 had no effect on financial
      position or results of operations.




SFAS
      No.
      157, Fair Value Measurements, defines fair value, establishes a framework for
      measuring fair value in generally accepted accounting principles, and expands
      disclosures about fair value measurements. SFAS No. 157 is effective for fiscal
      years beginning after November 15, 2007. The Company is in the process of
      evaluating the impact of the adoption of SFAS No. 157 on the consolidated
      financial statements.




-8-




SFAS
      No.
      159, The Fair Value Option for Financial Assets and Financial Liabilities,
      permits an entity to choose to measure many financial instruments and certain
      other items at fair value. The fair value option permits companies to choose
      to
      measure eligible items at fair value at specified election dates. Companies
      will
      report unrealized gains and losses on items for which the fair value option
      has
      been elected in earnings after adoption. SFAS No. 159 requires additional
      disclosures related to the fair value measurements included in the companies
      financial statements. This statement is effective for financial statements
      issued for fiscal years beginning after November 15, 2007. Early adoption is
      permitted; however, we will adopt SFAS No. 159 effective January 1, 2008. We
      are
      evaluating the impact of SFAS No. 159 on the consolidated financial
      statements.




-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 September 30,
      2007 and 2006. It should be read in conjunction with the audited consolidated
      financial statements and accompanying notes included in the Company’s Form 10-K
      for the year ended December 31, 2006. 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 SEPTEMBER 30, 2007 AND**


**DECEMBER
      31, 2006**





Total
      assets at September 30, 2007 increased by $116.3 million or 17% to $814.2
      million compared with $697.9 million at December 31, 2006. Earning assets at
      September 30, 2007 totaled $752.4 million or 92% of total assets compared with
      $639.0 million or 91% at December 31, 2006. Components of earning assets at
      September 30, 2007 are $651.6 million in gross loans, $96.4 million in
      investment securities and Federal Home Loan Bank (FHLB) stock, $4.0 million
      in
      federal funds sold, and $364,000 in interest bearing deposits with correspondent
      banks. Earning assets at December 31, 2006 consisted of $549.8 million in gross
      loans, $88.3 million in investment securities and FHLB stock and $855,000 in
      overnight investments and interest bearing deposits. Total deposits and
      stockholders’ equity at September 30, 2007 were $595.6 million and $89.1
      million, respectively, compared to $541.9 million and $83.0 million at December
      31, 2006.





Gross
      loans outstanding at September 30, 2007 increased by $101.8 million or 19%
      to
      $651.6 million compared to $549.8 million reported at December 31, 2006. The
      composition of the loan portfolio, by category, as of September 30, 2007 is
      51%
      commercial mortgage loans, 27% construction loans, 11% commercial loans, 7%
      home
      equity loans and lines, 3% residential mortgage loans and 1% consumer loans.
      The
      construction and acquisition/development category showed the most growth
      increasing $65.1 million or 59% from $109.8 million to $174.9 million. Other
      loan categories experiencing growth during the nine-month period include
      commercial real estate mortgage loans increasing by $26.2 million or 9% to
      $330.6 million, commercial and industrial loans increasing by $9.1 million
      or
      13% to $76.9 million, home equity loans and lines increasing by $2.1 million
      or
      5% to $44.8 million, and consumer loans increasing by $507,000 or 10% to $5.5
      million. Residential mortgage loans declined $1.2 million from $20.2 million
      to
      $19.0 million. The composition of the loan portfolio, by category, as of
      December 31, 2006 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 September 30, 2007 of $8.2 million
      or 1.26% of total outstanding loans compared to $6.9 million or 1.26% of total
      outstanding loans at December 31, 2006. At September 30, 2007, there were
      11 loans totaling $1.4 million in non-accrual status. We anticipate that two
      of
      these non-accrual loans totaling $381,000 will be paid off by mid November
      with
      no loss sustained. There were no loans past due 90 days or more and still
      accruing interest at September 30, 2007. Non-performing loans as a percentage
      of
      total loans at the current quarter end were 0.22%. At December 31, 2006, there
      were two loans totaling $135,000 in non accrual status and no loans past due
      90
      days or more and still accruing interest. Non-performing loans as a percentage
      of total loans at December 31, 2006 were 0.02%. For a more detailed discussion,
      see the section entitled Non-Performing Assets.




-10-




The
      Company has investment securities with an amortized cost of $90.6 million at
      September 30, 2007. 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 $89.8 million compared with $84.7 million at December
      31, 2006. At quarter end, there were no securities considered other than
      temporarily impaired. The Company’s investment securities consist of U.S.
      Government agency securities, collateralized mortgage obligations,
      mortgage-backed securities, municipal bonds and other marketable equity
      securities. The increase during the nine months of 2007 consisted of $12.3
      million in new purchases, a $70,000 increase in fair market value and $75,000
      in
      net accretion of discounts less $7.4 million in principal re-payments.





The
      Company owned $6.6 million of Federal Home Loan Bank (FHLB) stock at September
      30, 2007 compared to $3.6 million at December 31, 2006. As a member of the
      FHLB,
      the Company is required to maintain a certain level of FHLB stock based on
      asset
      size and outstanding borrowed funds.





There
      were $4.0 million in Federal funds sold at September 30, 2007 compared to
      $92,000 at December 31, 2006. Federal funds sold represent excess daily
      liquidity which is placed in overnight investments. Federal funds sold are
      ultimately used to fund new loans or purchase more permanent
      investments.





Interest-earning
      deposits held at correspondent banks decreased to $364,000 from $763,000 at
      December 31, 2006. Funds held in interest-bearing accounts at correspondent
      banks represent principal and interest payments from the investment portfolio
      waiting to be re-invested.





Non-earning
      and other assets increased by approximately $4.1 million between December 31,
      2006 and September 30, 2007. The largest component of the increase was in bank
      owned life insurance. The Company made an additional investment of $3.1 million
      in February 2007 and increases in cash value pushed the total increase to almost
      $3.4 million. Other assets experiencing increases between December 31, 2006
      and
      September 30, 2007 include bank premises and equipment, interest receivable
      and
      deferred tax asset. Cash and non-interest bearing deposits due from banks have
      declined since year-end.





Total
      deposits increased by $53.7 million or 10% between December 31, 2006 and
      September 30, 2007 from $541.9 million to $595.6 million. The largest increase
      occurred in the savings category, which grew by $44.0 million or 56% to $122.4
      million from $78.4 million $312.3 million from $295.7 million at year end 2006.
      The total increase in time deposits is comprised of a net increase in brokered
      deposits of $1.6 million and a net increase in retail certificates and IRA’s of
      $15.0 million. The Company’s reliance on wholesale brokered funding declined
      somewhat during the third quarter as more fully explained below in the
      discussion on borrowings. Increases to other deposit categories were as follows:
      time deposit balances grew by $16.6 million or 6% million to $312.3 million
      and
      non-interest bearing demand deposits grew by $2.2 million or 3% to $72.7
      million. Both the interest-bearing demand deposit and money market deposit
      categories declined during the first nine months by $708,000 and $8.3 million,
      respectively. The introduction of a new high-yielding relationship savings
      product in May 2006 caused some disintermediation between these categories
      and
      savings.





The
      composition of the deposit base, by category, at September 30, 2007 is as
      follows: 52% time deposits, 21% savings deposits, 12% non-interest-bearing
      demand deposits, 9% money market and 6% interest-bearing demand deposits. The
      composition of the deposit base, by category, at December 31, 2006 was 55%
      time deposits, 14% savings deposits, 13% non-interest-bearing demand deposits,
      11% money market and 7% interest-bearing demand deposits. Time deposits of
      $100,000 or more totaled $244.9 million at September 30, 2007 compared to $229.8
      million at December 31, 2006. 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 $143.3 million
      at
      September 30, 2007 compared with $141.7 million at December 31,
      2006.




-11-




The
      Company had $116.2 million of long-term debt outstanding at September 30, 2007
      compared to $45.2 million at December 31, 2006. The long-term debt is comprised
      of $108.0 million in FHLB term advances and $8.2 million in junior subordinated
      debt. At September 30, 2007, the Company had $10.0 million in short-term debt
      outstanding compared to $24.5 million at December 31, 2006. Short-term
      borrowings consist of FHLB term advances with remaining maturities of less
      than
      one year and Federal funds purchased from correspondent banks.





During
      the third quarter, there was a significant shift in the Company’s funding
      strategy as a result of external factors. Historically, the cost of buying
      wholesale brokered time deposits was slightly less than or equal to that of
      borrowing a bullet advance from the FHLB. Furthermore, since brokered funds
      are
      not required to be collateralized, the brokered market was our funding source
      of
      choice. However, as a result of the credit and liquidity crisis spurred on
      by
      the sub-prime mortgage problems, several very large mortgage banking companies
      were unable to find funding through normal channels and turned to the brokered
      time deposit market beginning in mid August. Consequently, the heavy demand
      increased the cost of brokered money to levels higher than FHLB borrowings.
      Due
      to the lower cost of FHLB funding, the sharp loan demand experienced during
      August and September and the maturity of existing brokered funds, the Company
      experienced a large increase in borrowed money. By the very end of September,
      the credit markets relating to corporate finance began to normalize and we
      would
      anticipate returning to our previous strategy and favor the use of brokered
      funds.





Accrued
      interest payable and other liabilities were flat for the nine-month period
      totaling $3.3 million at both December 31, 2006 and September 30, 2007.





Between
      December 31, 2006 and September 30, 2007, total stockholders’ equity rose by
      $6.1 million. The increase resulted from net income for the first nine months
      of
      $4.5 million plus $1.0 million in new stock issuance pursuant to the exercise
      of
      stock options, $133,000 in stock based compensation expense and a decline in
      unrealized losses on available for sale securities of $27,000. The Company
      distributed an 11-for-10 stock split on May 22, 2007. Retained earnings was
      reduced by the fair value of the stock dividend, as determined by using the
      adjusted stock price on the date of declaration, and the common stock and
      additional paid in capital accounts were adjusted to reflect the new shares
      issued.




**COMPARISON
      OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS**


**ENDED
      SEPTEMBER 30, 2007 AND 2006**





**Net
      Income.** **** Net
      income for the three-month period ended September 30, 2007 was $1.6 million
      or
      22% higher than net income of $1.3 million for the three-month period ended
      September 30, 2006. Diluted earnings per share for both periods was $0.16.
      Annualized return on average assets declined to 0.79% from 0.94% for the prior
      year quarter. The decline was due in part to a lower net interest margin
      resulting from strong earning asset growth priced in a very competitive lending
      environment and being funded with high cost sources of money. A flat yield
      curve
      environment and higher non-interest expenses also contributed to the lower
      return on average assets. Return on average equity for the current period was
      7.04% compared to 8.99% for the prior period. Return on average equity declined
      due to the lower return on assets and the additional shares issued in
      conjunction with the acquisition of Port City Capital Bank in August 2006.





**Net
      Interest Income.** Net
      interest income increased by $1.9 million or 39% from $4.9 million for the
      prior
      year three-month period to $6.8 million for the three-month period ended
      September 30, 2007. Total interest income for the current three month period
      benefited from a higher volume of earning assets and a slightly higher yield
      earned on those assets. Total interest expense from deposits and other
      borrowings increased due to growth of interest-bearing liabilities used to
      fund
      the earning assets and the higher incremental cost of obtaining those
      liabilities. The Company’s net interest margin decreased from 3.89% to 3.72% due
      to a greater dependency on interest-bearing liabilities to fund balance sheet
      growth and the shape of the interest rate yield curve.




-12-




Total
      interest income was $14.1 million at September 30, 2007 compared to $9.5 million
      for the comparable three-month period from the prior year. The 48% increase
      was
      the result of an additional $4.4 million due to the growth in total average
      earning assets and a $128,000 increase due to higher yields realized on earning
      assets. Total interest expense for the current period rose by $2.7 million
      from
      $4.6 million to $7.3 million. The increase was the result of an additional
      $2.4
      million in interest expense due to volume growth and a $236,000 increase due
      to
      the higher cost of money.





Total
      average earning assets increased $224.0 million or 45% from an average of $501.4
      million for the prior year three-month period to an average of $725.4 million
      for the three-month period ended September 30, 2007. The average balance of
      loans outstanding during the current quarter was $625.1 million, a $207.3
      million or 50% increase over the $417.8 million of average outstanding loans
      for
      the prior period. The average balance of the investment securities portfolio
      for
      the current three-month period was $93.7 million, increasing by $20.1 million
      or
      27% compared to an average of $73.6 million for the prior period. The average
      balance of federal funds sold and other earning assets decreased to $6.5 million
      from $9.9 million.





Average
      interest-bearing liabilities increased by $202.7 million or 48% from $422.9
      million for the quarter ended September 30, 2006 to $625.6 million for the
      current quarter. Total interest-bearing deposits increased by $166.9 million
      or
      45% from $368.2 million to $535.1 million. Time deposits experienced the largest
      increase averaging $326.0 million during the current year period compared to
      $220.9 million for the prior period. Total borrowings increased by 66% or $35.8
      million from $54.7 million to $90.5 million.





Net
      interest margin is interest income earned on loans, securities and other earning
      assets, less interest expense paid on deposits and borrowings, expressed as
      a
      percentage of total average earning assets. The net interest margin for the
      three-month period ended September 30, 2007 was 3.72% compared to 3.89% for
      the
      three-month period ended September 30, 2006. The average yield on earning assets
      for the current three-month period increased 17 basis points to 7.71% compared
      with 7.54% for the prior year period, while the average cost of interest-bearing
      funds increased by 30 basis points to 4.62% from 4.32%. The interest rate
      spread, which is the difference between the average yield on earning assets
      and
      the cost of interest-bearing funds, decreased by 12 basis points to 3.10% for
      the quarter ended September 30, 2007 from 3.22%% for the prior year quarter.
      The
      percentage of interest earning assets to average interest-bearing liabilities
      decreased from 118.57% for the prior year period to 115.95% for the three months
      ended September 30, 2007. A decrease in the ratio of average earning assets
      to
      average interest-bearing liabilities indicates an increased dependency on
      interest-bearing forms of funding to meet the demand of earning asset
      growth.





Over
      the
      two comparative three-month periods, interest rates have been stable with the
      final Federal Reserve increase coming on July 5, 2006. Between July 1, 2004 and
      July 5, 2006, the Federal Reserve (the “Fed”) increased short-term interest
      rates seventeen times for a total of 425 basis points. Rather causing a parallel
      shift in the interest rate yield curve, the increases caused a flattening and/or
      inversion with rates in the intermediate and long-term sectors being equal
      to or
      less than short-term rates. While the increased rates had a favorable impact
      on
      earning asset yields, the incremental cost to fund asset growth increased
      significantly. In mid September 2007, the Fed eased rates by 50 basis points
      in
      response to turmoil in the financial and mortgage sectors. The action has caused
      the yield curve to steepen to some extent.




Approximately
      54% of the Company’s loan portfolio has variable rate pricing based on the Prime
      lending rate or LIBOR (London Inter Bank Offering Rate). Due to the high
      incremental cost of funding loans, we had experienced a declining net interest
      margin during the past several quarters. During the third quarter, margin had
      somewhat stabilized. The recent Fed action will once again apply some downward
      pressure on net interest margin. The steepening of the yield curve may allow
      the
      Company to originate longer term fixed rate loans at or slightly lower than
      levels seen prior to the rate cut and those loans can be funded at a lower
      cost.
      This may allow the spread on new fixed rate loans to widen slightly, but the
      impact of the rate cut on the variable portion of the loan portfolio will be
      unfavorable.




-13-




**Provision
      for Loan Losses.** The
      Company’s provision for loan losses for the three-month period ended September
      30, 2007 was $666,000 compared to $182,000 for the same period in 2006.
      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 growth in balances of total loans outstanding
      during the third quarter of 2007, although the analysis discussion outlines
      additional factors impacting the provision. The allowance for loan losses was
      $8.2 million at September 30, 2007, representing 1.26% of total outstanding
      loans.





**Non-Interest
      Income.** For
      the
      three-month period ended September 30, 2007, non-interest income decreased
      by
      $6,000 to $689,000 compared to $695,000 for the same period in 2006. The
      decrease is due to a reduction in mortgage loan origination fees of $48,000
      and
      a $37,000 decrease in distributions received from certain non-marketable equity
      securities. Several categories of recurring non-interest income showed
      improvement over the comparative quarters. Income from the increase in cash
      value from bank owned life insurance grew by $40,000, fees earned from
      investment referral increased by $28,000, non-yield related loan fees increased
      by $20,000 and service charges and other deposit related fees increased by
      $16,000. The reduction in mortgage origination fees reflects an overall slowdown
      in the housing sector.




**Non-Interest
      Expenses.** For
      the
      three-month period ended September 30, 2007, non-interest expenses increased
      by
      $1.0 million or 28% from $3.4 million to $4.4 million. The largest component
      of
      non-interest expense for the current period was personnel expense. Salaries
      and
      benefits expense increased by $577,000 or 30% to $2.5 million for the current
      year period compared to $1.9 million for the same period in the prior year.
      As
      is the case for all non-interest expenses, the increase in salary and
      compensation expense is largely due to the addition of our new Wilmington Main
      Office (the former Port City Capital Bank). The acquisition took place on August
      31, 2006, so only one month of the prior period results included expenses
      related to the additional market area. Management anticipates personnel expense
      to continue to increase as we identify new opportunities for
      expansion.





Occupancy
      and equipment expenses increased by $70,000 or 14% from $512,000 for the
      three-month period ended September 30, 2006 to $582,000 for the current year
      period. The increase is primarily due to recurring expenses of the new
      Wilmington Main Office. Data processing costs increased by $72,000 or 35%.
      The
      Company outsources its data processing and expenses are closely tied to
      transaction and account volumes. The increase is reflective of not only the
      acquisition, but higher account volumes across the Company. As Crescent State
      Bank continues to grow and expand, management expects both occupancy and data
      processing costs to increase.





Other
      non-interest expenses increased by $251,000 to $1.0 million for the third
      quarter of 2007 compared with $816,000 for the prior year quarter. 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 $868,000 for the three-months ended
      September 30, 2007 compared with $721,000 for the prior year period. The
      effective tax rate for the three-month period ended September 30, 2007 was
      35.70% compared with 36.13% for the prior year period. The decrease in the
      effective tax rate is attributable to an increase in income from tax exempt
      sources.





-14-





**COMPARISON
      OF RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIODS**


**ENDED
      SEPTEMBER 30, 2007 AND 2006**





**Net
      Income.** Net
      income for the nine-month period ended September 30, 2007 was $4,476,000 or
      $0.47 per diluted share compared to $3,260,000 or $0.45 per diluted share for
      the nine-month period ended September 30, 2006. The $1.2 million increase
      represents a percentage increase of 37%. Diluted earnings per share did not
      show
      the same percentage increase as net income due to the issuance of 2,676,000
      shares, adjusted for the 11-for-10 stock split paid on May 22, 2007, pursuant
      to
      the Port City Capital Bank acquisition. Annualized return on average assets
      was
      0.79% and 0.92% for the two periods ended September 30, 2007 and 2006,
      respectively. The decline in return on assets was primarily attributed to a
      lower net interest margin resulting from the shape of the yield curve, the
      higher cost of funding earning asset growth and an increase in non-interest
      expenses. Return on average equity for the current period was 6.94% compared
      to
      9.21% for the prior period. Return on average equity decreased due to a lower
      return on average assets and the increased equity resulting from the Port City
      Capital Bank acquisition.




**Net
      Interest Income.** Net
      interest income increased by $6.4 million or 49% from $13.2 million for the
      nine-month period ended September 30, 2006 to $19.6 million for the current
      period. Growth in both earning assets and interest bearing liabilities resulted
      in increases in both total interest income and total interest expense in the
      current period.





Total
      interest income was $40.4 million for the current nine-month period compared
      to
      $24.4 million for the prior year period, an increase of $16.0 million or 66%.
      The total increase was comprised of a $14.5 million increase due to growth
      in
      average earning assets and a $1.5 million increase due to the rising average
      yield earned on those assets. Total interest expense increased by $9.6 million
      or 86% from $11.2 million for the prior year period to $20.8 million for the
      current period. The increase was the result of a $7.6 million increase due
      to
      growth in interest-bearing liabilities and a $2.0 million increase due to the
      rising cost of funds.





Total
      average earning assets increased $253.9 million or 57% from an average of $444.7
      million as of September 30, 2006 to an average of $698.6 million for the
      nine-month period ended September 30, 2007. The average balance of loans
      outstanding during the current period was $597.0 million reflecting a $222.8
      million or 60% increase over the $374.2 million for the prior year period.
      The
      average balance of the investment securities portfolio for the current period
      was $91.3 million, increasing by $25.6 million or 39% compared to an average
      of
      $65.7 million at September 30, 2006. The average balance of federal funds sold
      and other earning assets increased to $10.3 million for the current nine-month
      period compared to $4.9 million for the prior period.





Total
      average interest-bearing liabilities increased by $225.5 million or 60% from
      an
      average of $374.8 million for the period ended September 30, 2006 to $600.3
      million for the current nine-month period. Average interest-bearing deposits
      increased by $198.7 million or 62% growing from $320.5 million to $519.2
      million. Total average borrowings increased by $26.7 million or 49% to $81.0
      million for the current nine-month period from $54.3 million for the prior
      year
      period.





The
      net
      interest margin for the current period was 3.76% compared to 3.97% for the
      prior
      year period. The average yield on earning assets increased by 40 basis points
      to
      7.74% compared with 7.34%, while the average cost of interest-bearing funds
      increased by 64 basis points to 4.64% from 4.00%. The spread between the rates
      paid on earning assets and the cost of interest-bearing funds decreased by
      24
      basis points from 3.34% to 3.10%. The Company’s reliance on interest-bearing
      liabilities to fund earning asset growth increased as the percentage of interest
      earning assets to interest bearing liabilities declined from 118.67% to
      116.39%.





**Provision
      for Loan Losses.** The
      Company’s provision for loan losses for the nine-month period ended September
      30, 2007 was $1.3 million compared to $617,000 for the same period in 2006.
      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 loan loss provision
      is primarily due to net loan growth in the current period compared to that
      of
      the prior year period. See the section entitled “Non Performing Assets” for more
      details. The allowance for loan losses was $8.2 million at September 30, 2007,
      representing 1.26% of total outstanding loans.




-15-




**Non-Interest
      Income.** For
      the
      nine-month period ended September 30, 2007, non-interest income increased by
      $55,000 to just under $2.0 million. The largest components of non-interest
      income were $829,000 in customer service fees, $396,000 in mortgage loan
      origination fees, $281,000 increased cash surrender value on life insurance,
      $177,000 in service charges and fees on deposit accounts, and $115,000 in
      investment referral fees. Investment referral fees are included in other
      miscellaneous income.





For
      the
      nine-month period ended September 30, 2006, non-interest income consisted of
      $811,000 in customer service fees, $504,000 in mortgage loan origination fees,
      $171,000 increase in cash surrender value on life insurance, $135,000 in service
      charges and fees on deposit accounts, and $71,000 in investment referral fees.





The
      decline in mortgage origination fee revenue reflects the overall slowdown being
      experienced in the housing sector.





**Non-Interest
      Expenses.** Non-interest
      expenses increased by 41% or $3.8 million to $13.2 million for the nine-month
      period ended September 30, 2007 compared with $9.4 million for the same period
      ended September 30, 2006. The Company acquired Port City Capital Bank on August
      31, 2006, so the 2006 nine-month period included only one month of non-interest
      expenses associated with our new Wilmington Main Office.





The
      largest component of non-interest expense for the current period was personnel
      expense. Salaries and benefits expense was $7.4 million for the current
      nine-month period compared to $5.1 million for the same period in the prior
      year. Management anticipates personnel expense to continue to increase as
      opportunities to hire quality employees present themselves and we expand into
      new markets. Occupancy and equipment expenses increased by $223,000 or 15%
      from
      $1.5 million for the nine-month period ended September 30, 2006 to $1.7 million
      for the current year period. Data processing costs increased from $574,000
      for
      the prior year nine-month period to $795,000 for the current period. The Company
      outsources its data processing and expenses are closely tied to transaction
      and
      account volumes, and include the monthly costs associated with data line
      connectivity between offices. As the Company continues to grow in accordance
      with its strategic plan, management expects both occupancy and data processing
      costs to increase.





Other
      non-interest expenses increased by $1.1 million from $2.2 million to $3.3
      million. The increase was primarily a result of the Company’s continued growth.
      The largest components of other non-interest expenses include professional
      fees
      and services, office supplies and printing, advertising, and loan related fees.
      Management expects that as the complexity and size of the Company increases,
      expenses associated with these categories will continue to increase.




**Provision
      for Income Taxes.** The
      Company recorded income tax expense of $2.5 million during the nine-months
      ended
      September 30, 2007 compared to $1.8 million for the prior year period. The
      effective tax rates for the two periods were 36.00% and 35.97%, respectively.




-16-


**NET
      INTEREST INCOME**





Net
      interest income represents the difference between income derived from
      interest-earning assets and interest expense incurred on interest-bearing
      liabilities. Net interest income is affected by both (1) the difference between
      the rates of interest earned on interest-earning assets and the rates paid
      on
      interest-bearing liabilities (“interest rate spread”) and (2) the relative
      amounts of interest-earning assets and interest-bearing liabilities (“net
      interest-earning balance”). The following tables set forth information relating
      to average balances of the Company's assets and liabilities for the three and
      nine-month periods ended September 30, 2007 and 2006. The tables reflect the
      average yield on interest-earning assets and the average cost of
      interest-bearing liabilities (derived by dividing income or expense by the
      daily
      average balance of interest-earning assets or interest-bearing liabilities,
      respectively) as well as the net interest margin. In preparing the tables,
      non-accrual loans are included, when applicable, in the average loan balance.
      For purposes of the analysis, Federal Home Loan Bank stock is included in
      Investment Securities totals.


Average
          Balances, Interest and Average Yields/Cost
 (Dollars
          in Thousands)
  For
                  the Three Months Ended September 30,2007
              
              2006Average
              
              
              
              Average
              
              Average
              
              
              
              AverageBalance
              
              Interest
              
              Yield/Cost
              
              Balance
              
              Interest
              
              Yield/CostInterest-earnings
                  assetsLoan
                  portfolio
              
              $
              625,116
              
              $
              12,867
              
              
              8.17
              %
              $
              417,776
              
              $
              8,516
              
              
              8.09
              %Investment
                  securities
              
              
              93,739
              
              
              1,142
              
              
              4.87
              %
              
              73,636
              
              
              877
              
              
              4.76
              %Fed
                  funds and other interest-earning assets
              
              
              6,541
              
              
              86
              
              
              5.22
              %
              
              9,948
              
              
              129
              
              
              5.14
              %Total
                  earning assets
              
              
              725,396
              
              
              14,095
              
              
              7.71
              %
              
              501,360
              
              
              9,522
              
              
              7.54
              %Noninterest-bearing
                  assets
              
              
              62,133
              
              
              
              
              
              
              
              
              37,470Total
                  Assets
              
              $
              787,529
              
              
              
              
              
              
              
              $
              538,830Interest-bearing
                  liabilitiesInterest-bearing
                  NOW
              
              $
              32,879
              
              
              83
              
              
              1.00
              %
              $
              36,932
              
              
              131
              
              
              1.41
              %Money
                  market and savings
              
              
              176,243
              
              
              1,827
              
              
              4.11
              %
              
              110,363
              
              
              1,186
              
              
              4.26
              %Time
                  deposits
              
              
              325,972
              
              
              4,211
              
              
              5.13
              %
              
              220,904
              
              
              2,507
              
              
              4.50
              %Short-term
                  borrowings
              
              
              10,982
              
              
              149
              
              
              5.31
              %
              
              11,850
              
              
              164
              
              
              5.42
              %Long-term
                  debt
              
              
              79,509
              
              
              1,017
              
              
              5.01
              %
              
              42,802
              
              
              620
              
              
              5.67
              %Total
                  interest-bearing liabilities
              
              
              625,585
              
              
              7,287
              
              
              4.62
              %
              
              422,851
              
              
              4,608
              
              
              4.32
              %Non
                  interest-bearing deposits
              
              
              70,640
              
              
              
              
              
              
              
              
              57,534Other
                  liabilities
              
              
              3,287
              
              
              
              
              
              
              
              
              2,215Total
                  Liabilities
              
              
              699,512
              
              
              
              
              
              
              
              
              482,600Stockholders'
                  Equity
              
              
              88,017
              
              
              
              
              
              
              
              
              56,230Total
                  Liabilities & Stockholders' Equity
              
              $
              787,529
              
              
              
              
              
              
              
              $
              538,830Net
                  interest income
              
              
              
              
              $
              6,808
              
              
              
              
              
              
              
              $
              4,914Interest
                  rate spread
              
              
              
              
              
              
              
              
              3.10
              %
              
              
              
              
              
              
              
              3.22
              %Net
                  margin
              
              
              
              
              
              
              
              
              3.72
              %
              
              
              
              
              
              
              
              3.89
              %Percentage
                  of average interest-earningassets
                  to average interest bearingliabilities
              
              
              
              
              
              
              
              
              115.95
              %
              
              
              
              
              
              
              
              118.57
              %




-17-


Average
        Balances, Interest and Average Yields/Cost
 (Dollars
        in Thousands)


For
                  the Nine Months Ended September 30,2007
              
              2006Average
              
              
              
              Average
              
              Average
              
              
              
              AverageBalance
              
              Interest
              
              Yield/Cost
              
              Balance
              
              Interest
              
              Yield/CostInterest-earnings
                  assetsLoan
                  portfolio
              
              $
              597,043
              
              $
              36,773
              
              
              8.23
              %
              $
              374,181
              
              $
              21,968
              
              
              7.85
              %Investment
                  securities
              
              
              91,300
              
              
              3,299
              
              
              4.82
              %
              
              65,658
              
              
              2,265
              
              
              4.60
              %Fed
                  funds and other interest-earning assets
              
              
              10,291
              
              
              382
              
              
              4.96
              %
              
              4,875
              
              
              185
              
              
              5.07
              %Total
                  earning assets
              
              
              698,634
              
              
              40,454
              
              
              7.74
              %
              
              444,714
              
              
              24,418
              
              
              7.34
              %Noninterest-bearing
                  assets
              
              
              61,377
              
              
              
              
              
              
              
              
              29,743Total
                  Assets
              
              $
              760,011
              
              
              
              
              
              
              
              $
              474,457Interest-bearing
                  liabilitiesInterest-bearing
                  NOW
              
              $
              34,025
              
              
              280
              
              
              1.10
              %
              $
              37,851
              
              
              437
              
              
              1.54
              %Money
                  market and savings
              
              
              161,317
              
              
              5,050
              
              
              4.19
              %
              
              77,457
              
              
              2,186
              
              
              3.77
              %Time
                  deposits
              
              
              323,869
              
              
              12,317
              
              
              5.08
              %
              
              205,149
              
              
              6,423
              
              
              4.19
              %Short-term
                  borrowings
              
              
              16,856
              
              
              648
              
              
              5.07
              %
              
              16,200
              
              
              610
              
              
              4.97
              %Long-term
                  debt
              
              
              64,193
              
              
              2,537
              
              
              5.21
              %
              
              38,105
              
              
              1,557
              
              
              5.39
              %Total
                  interest-bearing liabilities
              
              
              600,260
              
              
              20,832
              
              
              4.64
              %
              
              374,762
              
              
              11,213
              
              
              4.00
              %Non
                  interest-bearing deposits
              
              
              70,387
              
              
              
              
              
              
              
              
              50,526Other
                  liabilities
              
              
              3,159
              
              
              
              
              
              
              
              
              1,843Total
                  Liabilities
              
              
              673,806
              
              
              
              
              
              
              
              
              427,131Stockholders'
                  Equity
              
              
              86,205
              
              
              
              
              
              
              
              
              47,326Total
                  Liabilities & Stockholders' Equity
              
              $
              760,011
              
              
              
              
              
              
              
              $
              474,457Net
                  interest income
              
              
              
              
              $
              19,622
              
              
              
              
              
              
              
              $
              13,205Interest
                  rate spread
              
              
              
              
              
              
              
              
              3.10
              %
              
              
              
              
              
              
              
              3.34
              %Net
                  margin
              
              
              
              
              
              
              
              
              3.76
              %
              
              
              
              
              
              
              
              3.97
              %Percentage
                  of average interest-earningassets
                  to average interest bearingliabilities
              
              
              
              
              
              
              
              
              116.39
              %
              
              
              
              
              
              
              
              118.67
              %




**VOLUME/RATE
      VARIANCE ANALYSIS**





The
      following tables analyze the dollar amount of changes in interest income and
      interest expense for major components of interest-earning assets and
      interest-bearing liabilities for the three and nine-month periods ended
      September 30, 2007 and 2006. 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.





-18-




Rate/Volume
        Analysis


Three
                  Months Ended September 30,2007
                  vs. 2006(in
                  Thousands)Increase
                  (Decrease) Due toVolume
              
              Rate
              
              Total**Interest
                  Income**Loan
                  portfolio
              
              
              4,247
              
              
              104
              
              
              4,351Investment
                  Securities
              
              
              243
              
              
              22
              
              
              265Fed
                  funds and other interest-earning assets
              
              
              (45
              )
              
              2
              
              
              (43
              )Total
                  interest-earning assets
              
              
              4,445
              
              
              128
              
              
              4,573**Interest
                  Expense**Interest-bearing
                  NOW
              
              
              (12
              )
              
              (36
              )
              
              (48
              )Money
                  market and savings
              
              
              696
              
              
              (55
              )
              
              641Time
                  deposits
              
              
              1,274
              
              
              430
              
              
              1,704Short-term
                  borrowings
              
              
              (12
              )
              
              (3
              )
              
              (15
              )Long-term
                  debt
              
              
              497
              
              
              (100
              )
              
              397Total
                  interest-bearing liabilities
              
              
              2,443
              
              
              236
              
              
              2,679**Net
                  interest income**
              
              
              2,002
              
              
              (108
              )
              
              1,894
  Rate/Volume
        Analysis
  Nine
                  Months Ended September 30,2007
                  vs. 2006(in
                  Thousands)Increase
                  (Decrease) Due toVolume
              
              Rate
              
              Total**Interest
                  Income**Loan
                  portfolio
              
              
              13,405
              
              
              1,400
              
              
              14,805Investment
                  Securities
              
              
              905
              
              
              129
              
              
              1,034Fed
                  funds and other interest-earning assets
              
              
              203
              
              
              (6
              )
              
              197Total
                  interest-earning assets
              
              
              14,513
              
              
              1,523
              
              
              16,036**Interest
                  Expense**Interest-bearing
                  NOW
              
              
              (38
              )
              
              (120
              )
              
              (158
              )Money
                  market and savings
              
              
              2,496
              
              
              368
              
              
              2,864Time
                  deposits
              
              
              4,116
              
              
              1,778
              
              
              5,894Short-term
                  borrowings
              
              
              25
              
              
              14
              
              
              39Long-term
                  debt
              
              
              1,041
              
              
              (61
              )
              
              980Total
                  interest-bearing liabilities
              
              
              7,640
              
              
              1,979
              
              
              9,619**Net
                  interest income**
              
              
              6,873
              
              
              (456
              )
              
              6,417





-19-




**NONPERFORMING
      ASSETS**





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




At
                September 30,
            
            At
                December 31,2007
            
            2006
            
            2006
            
            2005(Dollars
                in thousands)Nonaccrual
                loans
            
            $
            1,428
            
            $
            128
            
            $
            135
            
            $
            26Restructured
                loans
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                nonperforming loans
            
            
            1,428
            
            
            128
            
            
            135
            
            
            26Real
                estate owned
            
            
            249
            
            
            190
            
            
            98
            
            
            22Repossessed
                assets
            
            
            14
            
            
            -
            
            
            -
            
            
            -Total
                nonperforming assets
            
            $
            1,691
            
            $
            318
            
            $
            233
            
            $
            48Accruing
                loans past due90
                days or more
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Allowance
                for loan losses
            
            
            8,190
            
            
            6,573
            
            
            6,945
            
            
            4,351Nonperforming
                loans toperiod
                end loans
            
            
            0.22
            %
            
            0.02
            %
            
            0.02
            %
            
            0.01
            %Allowance
                for loan lossesto
                period end loans
            
            
            1.26
            %
            
            1.25
            %
            
            1.26
            %
            
            1.33
            %Allowance
                for loan lossesto
                nonperforming loans
            
            
            573
            %
            
            5,148
            %
            
            5,145
            %
            
            16,961
            %Nonperforming
                assetsto
                total assets
            
            
            0.21
            %
            
            0.05
            %
            
            0.03
            %
            
            0.01
            %Nonperforming
                assets and loanspast
                due 90 days or more tototal
                assets
            
            
            0.21
            %
            
            0.05
            %
            
            0.03
            %
            
            0.01
            %




Our
      financial statements are prepared on the accrual basis of accounting, including
      the recognition of interest income on loans, unless we place a loan on
      nonaccrual basis. We account for loans on a nonaccrual basis when we have
      serious doubts about the collectibility of principal or interest. Generally,
      our
      policy is to place a loan on nonaccrual status when the loan becomes past due
      90
      days. We also place loans on nonaccrual status in cases where we are uncertain
      whether the borrower can satisfy the contractual terms of the loan agreement.
      Amounts received on nonaccrual loans generally are applied first to principal
      and then to interest only after all principal has been collected. Restructured
      loans are those for which concessions, including the reduction of interest
      rates
      below a rate otherwise available to that borrower or the deferral of interest
      or
      principal have been granted due to the borrower’s weakened financial condition.
      We accrue interest on restructured loans at the restructured rates when we
      anticipate that no loss of original principal will occur. Potential problem
      loans are loans which are currently performing and are not included as
      nonaccrual or restructured loans above, but about which we have serious doubts
      as to the borrower’s ability to comply with present repayment terms. These loans
      are likely to be included later in nonaccrual, past due or restructured loans,
      so they are considered by our management in assessing the adequacy of our
      allowance for loan losses. At September 30, 2007, we identified twelve loans
      in
      the aggregate amount of $2.7 million as potential problem loans. Management
      has
      evaluated these credits and estimated the potential losses net of the collateral
      value for these loans. A specific amount has been reserved in the allowance
      for
      loan losses for these loans.




-20-





At
      September 30, 2007, there were six foreclosed properties valued at $249,000
      and
      eleven nonaccrual loans totaling $1,428,000. Foreclosed property is valued
      at
      the lower of appraised value or the outstanding loan balance. Subsequent to
      the
      end of the third quarter, three of the foreclosed properties were sold at
      auction and a loss of approximately $64,000 will be recognized in the fourth
      quarter. Interest foregone on loans that have been in nonaccrual loans during
      the nine-month period ended September 30, 2007 was approximately $45,100.





At
      September 30, 2006, there were six foreclosed properties valued at $190,000
      and
      two nonaccrual loans totaling $128,000. Foreclosed property is valued at the
      lower of appraised value or the outstanding loan balance. Interest foregone
      on
      nonaccrual loans for the nine-month period ended September 30, 2006 was
      approximately $7,000.





**ANALYSIS
      OF ALLOWANCE FOR LOAN LOSSES**





The
      allowance for loan losses is established through periodic charges to earnings
      in
      the form of a provision for loan losses. Increases to the allowance for loan
      losses occur as a result of provisions charged to operations and recoveries
      of
      amounts previously charged-off, and decreases to the allowance occur when loans
      are charged-off. Management evaluates the adequacy of our allowance for loan
      losses on a monthly basis. The evaluation of the adequacy of the allowance
      for
      loan losses involves the consideration of loan growth, loan portfolio
      composition and industry diversification, historical loan loss experience,
      current delinquency levels, adverse conditions that might affect a borrower’s
      ability to repay the loan, estimated value of underlying collateral, prevailing
      economic conditions and all other relevant factors derived from the Company’s
      history of operations. Additionally, as an important component of their periodic
      examination process, regulatory agencies review the allowance for loan losses
      and may require additional provisions for estimated losses based on judgments
      that differ from those of management.





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





Management
      has developed a model for evaluating the adequacy of the allowance for loan
      losses. The model uses the Company’s internal loan grading system to segment
      each category of loans by risk class. Using the various evaluation factors
      mentioned above, management predetermined allowance percentages for each risk
      class within each loan category. The total aggregate balance of loans in each
      risk class is multiplied by the associated allowance percentage to determine
      an
      adequate level of allowance for loan losses.





Those
      loans that are identified through the Company’s internal loan grading system as
      possessing characteristics which in the opinion of management suggest the
      highest degree of inherent risk 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 management’s
      analysis.





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





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 nine-month period ended September 30, 2007, there have been
      $102,000 in net loan charge-offs and are $1,428,000 in non-accrual loans
      compared with $81,000 in net loan charge-offs and $128,000 in non-accrual loans
      at September 30, 2006. The allowance for loan losses at September 30, 2007
      was
      $8.2 million, which represents 1.26% of total outstanding loans compared to
      $6.6
      million and 1.25% for the prior year.




-21-





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





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


Allocation
        of Allowance for Loan Losses


At
                    September 30,
            
            At
                  December 31,2007
            
            2006%
                of Total
            
            
            
            %
                of TotalAmount
            
            Loans
                (1)
            
            Amount
            
            Loans
                (1)(Dollars
                in thousands)Residential
                real estate loans
            
            $
            134
            
            
            2.92
            %
            $
            121
            
            
            3.67
            %Home
                equity loans and lines
            
            
            252
            
            
            6.86
            %
            
            269
            
            
            7.76
            %Commercial
                mortgage loans
            
            
            3,566
            
            
            50.73
            %
            
            3,920
            
            
            55.36
            %Construction
                loans
            
            
            2,429
            
            
            26.86
            %
            
            1,379
            
            
            19.99
            %Commercial
                and industrial loans
            
            
            1,654
            
            
            11.79
            %
            
            1,161
            
            
            12.32
            %Loans
                to individuals
            
            
            155
            
            
            0.84
            %
            
            95
            
            
            0.90
            %Total
                allowance
            
            $
            8,190
            
            
            100.00
            %
            $
            6,945
            
            
            100.00
            %(1)
                Represents total of all outstanding loans in each category as a percent
                of
                total loans outstanding






-22-


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 Nine-Month Periods Ended September 30,2007
              
              
              2006(Dollars
                  in thousands)Balance
                  at the beginning of the year
              
              $
              6,945
              
              $
              4,351Charge-offs:Commercial
                  and industrial loans
              
              
              88
              
              
              14Home
                  equity loans and lines
              
              
              11Residential
                  real estate loans
              
              
              -
              
              
              64Loans
                  to individuals
              
              
              4
              
              
              5Total
                  charge-offs
              
              
              103
              
              
              83Recoveries
              
              
              1
              
              
              2Net
                  charge-offs (recoveries)
              
              
              102
              
              
              81Acquired
                  in Port City Capital Bank transaction
              
              
              -
              
              
              1,686Provision
                  for loan losses
              
              
              1,347
              
              
              617Balance
                  at the end of the year
              
              $
              8,190
              
              $
              6,573Total
                  loans outstanding at period-end
              
              $
              651,652
              
              $
              526,066Average
                  loans outstanding for the period
              
              $
              597,043
              
              $
              374,181Allowance
                  for loan losses tototal
                  loans outstanding
              
              
              1.26
              %
              
              1.25
              %Ratio
                  of net charge-offs to average loans outstanding
              
              
              0.02
              %
              
              0.02
              %




**LIQUIDITY
      AND CAPITAL RESOURCES**





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





As
      of
      September 30, 2007, liquid assets (cash and due from banks, interest-earning
      deposits with banks, fed funds sold, and investment securities available for
      sale) were approximately $113.9 million, which represents 14% of total assets
      and 19% of total deposits. Supplementing this liquidity, the Company has
      available lines of credit from various correspondent banks of approximately
      $215.8 million of which $118.0 million is outstanding at September 30, 2007.
      At
      September 30, 2007, outstanding commitments for undisbursed lines of credit,
      letters of credit and undisbursed investment commitments amounted to
      approximately $173.8 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 52% of the Company’s total deposits at September 30,
      2007 and 55% at December 31, 2006. 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 41% of the Company’s total deposits at September
      30, 2007 and 42% at December 31, 2006. 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.




-23-





Under
      federal capital regulations, Crescent State Bank must satisfy certain minimum
      leverage ratio requirements and risk-based capital requirements. At September
      30, 2007, the Bank’s equity to asset ratio was 10.94%. All capital ratios place
      the Bank in excess of the minimum required to be deemed a well-capitalized
      bank
      by regulatory measures. The Bank’s ratios of Tier I capital to
      risk-weighted assets and total capital to risk-based assets at September 30,
      2007 were 8.95% and 10.09%, respectively. The Company is also required to
      maintain capital adequacy ratios. At September 30, 2007, the Company’s ratios of
      Tier 1 capital to risk-weighted assets and total capital to risk-based assets
      were 9.26% and 10.41%, 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.




-24-


**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, 2006.





**Item
      4T. Controls and Procedures**





Crescent
      Financial Corporation’s management, with the participation of the Chief
      Executive Officer and Principal Financial Officer, has evaluated the
      effectiveness of the Company’s disclosure controls and procedures as of
      September 30, 2007. 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 September 30, 2007, 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 September
      30, 2007 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.




-25-


**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, 2006.





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




None.





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




None.





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




None.





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




None.





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





(a)  Exhibits.


31.1
              Certification
                  of Principal Executive Officer pursuant to Rule 13a -
                  14(a)31.2
              Certification
                  of Principal Financial Officer pursuant to Rule 13a -
                  14(a)32.1
              Certification
                  of Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted
pursuant
                  to Section 906 of the Sarbanes-Oxley Act of 200232.2
              Certification
                  of Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002


-26-





**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:
              November 8, 2007
            By:
            /s/
              Michael G. CarltonMichael
                G. Carlton
              President
                and Chief Executive Officer  Date:
              November 8, 2007
            By:
            /s/
              Bruce W. ElderBruce
                W. Elder
              Principal
                Financial Officer