UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





FORM
10-Q





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





For the
Quarterly Period Ended June 30,
2010





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
              (IRS
      EmployerIncorporation
      or organization)
              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 xNo o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).


Yes oNo o





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




Large
      accelerated filer o
              Accelerated
      filer                   
      oNon-accelerated
      filer   o
              Smaller
      reporting company  x




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


Yes oNo 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 9,664,059 shares outstanding as of August 12,
2010.







CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 TABLE
OF CONTENTS


Page
      No.Part
      I.
              FINANCIAL
      INFORMATIONItem
      1 -
              Financial
      Statements (Unaudited)Consolidated
      Balance SheetsJune
      30, 2010 (unaudited) and December 31, 2009
              
              3Consolidated
      Statements of OperationsThree
      and Six Months Ended June 30, 2010 and 2009 (unaudited)
              
              4Consolidated
      Statements of Comprehensive Income (Loss)Three
      and Six Months Ended June 30, 2010 and 2009 (unaudited)
              
              5Consolidated
      Statement of Stockholders’ EquitySix
      Months Ended June 30, 2010 (unaudited)
              
              6Consolidated
      Statements of Cash FlowsSix
      Months Ended June, 2010 and 2009 (unaudited)
              
              7Notes
      to Consolidated Financial Statements
              
              8 -
      20Item
      2 -
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              21
      - 39Item
      3 -
              Quantitative
      and Qualitative Disclosures about Market Risk
              
              40Item
      4T -
              Controls
      and Procedures
              
              40Part
      II.
              Other
      InformationItem
      1 -
              Legal
      Proceedings
              
              41Item
      1a -
              Risk
      Factors
              
              41Item
      2 -
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              
              41Item
      3 -
              Defaults
      Upon Senior Debt
              
              41Item
      4 -
              (Removed
      and Reserved)
              
              41Item
      5 -
              Other
      Information
              
              41Item
      6 -
              Exhibits
              
              41
  -2-


Part
I. FINANCIAL INFORMATION




Item 1 - Financial
Statements





CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 CONSOLIDATED
BALANCE SHEETS




June
      30,
              
              
              December
      31,2010
              
              
              2009*(Unaudited)ASSETSCash
      and due from banks
              
              $
              10,894,811
              
              
              $
              9,285,386Interest-earning
      deposits with banks
              
              
              2,159,862
              
              
              
              4,616,722Federal
      funds sold
              
              
              15,930,000
              
              
              
              17,825,000Investment
      securities available for sale, at fair value
              
              
              186,128,530
              
              
              
              193,122,891Loans
      held for sale
              
              
              1,317,057
              
              
              
              -Loans
              
              
              709,442,692
              
              
              
              759,348,341Allowance
      for loan losses
              
              
              (18,348,000
              )
              
              
              (17,567,000
              )NET
      LOANS
              
              
              691,094,692
              
              
              
              741,781,341Accrued
      interest receivable
              
              
              4,150,168
              
              
              
              4,260,258Federal
      Home Loan Bank stock, at cost
              
              
              11,776,500
              
              
              
              11,776,500Bank
      premises and equipment
              
              
              11,972,508
              
              
              
              11,861,158Investment
      in life insurance
              
              
              18,068,193
              
              
              
              17,658,386Foreclosed
      assets
              
              
              16,071,580
              
              
              
              6,305,617Other
      assets
              
              
              16,161,027
              
              
              
              14,311,750TOTAL
      ASSETS
              
              $
              985,724,928
              
              
              $
              1,032,805,009LIABILITIES
      AND STOCKHOLDERS’ EQUITYDeposits:Demand
              
              $
              61,524,997
              
              
              $
              61,041,955Savings
              
              
              65,652,995
              
              
              
              58,086,102Money
      market and NOW
              
              
              191,240,085
              
              
              
              165,994,207Time
              
              
              403,807,257
              
              
              
              437,512,354TOTAL
      DEPOSITS
              
              
              722,225,334
              
              
              
              722,634,618Short-term
      borrowings
              
              
              22,000,000
              
              
              
              74,000,000Long-term
      debt
              
              
              149,748,000
              
              
              
              142,748,000Accrued
      expenses and other liabilities
              
              
              4,656,140
              
              
              
              3,902,185TOTAL
      LIABILITIES
              
              
              898,629,474
              
              
              
              943,284,803Commitments
      (Note B)Stockholders’
      EquityPreferred stock, no par value,
      5,000,000 shares authorized,24,900 shares issued and
      outstanding at bothJune 30, 2010 and December 31,
      2009
              
              
              23,153,539
              
              
              
              22,935,514Common stock, $1 par value,
      40,000,000 shares authorized;9,664,059 and 9,626,559 shares
      issued and outstandingat June 30, 2010 and December 31,
      2009, respectively
              
              
              9,664,059
              
              
              
              9,626,559Common
      stock warrant
              
              
              2,367,368
              
              
              
              2,367,368Additional
      paid-in capital
              
              
              74,559,849
              
              
              
              74,529,894Accumulated
      deficit
              
              
              (25,661,621
              )
              
              
              (21,354,080
              )Accumulated
      other comprehensive income
              
              
              3,012,260
              
              
              
              1,414,951TOTAL
      STOCKHOLDERS’ EQUITY
              
              
              87,095,454
              
              
              
              89,520,206TOTAL
      LIABILITIES ANDSTOCKHOLDERS’ EQUITY
              
              $
              985,724,928
              
              
              $
              1,032,805,009


*    Derived
from audited consolidated financial statements.




See
accompanying notes.
  -3-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
 Three
and Six Month Periods Ended June 30, 2010 and 2009






Three-month
      Periods
            
            
            Six-month
      PeriodsEnded
      June 30,
            
            
            Ended
      June 30,2010
            
            
            2009
            
            
            2010
            
            
            2009INTEREST
      INCOMELoans
            
            $
            11,495,695
            
            
            $
            12,025,703
            
            
            $
            22,979,736
            
            
            $
            24,102,761Investment
      securities available for sale
            
            
            1,857,147
            
            
            
            2,053,349
            
            
            
            3,793,477
            
            
            
            4,052,371Federal
      funds sold and interest-bearing deposits
            
            
            8,078
            
            
            
            5,298
            
            
            
            12,764
            
            
            
            7,335TOTAL
      INTEREST INCOME
            
            
            13,360,920
            
            
            
            14,084,350
            
            
            
            26,785,977
            
            
            
            28,162,467INTEREST
      EXPENSEDeposits
            
            
            4,232,451
            
            
            
            5,068,731
            
            
            
            8,578,052
            
            
            
            10,311,667Short-term
      borrowings
            
            
            123,674
            
            
            
            506,277
            
            
            
            329,955
            
            
            
            969,610Long-term
      borrowings
            
            
            1,466,704
            
            
            
            1,240,650
            
            
            
            2,878,860
            
            
            
            2,381,108TOTAL
      INTEREST EXPENSE
            
            
            5,822,829
            
            
            
            6,815,658
            
            
            
            11,786,867
            
            
            
            13,662,385NET
      INTEREST INCOME
            
            
            7,538,091
            
            
            
            7,268,692
            
            
            
            14,999,110
            
            
            
            14,500,082PROVISION
      FOR LOAN LOSSES
            
            
            8,389,074
            
            
            
            1,132,295
            
            
            
            10,190,250
            
            
            
            2,828,979NET
      INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES
            
            
            (850,983
            )
            
            
            6,136,397
            
            
            
            4,808,860
            
            
            
            11,671,103NON-INTEREST
      INCOMEMortgage
      loan origination revenue
            
            
            110,653
            
            
            
            215,364
            
            
            
            303,562
            
            
            
            511,836Fees
      on deposit accounts
            
            
            474,032
            
            
            
            395,708
            
            
            
            905,971
            
            
            
            783,711Earnings
      on life insurance
            
            
            219,530
            
            
            
            227,673
            
            
            
            436,962
            
            
            
            435,128Gain
      (loss) on disposal of assets
            
            
            (2,142
            )
            
            
            -
            
            
            
            4,858
            
            
            
            (500
            )Gain
      on sale of loans
            
            
            149,132
            
            
            
            -
            
            
            
            193,331
            
            
            
            -Loss
      on impairment of nonmarketable equity security
            
            
            -
            
            
            
            (218,762
            )
            
            
            -
            
            
            
            (406,802
            )Other
            
            
            139,403
            
            
            
            132,414
            
            
            
            291,633
            
            
            
            217,200TOTAL
      NON-INTEREST INCOME
            
            
            1,090,608
            
            
            
            752,397
            
            
            
            2,136,317
            
            
            
            1,540,573NON-INTEREST
      EXPENSESalaries
      and employee benefits
            
            
            3,049,607
            
            
            
            3.017,328
            
            
            
            6,179,358
            
            
            
            5,988,426Occupancy
      and equipment
            
            
            993,948
            
            
            
            904,160
            
            
            
            1,951,128
            
            
            
            1,655,120Data
      processing
            
            
            392,969
            
            
            
            302,159
            
            
            
            779,297
            
            
            
            751,659FDIC
      deposit insurance premium
            
            
            275,179
            
            
            
            772,868
            
            
            
            583,859
            
            
            
            1,021,588Net
      loss on foreclosed assets
            
            
            836,936
            
            
            
            15,272
            
            
            
            869,855
            
            
            
            40,272Foreclosed
      asset related costs
            
            
            441,418
            
            
            
            159,744
            
            
            
            682,583
            
            
            
            188,807Other
            
            
            1,165,117
            
            
            
            1,123,928
            
            
            
            2,295,014
            
            
            
            2,267,387TOTAL
      NON-INTEREST EXPENSE
            
            
            7,155,174
            
            
            
            6,295,459
            
            
            
            13,341,094
            
            
            
            11,913,259INCOME
      (LOSS) BEFORE INCOME TAXES
            
            
            (6,915,549
            )
            
            
            593,335
            
            
            
            (6,395,917
            )
            
            
            1,298,417INCOME
      TAXES
            
            
            (2,906,100
            )
            
            
            19,600
            
            
            
            (2,928,900
            )
            
            
            113,700NET
      INCOME (LOSS)
            
            
            (4,009,449
            )
            
            
            573,735
            
            
            
            (3,467,017
            )
            
            
            1,184,717Effective
      dividend on preferred stock (Note G)
            
            
            421,255
            
            
            
            421,760
            
            
            
            840,524
            
            
            
            589,865Net
      income (loss) available to common shareholders
            
            $
            (4,430,704
            )
            
            $
            151,975
            
            
            $
            (4,307,541
            )
            
            $
            594,852NET
      INCOME (LOSS) PER COMMON SHAREBasic
            
            $
            (.46
            )
            
            $
            .02
            
            
            $
            (.45
            )
            
            $
            .06Diluted
            
            $
            (.46
            )
            
            $
            .02
            
            
            $
            (.45
            )
            
            $
            .06WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING (Note C)Basic
            
            
            9,581,390
            
            
            
            9,569,290
            
            
            
            9,577,847
            
            
            
            9,569,290Diluted
            
            
            9,581,390
            
            
            
            9,599,466
            
            
            
            9,577,847
            
            
            
            9,583,903




See
accompanying notes.





-4-





CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
 Three
and Six Month Periods Ended June 30, 2010 and 2009


Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2010
              
              
              2009
              
              
              2010
              
              
              2009Net
      income (loss)
              
              $
              (4,009,448
              )
              
              $
              573,735
              
              
              $
              (3,467,017
              )
              
              $
              1,184,717Other
      comprehensive income (loss):Securities
      available for sale:Unrealized
      holding gains on available for sale securities
              
              
              1,631,558
              
              
              
              877,459
              
              
              
              2,897,130
              
              
              
              797,051Tax
      effect
              
              
              (629,031
              )
              
              
              (338,295
              )
              
              
              (1,116,960
              )
              
              
              (307,294
              )Net
      of tax amount
              
              
              1,002,527
              
              
              
              539,164
              
              
              
              1,780,170
              
              
              
              489,757Cash
      flow hedging activities:Unrealized
      holding loss on cash flow hedging activities
              
              
              (153,290
              )
              
              
              (151,941
              )
              
              
              (297,577
              )
              
              
              (151,941
              )Tax
      effect
              
              
              59,093
              
              
              
              59,000
              
              
              
              114,716
              
              
              
              59,000Net
      of tax amount
              
              
              (94,197
              )
              
              
              (92,941
              )
              
              
              (182,861
              )
              
              
              (92,941
              )Total
      other comprehensive income
              
              
              908,330
              
              
              
              446,223
              
              
              
              1,597,309
              
              
              
              396,816COMPREHENSIVE
      INCOME (LOSS)
              
              $
              (3,101,118
              )
              
              $
              1,019,958
              
              
              $
              (1,869,708
              )
              
              $
              1,581,533


See
accompanying notes.
  -5-


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





AccumulatedCommon
                  
                  
                  Additional
                  
                  
                  
                  
                  
                  other
                  
                  
                  TotalPreferred
      stock
                  
                  
                  Common
      stock
                  
                  
                  stock
                  
                  
                  paid-in
                  
                  
                  Accumulated
                  
                  
                  comprehensive
                  
                  
                  stockholders’Shares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  warrants
                  
                  
                  capital
                  
                  
                  deficit
                  
                  
                  income
                  
                  
                  equityBalance
      at December 31, 2009
                  
                  
                  24,900
                  
                  
                  $
                  22,935,514
                  
                  
                  
                  9,626,559
                  
                  
                  $
                  9,626,559
                  
                  
                  $
                  2,367,368
                  
                  
                  $
                  74,529,894
                  
                  
                  $
                  (21,354,080
                  )
                  
                  $
                  1,414,951
                  
                  
                  $
                  89,520,206Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,467,017
                  )
                  
                  
                  -
                  
                  
                  
                  (3,467,017
                  )Other
      comprehensive income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,597,309
                  
                  
                  
                  1,597,309Stock
      based compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  67,455
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  67,455Restricted
      stock issued
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  37,500
                  
                  
                  
                  37,500
                  
                  
                  
                  -
                  
                  
                  
                  (37,500
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Accretion
      of discount
                  
                  
                  -
                  
                  
                  
                  218,025
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (218,025
                  )
                  
                  
                  -
                  
                  
                  
                  -Preferred
      stock dividend
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (622,499
                  )
                  
                  
                  -
                  
                  
                  
                  (622,499
                  )Balance
      at June 30, 2010
                  
                  
                  24,900
                  
                  
                  $
                  23,153,539
                  
                  
                  
                  9,664,059
                  
                  
                  $
                  9,664,059
                  
                  
                  $
                  2,367,368
                  
                  
                  $
                  74,559,849
                  
                  
                  $
                  (25,661,621
                  )
                  
                  $
                  3,012,260
                  
                  
                  $
                  87,095,454
  See
accompanying notes.
  -6-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
 Six
Months Ended June 30, 2010 and 2009




2010
                
                
                2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                
                $
                (3,467,017
                )
                
                $
                1,184,717Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
                
                
                490,594
                
                
                
                431,904Provision
      for loan losses
                
                
                10,190,251
                
                
                
                2,828,979Gain
      on mortgage loan commitments
                
                
                (73,499
                )
                
                
                -Net
      gain on sales of mortgage loans
                
                
                (119,832
                )
                
                
                -Originations
      of mortgage loans held-for-sale
                
                
                (10,772,690
                )
                
                
                -Proceeds
      from sales of mortgage loans
                
                
                9,575,465
                
                
                
                -Proceeds
      from sale of loan
                
                
                50,558
                
                
                
                -Amortization
      of core deposit premium
                
                
                66,675
                
                
                
                66,675Deferred
      income taxes
                
                
                348,284
                
                
                
                (541,188
                )Loss
      on impairment of nonmarketable equity security
                
                
                -
                
                
                
                406,802Net
      loss on disposal of and valuation adjustments to foreclosed
      assets
                
                
                869,855
                
                
                
                40,272(Gain)
      loss on disposal of other assets
                
                
                (4,858
                )
                
                
                500Net
      amortization of premiums/discounts on securities
                
                
                681,147
                
                
                
                457,492Accretion
      of loan discount
                
                
                (826,637
                )
                
                
                (146,607
                )Amortization
      of deposit premium
                
                
                20,216
                
                
                
                54,865Net
      increase in cash value of life insurance
                
                
                (409,807
                )
                
                
                (417,366
                )Stock
      based compensation
                
                
                67,455
                
                
                
                89,523Change
      in assets and liabilities:(Increase)
      decrease in accrued interest receivable
                
                
                110,090
                
                
                
                (1,005,309
                )(Increase)
      in other assets
                
                
                (3,459,290
                )
                
                
                580,209Increase
      (decrease) in accrued interest payable
                
                
                56,282
                
                
                
                (351,517
                )Increase
      in accrued expenses and other liabilities
                
                
                514,812
                
                
                
                55,698TOTAL
      ADJUSTMENTS
                
                
                7,375,071
                
                
                
                2,550,932NET
      CASH PROVIDED BY OPERATING ACTIVITIES
                
                
                3,908,054
                
                
                
                3,735,649CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of investment securities available for sale
                
                
                (3,194,278
                )
                
                
                (107,377,651
                )Principal
      repayments of investment securities available for sale
                
                
                12,404,432
                
                
                
                19,601,789Purchase
      of Federal Home Loan Bank stock
                
                
                -
                
                
                
                (4,512,500
                )Proceeds
      from disposal of foreclosed real estate
                
                
                4,175,555
                
                
                
                2,759,260Proceeds
      from sale of other assets
                
                
                59,365
                
                
                
                -Net
      (increase) decrease in loans
                
                
                26,558,380
                
                
                
                2,468,017Purchases
      of bank premises and equipment
                
                
                (601,944
                )
                
                
                (1,594,138
                )NET
      CASH PROVIDED (USED) BY INVESTING ACTIVITIES
                
                
                39,401,510
                
                
                
                (88,655,223
                )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      increase (decrease) in deposits:Demand
                
                
                483,041
                
                
                
                3,425,569Savings
                
                
                7,566,893
                
                
                
                (683,397
                )Money
      market and NOW
                
                
                25,245,878
                
                
                
                6,101,489Time
      deposits
                
                
                (33,725,312
                )
                
                
                (17,078,655
                )Net
      increase (decrease) in short-term borrowings
                
                
                (52,000,000
                )
                
                
                90,294,000Net
      increase (decrease) in long-term borrowings
                
                
                7,000,000
                
                
                
                (3,000,000
                )Proceeds
      from issuance of preferred stock
                
                
                -
                
                
                
                24,900,000Dividends
      paid on preferred stock
                
                
                (622,499
                )
                
                
                (435,750
                )NET
      CASH PROVIDED (USED) BY FINANCING ACTIVITIES
                
                
                (46,051,999
                )
                
                
                103,523,256NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                
                
                (2,742,435
                )
                
                
                18,603,682CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                
                
                31,727,108
                
                
                
                10,282,789CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                28,984,673
                
                
                $
                28,886,471


See
accompanying notes.
  -7-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
A - BASIS OF PRESENTATION




In
management’s opinion, the financial information, which is unaudited, reflects
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the financial information as of and for the three and six-month periods ended June
30, 2010 and 2009, 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”, “we”, “our”,
“Crescent”) and its wholly owned subsidiary, Crescent State Bank (the
“Bank”).  All significant inter-company transactions and balances are
eliminated in consolidation.  Operating results for three and six-month periods ended June
30, 2010 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2010.





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 2009 annual report on Form
10-K. This quarterly report should be read in conjunction with such annual
report.





NOTE
B - COMMITMENTS




At June
30, 2010, commitments are as follows:




Undisbursed
      lines of credit
              
              $
              115,925,981Stand-by
      letters of credit
              
              
              4,092,000Commitments
      to sell loans held for sale
              
              
              1,317,057Undisbursed
      commitment to purchase additionalinvestment
      in Small Business Investment Corporation
              
              
              363,000





NOTE
C - PER SHARE RESULTS




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




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2010
              
              
              2009
              
              
              2010
              
              
              2009Weighted
      average number of shares used in computing basic net income per
      share
              
              
              9,581,390
              
              
              
              9,569,290
              
              
              
              9,577,847
              
              
              
              9,569,290Effect
      of dilutive stock options
              
              
              -
              
              
              
              30,176
              
              
              
              -
              
              
              
              14,613Weighted
      average number of shares used in computing diluted net income per
      share
              
              
              9,581,390
              
              
              
              9,599,466
              
              
              
              9,577,847
              
              
              
              9,583,903




-8-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
C - PER SHARE RESULTS (Continued)




For the
three month periods ended June 30, 2010 and 2009, there were 424,111 and 288,377
options and the warrant for 833,705 shares that were
anti-dilutive.  For the six month periods ended June 30, 2010 and
2009, there were 424,111 and 415,901 options and the warrant for 833,705 shares
that were anti-dilutive.




NOTE
D - INVESTMENT SECURITIES




The
following is a summary of the securities portfolio by major
classification.  All mortgage-backed securities and collateralized
mortgage obligations represent securities issued by a government sponsored
enterprise (i.e. Government National Mortgage Association, Federal Home Loan
Mortgage Corporation or Federal National Mortgage Association) where the
underlying collateral consists of conforming residential home mortgage
loans.




June
      30, 2010Gross
              
              
              GrossAmortized
              
              
              unrealized
              
              
              unrealized
              
              
              Faircost
              
              
              gains
              
              
              losses
              
              
              valueSecurities
      available for sale:U.S.
      government securities and obligations of U.S. government
      agencies
              
              $
              11,007,396
              
              
              $
              646,053
              
              
              $
              -
              
              
              $
              11,653,449Mortgage-backed
      securities
              
              
              50,650,967
              
              
              
              2,416,663
              
              
              
              -
              
              
              
              53,067,630Collateralized
      mortgage obligations
              
              
              67,689,260
              
              
              
              1,897,666
              
              
              
              19,861
              
              
              
              69,567,065Municipals
              
              
              50,865,579
              
              
              
              896,909
              
              
              
              329,941
              
              
              
              51,432,547Marketable
      equity
              
              
              420,844
              
              
              
              1,363
              
              
              
              14,368
              
              
              
              407,839$
              180,634,046
              
              
              $
              5,858,654
              
              
              $
              364,170
              
              
              $
              186,128,530
  December
      31, 2009Gross
              
              
              GrossAmortized
              
              
              unrealized
              
              
              unrealized
              
              
              Faircost
              
              
              gains
              
              
              losses
              
              
              valueSecurities
      available for sale:U.S.
      government securities and obligations of U.S. government
      agencies
              
              $
              12,235,041
              
              
              $
              448,086
              
              
              $
              -
              
              
              $
              12,683,127Mortgage-backed
      securities
              
              
              58,766,929
              
              
              
              1,562,514
              
              
              
              126,356
              
              
              
              60,203,087Collateralized
      mortgage obligations
              
              
              70,300,750
              
              
              
              948,641
              
              
              
              386,219
              
              
              
              70,863,172Municipals
              
              
              48,820,579
              
              
              
              673,223
              
              
              
              465,397
              
              
              
              49,028,405Marketable
      equity
              
              
              402,050
              
              
              
              -
              
              
              
              56,950
              
              
              
              345,100$
              190,525,349
              
              
              $
              3,632,464
              
              
              $
              1,034,922
              
              
              $
              193,122,891




-9-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
D - INVESTMENT SECURITIES (Continued)




The
following tables show investments’ gross unrealized losses and fair values,
aggregated by investment category and length of time that the individual
securities have been in a continuous unrealized loss position, at June 30, 2010
and December 31, 2009. The June 30, 2010 unrealized losses on investment
securities relate to three collateralized mortgage obligations and twenty
municipal securities. The December 31, 2009 unrealized losses on investment
securities relate to three mortgage-backed securities, twelve collateralized
mortgage obligations, twenty-five municipal securities and two marketable equity
securities. The unrealized losses relate to debt securities that have incurred
fair value reductions due to higher market interest rates since the securities
were purchased.  The unrealized losses will reverse at maturity or
prior to maturity if market interest rates decline to levels that existed when
the securities were purchased.  Since none of the unrealized losses
relate to the marketability of the securities or the issuer’s ability to honor
redemption obligations, none of the securities are deemed to be other than
temporarily impaired.




June
      30, 2010Less
      Than 12 Months
                
                
                12
      Months or More
                
                
                TotalFair
                
                
                Unrealized
                
                
                Fair
                
                
                Unrealized
                
                
                Fair
                
                
                Unrealizedvalue
                
                
                losses
                
                
                value
                
                
                losses
                
                
                value
                
                
                lossesSecurities
      available for sale:Mortgage-backed
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Collateralized
      mortgage obligations
                
                
                7,154,993
                
                
                
                19,861
                
                
                
                -
                
                
                
                -
                
                
                
                7,154,993
                
                
                
                19,861Municipals
                
                
                12,928,886
                
                
                
                160,926
                
                
                
                3,801,504
                
                
                
                169,015
                
                
                
                16,730,390
                
                
                
                329,941Marketable
      equity
                
                
                67,455
                
                
                
                14,368
                
                
                
                -
                
                
                
                -
                
                
                
                67,455
                
                
                
                14,368Total
      temporarily impaired securities
                
                $
                20,151,334
                
                
                $
                195,155
                
                
                $
                3,801,504
                
                
                $
                169,015
                
                
                $
                23,952,838
                
                
                $
                364,170
  December
      31, 2009Less
      Than 12 Months
              
              
              12
      Months or More
              
              
              TotalFair
              
              
              Unrealized
              
              
              Fair
              
              
              Unrealized
              
              
              Fair
              
              
              Unrealizedvalue
              
              
              losses
              
              
              value
              
              
              losses
              
              
              value
              
              
              lossesSecurities
      available for sale:Mortgage-backed
              
              $
              10,253,608
              
              
              $
              126,356
              
              
              $
              -
              
              
              $
              -
              
              
              $
              10,253,608
              
              
              $
              126,356Collateralized
      mortgage obligations
              
              
              26,940,754
              
              
              
              386,219
              
              
              
              -
              
              
              
              -
              
              
              
              26,940,754
              
              
              
              386,219Municipals
              
              
              17,081,421
              
              
              
              244,125
              
              
              
              2,858,321
              
              
              
              221,272
              
              
              
              19,939,742
              
              
              
              465,397Marketable
      equity
              
              
              -
              
              
              
              -
              
              
              
              345,100
              
              
              
              56,950
              
              
              
              345,100
              
              
              
              56,950Total temporarily impaired securities
              
              $
              54,275,783
              
              
              $
              756,700
              
              
              $
              3,203,421
              
              
              $
              278,222
              
              
              $
              57,479,204
              
              
              $
              1,034,922




-10-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
D - INVESTMENT SECURITIES (Continued)




At June
30, 2010 and December 31, 2009, investment securities with a carrying value of
$99,221,820 and $96,437,558 respectively, were pledged to secure public
deposits, borrowings and for other purposes required or permitted by
law.





The
amortized cost and fair values of securities available for sale at June 30, 2010
by expected maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.




Amortized
              
              
              Faircost
              
              
              valueDue
      within one year
              
              $
              19,528,398
              
              
              $
              20,300,722Due
      after one year through five years
              
              
              92,940,758
              
              
              
              96,069,480Due
      after five years through ten years
              
              
              38,908,992
              
              
              
              40,061,963Due
      after ten years
              
              
              28,835,054
              
              
              
              29,288,526Other
      equity securities
              
              
              420,844
              
              
              
              407,839$
              180,634,046
              
              
              $
              186,128,530




At June
30, 2010, the balance of Federal Home Loan Bank (“FHLB”) of Atlanta stock held
by the Company is $11,776,500.  After a period of suspended dividends
the FHLB of Atlanta has declared and paid an annualized dividend for the fourth
quarter of 2009 and the first quarter of 2010 of 0.27% and 0.26%,
respectively.  On June 30, 2010 it was announced that the FHLB would
resume repurchasing activity-based excess capital stock held by members, on a
limited basis.  The repurchase of excess capital stock is subject to
the FHLB continuing to meet all applicable statutory and regulatory conditions
for an excess stock repurchase and all other conditions provided in the FHLB’s
Capital Plan. The FHLB will continue to evaluate on a quarterly basis whether to
repurchase membership-based excess stock. Management believes that its
investment in FHLB stock was not other-than-temporarily impaired as of June 30,
2010 or December 31, 2009.  Further, there can be no assurance that
the impact of recent or future legislation on the Federal Home Loan Banks will
not also cause a decrease in the value of the FHLB stock held by the
Company.





NOTE
E – DERIVATIVE FINANCIAL INSTRUMENTS




The
Company uses derivative financial instruments, currently in the form of interest
rate swaps, to manage its interest rate risk. These instruments carry varying
degrees of credit, interest rate, and market or liquidity risks. Derivative
instruments are recognized as either assets or liabilities in the accompanying
financial statements and are measured at fair value. Subsequent changes in the
derivatives’ fair values are recognized in earnings unless specific hedge
accounting criteria are met.





Crescent
has established objectives and strategies that include interest-rate risk
parameters for maximum fluctuations in net interest income and market value of
portfolio equity. Interest rate risk is monitored via simulation modeling
reports. The goal of the Company’s asset/liability management efforts is to
maintain profitable financial leverage within established risk parameters.
Crescent entered into several financial arrangements using derivatives during
2009 to add stability to interest income and to manage its exposure to interest
rate movements.





-11-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
E – DERIVATIVE FINANCIAL INSTRUMENTS (Continued)




Cash
Flow Hedges




Through a
special purpose entity (see Note H of Item 8 in Crescent’s 2009 Form 10-K)
the Company issued trust preferred debentures in 2003.  In 2007, the
Company entered into a subordinated term loan agreement with a non-affiliated
financial institution.  These instruments, as more fully described in
the Note H of Item 8 in the Company’s 2009 Form 10-K, were issued as part of its
capital management strategy. These instruments are variable rate and expose the
Company to interest rate risk caused by the variability of expected future
interest expense attributable to changes in 3-month LIBOR. To mitigate this
exposure to fluctuations in cash flows resulting from changes in interest rates,
the Company entered into four pay-fixed interest rate swap agreements in June
2009.





There
were two interest rate swaps entered into for each of the two
instruments.  The notional amount of each instrument was split in two
equal halves with one half being swapped for a three year period and the second
for a four year period.  The trust preferred debentures and the
subordinated loan carry contractual variable rates of interest based on the
three-month London Inter Bank Offered Rate (LIBOR) plus 300 and 410 basis points
respectively.  The weighted average fixed rates resulting from the
swap transactions are 5.73% and 6.63%, respectively.





Based on
the evaluation performed at inception and through the current date, these
derivative instruments qualify for cash flow hedge accounting. Therefore, the
cumulative change in fair value of the interest rate swaps, to the extent that
it is expected to be offset by the cumulative change in anticipated interest
cash flows from the hedged trust preferred debenture and subordinated term loan,
will be deferred and reported as a component of other comprehensive income
(“OCI”). Any hedge ineffectiveness will be charged to current
earnings.





Since the floating index and reset dates are based on identical
terms, management believes that the hedge relationship of the cumulative changes
in expected future cash flows from the interest rate swaps and the cumulative
changes in expected interest cash flows from the trust-preferred debentures and
subordinated term loan agreement will be highly effective. For the three and six
month periods ended June 30, 2010 and 2009, management has determined that there
is no hedge ineffectiveness.





The
notional amount of the debt obligations being hedged was $15.5 million and the
fair value of the interest rate swap liability, which is recorded in accrued
expenses and other liabilities at June 30,
2010, was an unrealized loss of $592,511.





The
following tables disclose the location and fair value amounts of derivative
instruments designated as hedging instruments in the consolidated balance
sheets.




June
      30, 2010Estimated
      FairBalance
      Sheet
              
              Notional
              
              
              Value
      ofLocation
              
              Amount
              
              
              Asset
      (Liability)Trust
      preferred securities:Interest
      rate swap
              Other
      liabilities
              
              $
              4,000,000
              
              
              $
              (116,376
              )Interest
      rate swap
              Other
      liabilities
              
              
              4,000,000
              
              
              
              (190,291
              )Subordinated
      term loan agreements:Interest
      rate swap
              Other
      liabilities
              
              
              3,750,000
              
              
              
              (108,156
              )Interest
      rate swap
              Other
      liabilities
              
              
              3,750,000
              
              
              
              (177,688
              )$
              15,500,000
              
              
              $
              (592,511
              )




-12-


CRESCENT FINANCIAL CORPORATION AND
SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
E – DERIVATIVE FINANCIAL INSTRUMENTS (Continued)




December
      31, 2009Estimated
      FairBalance
      Sheet
              
              Notional
              
              
              Value
      ofLocation
              
              Amount
              
              
              Asset(Liability)Trust
      preferred securities:Interest
      rate swap
              Other
      liabilities
              
              $
              4,000,000
              
              
              $
              (67,847
              )Interest
      rate swap
              Other
      liabilities
              
              
              4,000,000
              
              
              
              (83,652
              )Subordinated
      term loan agreements:Interest
      rate swap
              Other
      liabilities
              
              
              3,750,000
              
              
              
              (64,216
              )Interest
      rate swap
              Other
      liabilities
              
              
              3,750,000
              
              
              
              (79,219
              )$
              15,500,000
              
              
              $
              (294,934
              )




See Note
F for additional information.


The
following table discloses activity in accumulated Other Comprehensive Income
(“OCI”) related to the interest rate swaps during the six month period ended
June 30, 2010.




June
      30,
                2010Accumulated
      OCI resulting from interest rate swaps as of January 1, 2010, net of
      tax
              
              $
              (181,237
              )Other
      comprehensive loss recognized during three month period ended June 30,
      2010, net of tax
              
              
              (182,861
              )Accumulated
      OCI resulting from interest rate swaps as of June 30, 2010, net of
      tax
              
              $
              (364,098
              )




The
following table discloses activity in accumulated OCI related to the interest
rate swaps during the year ended December 31, 2009.




December
      31,
                2009Accumulated
      OCI resulting from interest rate swaps as of January 1, 2009, net of
      tax
              
              $
              -Other
      comprehensive loss recognized, net of tax
              
              
              (181,237
              )Accumulated
      OCI resulting from interest rate swaps as of December 31, 2009, net of
      tax
              
              $
              (181,237
              )





The
Company monitors the credit risk of the interest rate swap
counterparty.





NOTE
F - FAIR VALUE MEASUREMENT




Fair
value is a market-based measurement and is defined as the price that would be
received to sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date. The transaction
to sell the asset or transfer the liability is a hypothetical transaction at the
measurement date, considered from the perspective of a market participant that
holds the assets or owes the liability. In general, the transaction price will
equal the exit price and, therefore, represent the fair value of the asset or
liability at initial recognition. In determining whether a transaction price
represents the fair value of the asset or liability at initial recognition, each
reporting entity is required to consider factors specific to the transaction and
the asset or liability, the principal or most advantageous market for the asset
or liability, and market participants with whom the entity would transact in the
market. In order to determine the fair value or the exit price, entities must
determine the unit of account, highest and best use, principal market, and
market participants.




-13-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
F - FAIR VALUE MEASUREMENT (Continued)




These
determinations allow the reporting entity to define the inputs for fair value
and level of hierarchy.





Outlined
below is the application of the fair value hierarchy.





Level 1 –
inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets. An active market for the
asset or liability is a market in which the transactions for the asset or
liability occur with sufficient frequency and volume to provide pricing
information on an ongoing basis. As of June 30, 2010 and December 31, 2009, the
Company carried certain marketable equity securities at fair value hierarchy
Level 1.





Level 2 –
inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the
financial instrument. As of June 30, 2010 and December 31, 2009, the types of
financial assets and liabilities the Company carried at fair value hierarchy
Level 2 included securities available for sale and derivative
liabilities.





Level 3 –
inputs to the valuation methodology are unobservable and significant to the fair
value measurement. Unobservable inputs are supported by little or no market
activity or by the entity’s own assumptions. As of June 30, 2010 and December
31, 2009, while the Company did not carry any financial assets or liabilities,
measured on a recurring basis, at fair value hierarchy Level 3, the Company did
value impaired loans and other real estate owned, measured on a non-recurring
basis, at fair value hierarchy Level 3.





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





Investment
Securities Available-for-Sale




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





Derivative
Liabilities




Derivative
instruments at June 30, 2010 and December 31, 2009 include interest rate swaps
and are valued using models developed by third-party providers. This type of
derivative is classified as Level 2 within the valuation hierarchy.





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





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





-14-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
F - FAIR VALUE MEASUREMENT (Continued)




Loans




The
Company does not record loans at fair value on a recurring basis. However, from
time to time, a loan is considered impaired and an allowance for loan losses is
established. Loans for which it is probable that payment of interest and
principal will not be made in accordance with the contractual terms of the loan
agreement are considered impaired.  The fair value of impaired loans
is estimated using one of several methods, including collateral value, market
value of similar debt, enterprise value, liquidation value and discounted cash
flows. Those impaired loans not requiring an allowance represent loans for which
the fair value of the expected repayments or collateral exceed the recorded
investments in such loans. At June 30, 2010, substantially all of the total
impaired loans were evaluated based on the fair value of the collateral.
Impaired loans where an allowance is established based on the fair value of
collateral require classification in the fair value hierarchy. When the fair
value of the collateral is based on an observable market price or a current
appraised value, the Company records the impaired loan or asset as nonrecurring
Level 2. When current appraised value is not available or management determines
the fair value of the collateral is further impaired below the appraised value
and there is no observable market price, the Company records the impaired loan
or asset as nonrecurring Level 3.   There were $54.0 million in
impaired loans at June 30, 2010, of which $29.5 million in loans showed
impairment and had a specific reserve of $8.6 million.  Impaired loans
totaled $66.1 million at December 31, 2009.  Of such loans, $35.4
million had specific loss allowances aggregating $9.1 million at that
date.





Foreclosed
Assets




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





-15-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
F - FAIR VALUE MEASUREMENT (Continued)




There
were no significant transfers between the valuation of financial assets or
liabilities between levels 1 and 2 in the valuation hierarchy.  Below
is a table that presents information about assets measured at fair value at June
30, 2010, and December 31, 2009:




Fair
      Value Measurements atJune
      30, 2010, UsingDescription
              
              Total
      Carrying Amount in The Consolidated Balance Sheet
6/30/2010
              
              
              Assets/(Liabilities)
      Measured at Fair Value 6/30/2010
              
              
              Quoted
      Prices in Active Markets for Identical Assets (Level 1)
              
              
              Significant
      Other Observable Inputs
                (Level
      2)
              
              
              Significant
      Unobservable Inputs
                (Level
      3)Securities
      available for sale:U.S.
      Government obligations and agency
              
              $
              11,653,449
              
              
              $
              11,653,449
              
              
              $
              -
              
              
              $
              11,653,449
              
              
              $
              -Mortgage-backed
              
              
              53,067,630
              
              
              
              53,067,630
              
              
              
              -
              
              
              
              53,067,630
              
              
              
              -Collateralized
      mortgage obligations
              
              
              69,567,065
              
              
              
              69,567,065
              
              
              
              -
              
              
              
              69,567,065
              
              
              
              -Municipals
              
              
              51,432,547
              
              
              
              51,432,547
              
              
              
              -
              
              
              
              51,432,547
              
              
              
              -Marketable
      equity
              
              
              407,839
              
              
              
              407,839
              
              
              
              407,839
              
              
              
              -
              
              
              
              -Foreclosed
      assets
              
              
              16,071,580
              
              
              
              16,071,580
              
              
              
              -
              
              
              
              -
              
              
              
              16,071,580Impaired
      loans *
              
              
              20,921,454
              
              
              
              20,921,454
              
              
              
              -
              
              
              
              -
              
              
              
              20,921,454Derivative
      liabilities
              
              
              (592,511
              )
              
              
              (592,511
              )
              
              
              -
              
              
              
              (592,511
              )
              
              
              -




Fair
      Value Measurements atDecember
      31, 2009, UsingDescription
              
              Assets/(Liabilities)
      Measured at Fair Value 12/31/2009
              
              
              Quoted
      Prices in Active Markets for Identical Assets (Level 1)
              
              
              Significant
      Other Observable Inputs
                (Level
      2)
              
              
              Significant
      Unobservable Inputs
                (Level
      3)Securities
      available for sale:U.S.
      Government obligations and agency
              
              $
              12,683,127
              
              
              $
              -
              
              
              $
              12,683,127
              
              
              $
              -Mortgage-backed
              
              
              60,203,087
              
              
              
              -
              
              
              
              60,203,087
              
              
              
              -Collateralized
      mortgage obligations
              
              
              70,863,172
              
              
              
              -
              
              
              
              70,863,172
              
              
              
              -Municipals
              
              
              49,028,405
              
              
              
              -
              
              
              
              49,028,405
              
              
              
              -Marketable
      equity
              
              
              345,100
              
              
              
              345,100
              
              
              
              -
              
              
              
              -Foreclosed
      assets
              
              
              6,305,617
              
              
              
              -
              
              
              
              -
              
              
              
              6,305,617Impaired
      loans *
              
              
              26,258,018
              
              
              
              -
              
              
              
              -
              
              
              
              26,258,018Derivative
      liabilities
              
              
              (294,934
              )
              
              
              -
              
              
              
              (294,934
              )
              
              
              -







*
              Impaired loans secured by Real
      Estate have historically been classified at fair value hierarchy Level 2,
      however, based on additional review by management, it has been deemed more
      appropriate to classify these loans at fair value hierarchy Level
      3.  Accordingly, $23,434,441 of impaired loans, classified at
      Level 2 as of December 31, 2009, are now included in the total at fair
      value hierarchy Level 3.
  -16-
  CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
F - FAIR VALUE MEASUREMENT (Continued)




ASC Topic
825 Financial Instruments requires disclosure of fair value information about
financial instruments on an interim basis, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques.





Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instruments. ASC Topic 825 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company. In addition to the valuation methods previously described for
investments available for sale and derivative assets and liabilities, the
following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:





Cash
and Cash Equivalents




The
carrying amounts for cash and cash equivalents approximate fair value because of
the short maturities of those instruments.





Investment
Securities




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





Loans




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





Federal
Home Loan Bank Stock




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





Investment
in Life Insurance




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





Deposits




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





-17-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
F - FAIR VALUE MEASUREMENT (Continued)




Short-term
Borrowings and Long-term Debt




The fair
value of short-term borrowings and long-term debt are based upon the discounted
value when using current rates at which borrowings of similar maturity could be
obtained.





Accrued
Interest Receivable and Accrued Interest Payable




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





Derivative
financial instruments




Fair
values for interest rate swaps are based upon the estimated amounts required to
settle the contracts.





The
carrying amounts and estimated fair values of the Company’s financial
instruments, none of which are held for trading purposes, are as follows at June
30, 2010 and December 31, 2009:




June
      30, 2010
              
              
              December
      31, 2009Carrying
                amount
              
              
              Estimated
                fair
      value
              
              
              Carrying
                amount
              
              
              Estimated
                fair
      valueFinancial
      assets:Cash
      and cash equivalents
              
              $
              28,984,673
              
              
              $
              28,984,673
              
              
              $
              31,727,108
              
              
              $
              31,727,108Investment
      securities
              
              
              186,128,530
              
              
              
              186,128,530
              
              
              
              193,122,891
              
              
              
              193,122,891Federal
      Home Loan Bank stock
              
              
              11,776,500
              
              
              
              11,776,500
              
              
              
              11,776,500
              
              
              
              11,776,500Loans,
      net
              
              
              691,094,691
              
              
              
              655,830,691
              
              
              
              741,781,341
              
              
              
              701,738,000Investment
      in life insurance
              
              
              18,068,193
              
              
              
              18,068,193
              
              
              
              17,658,386
              
              
              
              17,658,386Accrued
      interest receivable
              
              
              4,150,168
              
              
              
              4,150,168
              
              
              
              4,260,258
              
              
              
              4,260,258Financial
      liabilities:Deposits
              
              
              722,225,334
              
              
              
              741,862,334
              
              
              
              722,634,618
              
              
              
              742,001,000Short-term
      borrowings
              
              
              22,000,000
              
              
              
              22,880,000
              
              
              
              74,000,000
              
              
              
              74,260,000Long-term
      borrowings
              
              
              149,748,000
              
              
              
              151,375,000
              
              
              
              142,748,000
              
              
              
              139,457,000Interest
      rate swaps
              
              
              592,511
              
              
              
              592,511
              
              
              
              294,934
              
              
              
              294,934Accrued
      interest payable
              
              
              1,531,410
              
              
              
              1,531,410
              
              
              
              1,475,128
              
              
              
              1,475,128





NOTE
G - CUMULATIVE PERPETUAL PREFERRED STOCK




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




-18-


CRESCENT
FINANCIAL CORPORATION AND SUBSIDIARY
 Notes
to Consolidated Financial Statements





NOTE
G - CUMULATIVE PERPETUAL PREFERRED STOCK (Continued)




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




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




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





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





NOTE
H - RECENT ACCOUNTING PRONOUNCEMENTS




In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (SFAS) No. 166 “Accounting for Transfers of
Financial Assets – an amendment of the FASB Statement No. 140” (“ASC 860”),
which eliminates the concept of a qualifying special purpose entity (QSPE),
changes the requirements for derecognizing financial assets, and requires
additional disclosures including information about continuing exposure to risks
related to transferred financial assets. ASC 860 is effective for financial
asset transfers occurring after the beginning of fiscal years beginning after
November 15, 2009. The disclosure requirements must be applied to transfers that
occurred before and after the effective date.  The adoption on January
1, 2010, did not have a material impact on the Company's consolidated financial
statements.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)
(“ASC 810”), which contains new criteria for determining the primary
beneficiary, eliminates the exception to consolidating QSPEs, requires continual
reconsideration of conclusions reached in determining the primary beneficiary,
and requires additional disclosures. ASC 810 is effective as of the beginning of
fiscal years beginning after November 15, 2009 and is applied using a cumulative
effect adjustment to retained earnings for any carrying amount adjustments
(e.g., for newly-consolidated VIEs). The adoption on January 1, 2010, did not
have a material impact on the Company's consolidated financial
statements.





ASU No.
2010-06, Fair Value Measurements and Disclosures (“ASC 820”): Improving
Disclosures about Fair Value Measurements. This ASU requires some new
disclosures and clarifies some existing disclosure requirements about fair value
measurement as set forth in Codification Subtopic 820-10. The FASB’s objective
is to improve these disclosures and, thus, increase the transparency in
financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic
820-10 to now require:





A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers, and in the reconciliation for fair value measurements
using significant unobservable inputs, a reporting entity should present
separately information about purchases, sales, issuances, and settlements. In
addition, ASU 2010-06 clarifies the requirements of the following existing
disclosures:





·
            For
      purposes of reporting fair value measurement for each class of assets and
      liabilities, a reporting entity needs to use judgment in determining the
      appropriate classes of assets and liabilities; and


·
            A
      reporting entity should provide disclosures about the valuation techniques
      and inputs used to measure fair value for both recurring and nonrecurring
      fair value measurements.





-19-




ASU
2010-06 is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 nonrecurring fair
value measurements. Those disclosures are effective for fiscal years beginning
after December 15, 2010, and for interim periods within those fiscal years.
Early application is permitted.  Adoption as of January 1, 2010 did
not have a material effect on the Company’s financial
statements.  Additional disclosures have been considered in this
report.





ASU
2010-20, Receivables (Topic
310): Disclosure about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses.The objective of this ASU is for an entity
to provide disclosures that facilitate financial statement users’ evaluation of
the following:





·
            The
      nature of credit risk inherent in the entity’s portfolio of financing
      receivables;


·
            How
      that risk is analyzed and assessed in arriving at the allowance for credit
      losses; and


·
            The
      changes and reasons for those changes in the allowance for credit
      losses.





To
achieve these objectives, an entity should provide disclosures on a
disaggregated basis on two defined levels: (1) portfolio segment; and (2) class
of financing receivable. The ASU makes changes to existing disclosure
requirements and includes additional disclosure requirements about financing
receivables, including:





·
            Credit
      quality indicators of financing receivables at the end of the reporting
      period by class of financing
receivables;


·
            The
      aging of past due financing receivables at the end of the reporting period
      by class of financing receivables;
and


·
            The
      nature and extent of troubled debt restructurings that occurred during the
      period by class of financing receivables and their effect on the allowance
      for credit losses.





For
public entities, the disclosures as of the end of a reporting period are
effective for interim and annual reporting periods ending on or after December
15, 2010. The disclosures about activity that occurs during a reporting period
are effective for interim and annual reporting periods beginning on or after
December 15, 2010. Additional disclosures will be considered for year-end 2010
reporting.




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





-20-


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 for periods ended June 30, 2010 and 2009 and financial
condition for the periods ended June 30, 2010 and December 31, 2009. It should
be read in conjunction with the unaudited consolidated financial statements and
accompanying notes included in this report and the supplemental financial data
appearing throughout this discussion and analysis. Because the Company has no
operations and conducts no business on its own other than owning Crescent State
Bank, the discussion contained in this Management's Discussion and Analysis
concerns primarily the business of the Bank. However, for ease of reading and
because the financial statements are presented on a consolidated basis, the
Company and the Bank are collectively referred to herein as the Company unless
otherwise noted.  All significant intercompany transactions and
balances are eliminated in consolidation.





COMPARISON
OF FINANCIAL CONDITION AT


JUNE
30, 2010 AND DECEMBER 31, 2009





Total
assets decreased by $47.1 million or 5% to $985.7 million at June 30, 2010 from
$1.0 billion at December 31, 2009.  Earning assets at June 30, 2010
were 94% or $926.8 million compared with 95% or $986.7 million at December 31,
2009.   Components of earning assets at June 30, 2010 are $710.8
million in gross loans and mortgage loans held for sale, $197.9 million in
investment securities and Federal Home Loan Bank (FHLB) stock and $18.1 in
overnight investments and interest-earning deposits with correspondent
banks.  Earning assets at December 31, 2009 consisted of $759.3
million in gross loans, $204.9 million in investment securities and FHLB stock
and $22.4 million in overnight investments and interest-earning deposits. Total
deposits and stockholders’ equity at June 30, 2010 were $722.2 million and $87.1
million, respectively, compared to $722.6 million and $89.5 million at December
31, 2009.





Gross
loans held for investment declined by $49.9 million between December 31, 2009
and June 30, 2010.  Mortgage loans held for sale increased by $1.3
million.  The Company just began originating mortgage loans for sale
in March 2010 and therefore no loans were held for sale at December 31,
2009.  All loan categories experienced a decline due to normal
principal payments, the continued softness in loan demand and the transfer of
assets from loans to other real estate owned and repossessions.  The
net decline by loan category is as follows: $21.9 million in construction, land
acquisition and development, $13.9 million in commercial real estate, $6.2
million in residential mortgage, $4.0 million in home equity loans and lines,
$3.4 million in commercial and industrial and $480,000 in consumer loans. Of the
total $49.9 million decline, $24.5 million is attributed to transferring assets
from the loan account into other asset categories and charge-offs related to
those accounts.  The remaining $25.4 million is the net of $21.7
million in new loans and $47.1 million in normal principal payoffs and
curtailments. See the discussions on Nonperforming Assets and Allowance for Loan
Losses for additional details.  The composition of the loan portfolio,
by category, as of June 30, 2010 is 49% commercial mortgage loans, 22%
construction loans, 13% residential mortgage loans, 8% home equity loans and
lines, 7% commercial loans and 1% consumer loans.  The composition of
the loan portfolio, by category, as of December 31, 2009 was 47% commercial
mortgage loans, 24% construction loans, 13% residential real estate mortgage
loans, 8% home equity loans and lines, 7% commercial loans and 1% consumer
loans.





-21-


Loans for
commercial real estate, construction and land acquisition and development
comprised 71% of the total loan portfolio at June 30, 2010.  A more
detailed breakdown of loans in those sectors is presented in the table
below:




Breakdown
      of Commercial Real EstateLoan
      Type
            
            Total
      Aggregate
              Exposure
              (in
      thousands)Non
      owner occupied investment property
            
            $
            177,445Owner
      occupied commercial property
            
            
            149,070Multi-family
      investment property
            
            
            18,149Agriculture/Farmland
            
            
            790Subtotal
            
            
            345,454Deferred
      unearned interest
            
            
            (506
            )Total
      commercial real estate loans
            
            $
            344,948




Breakdown
      of Construction, Acquisition & DevelopmentLoan
      Type
              
              Total
      Aggregate
                Exposure
                (in
      thousands)Land
      acquisition and development - commercial purposes
              
              $
              79,447Land
      acquisition and development - residential purposes
              
              $
              51,5421
      to 4 family residential construction
              
              
              15,181Commercial
      construction
              
              
              11,145Subtotal
              
              
              157,315Deferred
      unearned interest
              
              
              (116
              )Total
      construction, acquistition & development
              
              $
              157,199




The
Company had an allowance for loan losses at June 30, 2010 of $18.4 million or
2.59% of outstanding loans compared to $17.6 million or 2.31% at
December 31, 2009. The increase was primarily due to the net charge-off of
$9.4 million in loans for the first half of 2010. At June 30, 2010, there were
fifty-two loans totaling $11.9 million in non-accrual
status.    There were no loans past due 90 days or more
still accruing interest at June 30, 2010.  Non-performing loans as a
percentage of total loans at June 30, 2010 were 1.68%.  At December
31, 2009, there were sixty-six loans totaling approximately $18.1 million in
non-accrual status. Year-to-date, collateral for twenty-three of the sixty-six
loans in nonaccrual status at year end had been foreclosed or repossessed, ten
of which were then sold.   Ten loans were paid in full, nine
loans were charged-off and twenty-four loans remained in non-accrual status at
June 30, 2010.  The percentage of non-performing loans to total loans
at December 31, 2009 was 2.44%.  For a more detailed discussion, see
the section entitled Nonperforming Assets.





The
Company has investment securities with an amortized cost of $180.6 million at
June 30, 2010.  All investments are accounted for as available for
sale and are presented at their fair market value of $186.1 million compared to
$193.1 million at year-end 2009.  The Company’s investment securities
at June 30, 2010, consist of U.S. Government agency securities, collateralized
mortgage obligations, mortgage-backed securities, municipal bonds and marketable
equity securities.  All of the Company’s mortgage-backed and
collateralized mortgage obligations are issued by a Government Sponsored
Enterprise (GSE). The decrease in the available for sale portfolio during the
first half of 2010 was the net result of $3.2 million in new purchases and a
$2.9 million increase in the fair value of the portfolio, less $12.4 million in
principal re-payments and $681,000 in net amortization of premiums.





The
Company owned $11.8 million of Federal Home Loan Bank (FHLB) stock at both June
30, 2010 and December 31, 2009.  The FHLB recently announced that they
would redeem excess stock as determined by the level of the Company’s advances
outstanding.  Accordingly, $424,000 in stock was redeemed by the FHLB
on July 15, 2010.





-22-


There
were $15.9 million in Federal funds sold at June 30, 2010 compared to $17.8
million at December 31, 2009.  The decrease in Fed funds sold reflects
on-balance sheet liquidity used to redeem maturing time deposits and borrowings
and for deposit fluctuations of non-maturing deposit types.





Interest-earning
deposits held at correspondent banks were $2.2 million at June 30, 2010 compared
with $4.6 million at December 31, 2009.  Interest-earning funds held
at correspondent bank accounts are used primarily to redeem maturing time
deposits and borrowings and to meet liquidity requirements for deposit
fluctuations of non-maturing deposit types.





Foreclosed
assets consist of other real estate owned and loan collateral which has been
repossessed.  Other real estate owned by the Company was $14.1 million
at June 30, 2010 compared with $6.3 million at December 31, 2009.  The
net increase in other real estate owned of $7.8 million was comprised of $12.8
million in new foreclosed property less $4.2 million in proceeds from the sale
of properties and $901,000 in additional valuation write-downs on
properties.  The value of repossessed assets was $2 million at June
30, 2010 and there were no repossessed assets at December 31, 2009.





Non-earning
and other assets increased by approximately $3.9 million between December 31,
2009 and June 30, 2010.  There were increases in non-interest bearing
cash and cash due from banks, other assets, bank owned life insurance and
premises and equipment of $1.6 million, $1.8 million, $410,000 and $111,000,
respectively.  The change in other assets was due primarily to
recording income tax benefits during the first six months of $3.6 million and
booking $2.0 million in repossessed loan collateral.  The net deferred
tax asset decreased by $1.5 million due to the impact of the increase in the
unrealized gain on investments.  Accrued interest receivable declined
by $110,000 due to lower volumes of earning assets.  For more details
regarding the increase in cash and cash equivalents, see the Consolidated
Statement of Cash Flows.





Total
deposits decreased by $409,000 between December 31, 2009 and June 30, 2010 from
$722.6 million to $722.2 million.  The Company has continued to focus
on reducing its reliance on brokered deposits and shifting its deposit mix more
in favor of non-maturity deposit types.  Brokered time deposits have
decreased by $22.5 million from $203.4 million at year end 2009 to $180.9
million at June 30, 2010.  Other retail time deposits decreased by
$11.2 million from $234.1 million to $222.9 million.  Time deposits as
a percentage of total deposits have declined from 61% to 56%.  In an
effort to improve core deposit volumes, the Company introduced a new
interest-bearing checking account in December 2008 that rewards depositors with
a higher rate of interest if they modify their account activity behavior to
include more electronic methods of transactions and account statement
receipt.  As a result, interest-bearing checking balances increased by
$31.4 million to $124.5 at June 30, 2010. Savings account balances have
increased by $7.6 million and money market account balances have declined by
$6.1 million over the first half of 2010.  The decline in money market
balances is in both business and personal account types.  The decline
in personal is due in part to disintermediation related to the new
interest-bearing checking product and business declines are driven by economic
conditions and seasonal fluctuations.  Non-interest bearing deposit
balances have increased by $483,000 from $61.0 million to $61.5
million.





The
composition of the deposit base, by category, at June 30, 2010 is as follows:
56% time deposits, 17% interest-bearing demand deposits, 9% money market, 9%
statement savings accounts and 9% non-interest-bearing demand
deposits.  The composition of the deposit base, by category, at
December 31, 2009 was as follows:  61% in time deposits, 13% in
interest-bearing deposits, 10% in money market, and 8% in both non
interest-bearing demand deposits and statement savings. Time deposits of
$100,000 or more totaled $336.3 million at June 30, 2010 compared to $357.4
million at December 31, 2009.





-23-


The
Company had total borrowings of $171.7 million at June 30, 2010 compared with
$216.7 million at December 31, 2009.  The composition of borrowings is
$134.0 million in long-term advances and $22.0 million in short-term advances
from the Federal Home Loan Bank of Atlanta (FHLB), $8.2 million in junior
subordinated debt issued to an unconsolidated subsidiary and $7.5 million in a
subordinated term loan from a non-affiliated financial
institution.  Borrowings at December 31, 2009 consisted of $127.0
million in long-term FHLB advances, $24.0 million in short-term FHLB advances,
$50.0 million in short-term Fed Discount Window advances, $8.2 million in junior
subordinated debt issued to an unconsolidated subsidiary, and $7.5 million in a
subordinated term loan.  The $50.0 million in Fed Discount Window
advances at December 31, 2009 were part of the Company’s strategy to leverage
the funds received through the Capital Purchase Program.  As
additional liquidity has been made available through deposit gathering and
normal principal pay downs from both the investment and loan portfolios, we were
able to repay the $50.0 million during the first six months of
2010.  There were no Federal funds purchased at either balance sheet
date.





Accrued
interest payable and other liabilities increased by $728,000 and were $4.6
million and $3.9 million at June 30, 2010 and December 31, 2009,
respectively.





Total
stockholders’ equity declined by $2.4 million between December 31, 2009 and June
30, 2010. The decrease was primarily due to the net loss for the six month
period of $3,467,000 and the $622,000 dividend paid on preferred stock, and was
partially offset by the $1,597,000 increase in the other comprehensive
income.





COMPARISON
OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED


JUNE
30, 2010 AND 2009





Net Income(Loss).Net
loss for the three-month period ended June 30, 2010, before adjusting for the
effective dividend on preferred stock, was approximately ($4,010,000) compared
to net income of $574,000 for the prior year three-month period ended June 30,
2009. After adjusting for dividends and discount accretion on preferred stock,
net loss attributable for common shareholders for the current period was
($4,431,000) or ($0.46) per diluted share compared to net income attributable to
common shareholders of $152,000 or $0.02 per diluted share for the quarter ended
June 30, 2009.  Dividends
and discount accretion for the quarters ended June 30, 2010 and 2009 were
$421,000 and $422,000, respectively.  Annualized return on average
assets was (1.60%) for the current quarter compared to 0.21% for the prior
period.  Earnings in the current period were impacted by higher loan
loss provisions and an increase in non-interest operating expenses driven
largely by increased costs related to the foreclosure and collection
process.Return on
average equity for the current period was (17.75%) compared to 1.89% for the
prior three month period.  The decline in return on average equity is
due to the lower level of earnings combined with higher capital from the
issuance of the preferred stock.





Net Interest Income.Net interest
income increased by 4% or $269,000 from $7.3 million for the prior three-month
period to $7.5 million for the three-month period ended June 30,
2010.  The decline in interest expense due to both the low prevailing
interest rate environment and the decrease in the volume of interest-bearing
liabilities, more than offset the decrease interest income resulting from the
lower level of interest-earning assets.  The Company’s net interest
margin expanded by 33 basis points from 3.00% for the quarter ended June 30,
2009 to 3.33% for the current quarter.





-24-


Total
interest income decreased by 5% or $723,000 to $13.4 million for the current
three-month period compared to $14.1 million for the prior year
period.  The net decline resulted from a $917,000 decrease due to the
reduction in earning assets and a $194,000 increase due to slightly higher
yields realized on those assets.  Total interest expense for the
current period declined by $993,000 from $6.8 million to $5.8
million.  The decrease was the result of an $842,000 decline from
lower cost of funds and a $151,000 decrease due to lower levels of
interest-bearing liabilities.





Total
average earning assets for the current three-month period declined by $57.8
million or 6% to $941.1 million compared to an average of $998.9 million for the
prior three-month period. The average balance of loans outstanding decreased by
6% or $46.9 million from $782.9 million to $736.0 million.  The sharp
reduction in average loans outstanding is the result of many factors including
the current economic cycle, reduced loan demand, the movement of loan assets to
foreclosed or repossessed assets and charge-offs of loans deemed uncollectible.
The percentage of average loans to average earning assets was 78% for both
three-month periods ending June 30, 2010 and 2009. The average balance of the
investment securities portfolio for the current three-month period is $194.2
million, decreasing by $13.8 million or 7% from an average of $208.0 million at
June 30, 2009.  The Company has been using principal repayments from
the investment portfolio to reduce its reliance on brokered time deposits. The
average balance of federal funds sold and other earning assets increased to
$10.8 million for the current three-month period compared to $8.0 million for
the prior period.





Average
interest-bearing liabilities decreased by $41.1 million or 5% from $882.1
million for the quarter ended June 30, 2009 to $841.0 million for the current
quarter.  Total interest-bearing deposits increased by $19.1 million
or 3% from $660.5 million to $641.4 million.  Due to the introduction
of a new high yield interest checking product, average NOW account balances have
increased by $63.3 million.  Average time deposits have declined by
$45.2 million from $455.2 million to $410.0 million. Total borrowings decreased
by 25% or $61.2 million from $240.7 million to $180.5 million.  The
decreases in both time deposits and borrowings can be attributed to utilizing
the liquidity provided from the decline in earning assets and the increase in
non-maturity, core deposits to reduce the these categories of
funding.





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 tax-equivalent net
interest margin for the three-month period ended June 30, 2010 was 3.33%
compared to 3.00% for the three-month period ended June 30, 2009.  The
average yield on earning assets for the current three-month period increased by
8 basis points to 5.82% compared with 5.74% for the prior year period, while the
average cost of interest-bearing funds decreased by 32 basis points to 2.78%
from 3.10%.  The interest rate spread between the average yield on
earning assets and the cost of interest-bearing funds increased by 40 basis
points from 2.64% to 3.04%.  The percentage of interest earning assets
to average interest-bearing liabilities decreased from 113.24% for the prior
year period to 111.90% for the three months ended June 30, 2010.  A
decrease in the ratio of average earning assets to average interest-bearing
liabilities indicates an increased dependency on interest-bearing instruments to
fund earning assets.  The increased dependence is due in part to a
$5.8 million decline in average noninterest-bearing deposits over the
comparative periods.  The current economic cycle has impacted the
deposit levels of our noninterest-bearing customer base.





Short-term
interest rates have been stable since January 2009.  The yield on
earning assets has actually expanded slightly in the current three-month period
compared with the prior year period due to the implementation of interest rate
floors on many of our new and renewing variable rate loans.  For
example, a loan may have previously been priced at the Prime rate of interest,
currently at 3.25%, with no floor. Upon renewal, a floor of 5.5% may have been
introduced.  The impact on yields on the loan portfolio has been
positive.  Somewhat offsetting this positive impact has been the
reversal of previously accrued yet uncollected interest on loans moved to
nonaccrual status.  On the funding side of the equation, the cost of
funds continues to migrate lower primarily due to the continuous downward
repricing of the time deposit portfolio.  The cost of time deposits
has declined by 92 basis points over the comparative
periods.  Somewhat offsetting this positive trend is a higher cost of
funds on the new interest-bearing checking product.  The overall cost
of interest-bearing checking accounts has increased by 138 basis
points.





-25-


Approximately
42% of the Company’s loan portfolio has variable rate pricing based on the Prime
lending rate or LIBOR (London Inter Bank Offering Rate).  The
percentage of variable rate to total loans has declined from 46% at June 30,
2009.  In the current low interest rate environment, borrowers are
more inclined to desire a fixed rate loan option as opposed to a variable rate
even if the variable rate has a lower starting point.  The Company has
shifted its strategic focus from a growth orientation to a more
performance-related, relationship orientation.  The Company is being
more disciplined with loan pricing.  As a result, the loan portfolio
will not experience the same growth rates as has been seen to in recent years,
but should provide better yields.  This should also ease reliance on
wholesale forms of funding.  While there is an attempt to focus on
local market relationships, wholesale forms of funding will continue to make
sense from an economic standpoint at certain times.





The
Company expects that net interest margin will continue to expand in the
short-term as long as short-term rates remain
unchanged.   Approximately 35% or $140.1 million time deposits
carrying a weighted average rate of 2.62% will mature over the coming six months
and can be renewed at lower rates.  The Company entered into interest
rate swap agreements on $7.5 million subordinated loan agreement and $8.0
million trust preferred securities.  These two borrowings carry
variable rates of interest based on three-month LIBOR.  We have
swapped these variable cash flows for fixed rate cash flows for an average
remaining period of two and a half years.  In addition to adopting a
funding strategy that pushes funding maturities further out into the future,
these swaps will further protect the Company when rates do begin to
rise.





Provision for Loan
Losses.The
Company’s provision for loan losses for the three-month period ended June 30,
2010 was $8.4 million compared to $1.1 million for the same period in
2009.  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 the level of current
period charge-offs and credit quality issues resulting from current economic
conditions. The allowance for loan losses was $18.3 million at June 30, 2010,
representing 2.59% of total outstanding loans.  See the sections on
Nonperforming Assets and Analysis of Allowance for Loan Losses for additional
details.





Non-Interest Income.For
the three-month period ended June 30, 2010, non-interest income increased by
$338,000 or 45% to $1.1 million compared to $752,000 for the same period in
2009. The primary reason for the increase was the 2009 impairment write-down of
a non-marketable equity security of $219,000.  The following
categories experienced increases over the prior period: service charges and fees
on deposit accounts increased by $78,000 to $474,000, mortgage loan origination
fees and gains realized on the sale of mortgage loans increased by $44,000 to
$260,000 and other miscellaneous fees increased by $7,000 to
$139,000.  The increase in mortgage loan related income is
attributable to increasing the number of loan officers over the past twelve
months and improved margins on those loans held for sale.  Earnings on
cash value of bank owned life insurance declined by $8,000 due to lower
crediting rates on existing policies.  The company recognized a $2,000
loss on the disposition of fixed assets during the second quarter of
2010.





Non-Interest Expenses.For
the current three-month period, non-interest expenses increased by $860,000 or
14% from $6.3 million to $7.2 million. The sharp increase is attributable to
expenses related to the acquisition, servicing and disposition of foreclosed and
repossessed assets.  Expenses related to the loan collection and
foreclosure process increased by $1.1 million to $1.3 million for the current
quarter compared to $227,000 for the prior year quarter.  The increase
was primarily due to a $901,000 valuation write-down of foreclosed assets, a
$282,000 increase in acquisition and servicing expenses for foreclosed assets
and partially offset by an increase in the net gain on sale of foreclosed assets
of $79,000.  Management expects that expenses related to the loan and
collections process will continue at elevated levels compared prior period
levels until the end of this credit cycle.  Expenses related to
personnel and occupancy increased by $32,000 and $90,000,
respectively.  The increases are primarily related to incurring a full
quarter of expenses related to our Raleigh, North Carolina main office which
opened in mid May 2009.  Data processing expenses increased by $91,000
or 30%.  Data processing expenses are somewhat dependent on account
volumes and the introduction of the new interest checking product has increased
the number of deposit accounts significantly.  The Company has
realized expense reductions in several areas when compared with the three-month
period ended June 30, 2009 including FDIC insurance premiums, office supplies,
other deposit losses and outside service fees.





-26-


Provision for Income
Taxes.The
Company recorded income tax benefit of $2.9 million for the three-months ended
June 30, 2010 compared with tax expense of $20,000 for the prior year
period.  The current period benefit was approximately 42% of the
quarterly loss.  The impact of tax exempt interest income increased
the taxable loss and therefore increased the benefit.  The effective
tax rate for the three-month period ended June 30, 2009 was 3%.  The
small effective tax rate in 2009 was attributable to lower pre-tax income and a
large percentage of income coming from tax exempt sources.





COMPARISON
OF RESULTS OF OPERATIONS FOR THE SIX MONTH PERIODS ENDED


June
30, 2010 AND 2009





Net Income (Loss).Net
loss for the six-month period ended June 30, 2010, before adjusting for the
effective dividend on preferred stock, was ($3,467,000) compared to net income
of $1,185,000 for the prior year six-month period ended June 30, 2009. After
adjusting for $841,000 and $590,000 in dividends and discount accretion on
preferred stock for the two respective periods, net loss attributable to common
shareholders for the current period was ($4,308,000) or ($0.45) per diluted
share compared with net income attributable to common shareholders of $595,000
or $0.06 per diluted share for the first quarter of the prior year.  Annualized
return on average assets was (0.70%) compared to 0.22% for the prior
period.  Earnings in the current period were impacted by a larger loan
loss provision and increased non-interest expenses driven by the cost to acquire
and service foreclosed and repossessed loan collateral.Return on
average equity for the current period was (7.75%) compared to 1.98% for the
prior period.





Net Interest Income.Net interest
income increased by 4% or $499,000 from $14.5 million for the prior year
six-month period to $15.0 million for the current period ended June 30,
2010.  The increase was attributable to a larger decline in interest
expense on interest-bearing liabilities than the decline in interest income
resulting from the lower volume of earning assets.  The improved cost
of funds combined with a more stable yield on earning assets helped offset the
impact of  a lower percentage of average interest-earning assets to
average interest-bearing liabilities ratio and resulted in an increase in the
tax equivalent net interest margin.





Total
interest income decreased by 5% or $1.4 million to $26.8 million for the current
six-month period compared to $28.2 million for the prior year
period.  The decline in was comprised of a $1.1 million decrease due
to a drop in average earning assets volume and a $307,000 decrease due to lower
yields on those assets.  Total interest expense for the current period
declined by 14% or $1.9 million to $11.8 million from $13.7
million.  The decline in total interest expense was comprised of a
$1.3 million decline due to the lower cost of funding and a $555,000 decline due
to a lower volume of interest-bearing liabilities.





-27-


Total
average earning assets decreased $41.4 million or 4% from an average of $992.4
million to an average of $951.0 million for the current six-month period. The
composition of the net decrease was as follows: the average balance of loans
outstanding decreased by 5% or $41.8 million from $785.8 million to $744.0
million, the average balance of the investment securities portfolio decreased by
2% or $3.1 million from $200.0 million to $196.9 million and the average balance
of federal funds sold and other interest-earning assets increased by 54% or $3.5
million from $6.5 million to $10.0 million.  The average of gross
loans outstanding has declined due to a variety of factors including the
movement of loans into other asset categories and a reduction in loan demand
based on current economic conditions over the past twenty-four
months.





Average
interest-bearing liabilities decreased by $25.5 million or 3% from $877.1
million for the six-month period ended June 30, 2009 to $851.6 million for the
period ended June 30, 2010.  Total interest-bearing deposits increased
by $12.2 million or 2% from $643.0 million to $655.2 million.  Average
balances of interest-bearing NOW accounts increased by 121% or $58.7 million
from $48.4 million to $107.1 million largely due to the success of the new
high-yield interest checking product.  Total average time deposits
declined by over $42.1 million primarily due to the Company reducing its
exposure to brokered deposits by $39.1 million over the last twelve
months.  Average total borrowings decreased by $37.6 million or 16%
from $234.1 million to $196.5 million.  The Company is making a
concerted effort to reduce its exposure to wholesale funding.  The
decrease in borrowings came in a category whose interest rate was short-term in
nature, but was subject to significant volatility in a rising interest rate
environment.





The tax
equivalent net interest margin for the six-month period ended June 30, 2010 was
3.30% compared to 3.03% for the prior year period.  The average yield
on earning assets for both comparative periods was 5.80%, while the average cost
of interest-bearing funds decreased by 35 basis points to 2.79% from
3.14%.  The interest rate spread between the average yield on earning
assets and the cost of interest-bearing funds, improved by 35 basis points from
2.66% to 3.01%.  The percentage of interest earning assets to average
interest-bearing liabilities decreased from 113.14% for the prior year period to
111.66% for the six months ended June 30, 2010.  A decrease in the
ratio of average earning assets to average interest-bearing liabilities
indicates increased dependency on interest-bearing forms of funding and
otherwise has a negative impact on the margin.





Provision for Loan
Losses.The
Company’s provision for loan losses for the six-month period ended June 30, 2010
was $10.2 million compared to $2.8 million for the same period in
2009.  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 the level of current
year charge-offs and credit quality issues resulting from the current economic
conditions.





Non-Interest Income.For
the six-month period ended June 30, 2010, non-interest income increased by
$596,000 or 39% to $2.1 million from $1.5 million.  The largest
components of non-interest income in the first half of 2010 were $769,000 in
customer service fees, $497,000 in mortgage loan origination fees and gains on
sale of mortgage loans, $437,000 in earnings on cash value of life insurance and
$136,000 in service charges on deposit accounts.  For the six-month
period ended June 30, 2009 the largest components were $661,000 in customer
service fees, $512,000 in mortgage loan origination fees, $435,000 in earnings
on cash value of bank owned life insurance and $123,000 in service charge
revenue from deposit accounts.  For the current six month period the
Company recognized a $5,000 gain on the sale of assets.  During the
first half of 2009, the Company wrote-off $407,000 of a non-marketable equity
investment that was deemed other than-temporarily-impaired.





-28-


Non-Interest Expenses.Non-interest
expenses increased by 12% or $1.4 million to $13.3 million for the six-month
period ended June 30, 2010 compared with $11.9 million for the prior year
period. The five largest components of non-interest expense are personnel,
occupancy, loan collection related expenses, data processing and FDIC deposit
insurance premiums.  The net increases in these categories accounted
for virtually all of the total increase in non-interest expenses for the
comparative periods.  Loan collection related expenses were $1.7
million, up $1.3 million or 398% over the $336,000 in expenses for the prior
year period.  Within this expense category, the Company had valuation
write-downs on foreclosed assets of $901,000 and professional expenses related
to the acquisition and servicing of foreclosed assets of
$683,000.  These expenses were partially offset by a net gain on the
disposition of foreclosed assets owned of $72,000.  Total occupancy
expenses have increased by 18% or $296,000 due to the 2009 opening of two new
branch offices in Raleigh, North Carolina and the expansion of our operations
facility in Cary, NC.  The new facilities and the expansion of the
Company’s mortgage operations accounted for the 3% or $190,000 increase in
personnel expenses.  Data processing expenses increased by $28,000 as
the volume of deposit accounts increased significantly.  For the
six-month period ended June 30, 2009; $156,000 of expense was considered
non-recurring data conversion related expenses.  FDIC deposit
insurance premiums decline by 43% or $438,000 primarily due to the recognition
of a $493,000 special assessment during the second quarter of 2009.





Provision for Income
Taxes.The
Company recorded an income tax benefit of $2.9 million for the six-months ended
June 30, 2010 compared to tax expense of $114,000 for the prior year
period.  The current period benefit was approximately 46% of the
pre-tax loss.  The impact of tax exempt interest income increased the
taxable loss and therefore increased the size of the benefit relative to the
combined statutory rate.  The effective tax rate for the six-month
period ended June 30, 2009 was 9%.  The small effective tax rate was
attributable to low pre-tax income and a large percentage of income coming from
tax exempt sources.





-29-




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
six-month periods ended June 30, 2010 and 2009. The tables reflect the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities (derived by dividing income or expense by the daily average balance
of interest-earning assets or interest-bearing liabilities, respectively) as
well as the net interest margin. In preparing the tables, non-accrual loans are
included, when applicable, in the average loan balance.  For purposes
of the analysis, Federal Home Loan Bank stock is included in Investment
Securities totals.





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


For
      the Three Months Ended June 30,2010
              
              
              2009Average
                Balance
              
              
              Interest
              
              
              Average
                Yield/Cost
              
              
              Average
                Balance
              
              
              Interest
              
              
              Average
                Yield/CostInterest-earnings
      assetsLoan
      portfolio
              
              $
              736,015
              
              
              $
              11,496
              
              
              
              6.26
              %
              
              $
              782,886
              
              
              $
              12,026
              
              
              
              6.16
              %Investment
      securities
              
              
              194,227
              
              
              
              1,857
              
              
              
              4.41
              %
              
              
              208,028
              
              
              
              2,053
              
              
              
              4.35
              %Fed
      funds and other interest-earning assets
              
              
              10,826
              
              
              
              8
              
              
              
              0.30
              %
              
              
              7,978
              
              
              
              5
              
              
              
              0.25
              %Total
      interest-earning assets
              
              
              941,068
              
              
              
              13,361
              
              
              
              5.82
              %
              
              
              998,892
              
              
              
              14,084
              
              
              
              5.74
              %Noninterest-bearing
      assets
              
              
              51,135
              
              
              
              
              
              
              
              
              
              
              
              71,627Total
      Assets
              
              $
              992,203
              
              
              
              
              
              
              
              
              
              
              $
              1,070,519Interest-bearing
      liabilitiesInterest-bearing
      NOW
              
              $
              117,204
              
              
              
              801
              
              
              
              2.74
              %
              
              $
              53,873
              
              
              
              183
              
              
              
              1.36
              %Money
      market and savings
              
              
              133,295
              
              
              
              395
              
              
              
              1.19
              %
              
              
              132,295
              
              
              
              476
              
              
              
              1.44
              %Time
      deposits
              
              
              409,981
              
              
              
              3,036
              
              
              
              2.97
              %
              
              
              455,243
              
              
              
              4,410
              
              
              
              3.89
              %Short-term
      borrowings
              
              
              29,342
              
              
              
              124
              
              
              
              1.70
              %
              
              
              118,239
              
              
              
              506
              
              
              
              1.72
              %Long-term
      debt
              
              
              151,177
              
              
              
              1,467
              
              
              
              3.84
              %
              
              
              122,429
              
              
              
              1,241
              
              
              
              4.01
              %Total
      interest-bearing liabilities
              
              
              840,999
              
              
              
              5,823
              
              
              
              2.78
              %
              
              
              882,079
              
              
              
              6,816
              
              
              
              3.10
              %Non-interest
      bearing deposits
              
              
              57,589
              
              
              
              
              
              
              
              
              
              
              
              63,380Other
      liabilities
              
              
              4,001
              
              
              
              
              
              
              
              
              
              
              
              2,913Total
      Liabilities
              
              
              902,589
              
              
              
              
              
              
              
              
              
              
              
              948,372Stockholders'
      Equity
              
              
              89,614
              
              
              
              
              
              
              
              
              
              
              
              122,147Total
      Liabilities & Stockholders' Equity
              
              $
              992,203
              
              
              
              
              
              
              
              
              
              
              $
              1,070,519Net
      interest income
              
              
              
              
              
              $
              7,538
              
              
              
              
              
              
              
              
              
              
              $
              7,268Interest
      rate spread
              
              
              
              
              
              
              
              
              
              
              3.04
              %
              
              
              
              
              
              
              
              
              
              
              2.64
              %Net
      interest-margin
              
              
              
              
              
              
              
              
              
              
              3.33
              %
              
              
              
              
              
              
              
              
              
              
              3.00
              %Percentage
      of average interest-earning assets to average interest-bearing
      liabilities
              
              
              
              
              
              
              
              
              
              
              111.90
              %
              
              
              
              
              
              
              
              
              
              
              113.24
              %
  -30-


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


For
      the Six Months Ended June 30,2010
              
              
              2009Average
                Balance
              
              
              Interest
              
              
              Average
                Yield/Cost
              
              
              Average
                Balance
              
              
              Interest
              
              
              Average
                Yield/CostInterest-earnings
      assetsLoan
      portfolio
              
              $
              744,047
              
              
              $
              22,980
              
              
              
              6.23
              %
              
              $
              785,832
              
              
              $
              24,103
              
              
              
              6.19
              %Investment
      securities
              
              
              196,870
              
              
              
              3,793
              
              
              
              4.42
              %
              
              
              200,013
              
              
              
              4,052
              
              
              
              4.44
              %Fed
      funds and other interest-earning assets
              
              
              10,052
              
              
              
              13
              
              
              
              0.26
              %
              
              
              6,515
              
              
              
              7
              
              
              
              0.22
              %Total
      interest-earning assets
              
              
              950,969
              
              
              
              26,786
              
              
              
              5.80
              %
              
              
              992,360
              
              
              
              28,162
              
              
              
              5.80
              %Noninterest-earning
      assets
              
              
              51,114
              
              
              
              
              
              
              
              
              
              
              
              69,670Total
      Assets
              
              $
              1,002,083
              
              
              
              
              
              
              
              
              
              
              $
              1,062,030Interest-bearing
      liabilitiesInterest-bearing
      NOW
              
              $
              107,079
              
              
              
              1,425
              
              
              
              2.68
              %
              
              $
              48,352
              
              
              
              279
              
              
              
              1.16
              %Money
      market and savings
              
              
              131,806
              
              
              
              800
              
              
              
              1.22
              %
              
              
              136,292
              
              
              
              970
              
              
              
              1.44
              %Time
      deposits
              
              
              416,306
              
              
              
              6,353
              
              
              
              3.08
              %
              
              
              458,374
              
              
              
              9,063
              
              
              
              3.99
              %Short-term
      borrowings
              
              
              47,221
              
              
              
              330
              
              
              
              1.40
              %
              
              
              112,280
              
              
              
              969
              
              
              
              1.73
              %Long-term
      debt
              
              
              149,229
              
              
              
              2,879
              
              
              
              3.84
              %
              
              
              121,797
              
              
              
              2,381
              
              
              
              3.91
              %Total
      interest-bearing liabilities
              
              
              851,641
              
              
              
              11,787
              
              
              
              2.79
              %
              
              
              877,095
              
              
              
              13,662
              
              
              
              3.14
              %Non-interest
      bearing deposits
              
              
              56,404
              
              
              
              
              
              
              
              
              
              
              
              61,316Other
      liabilities
              
              
              3,845
              
              
              
              
              
              
              
              
              
              
              
              3,002Total
      Liabilities
              
              
              911,890
              
              
              
              
              
              
              
              
              
              
              
              941,413Stockholders'
      Equity
              
              
              90,193
              
              
              
              
              
              
              
              
              
              
              
              120,617Total
      Liabilities & Stockholders' Equity
              
              $
              1,002,083
              
              
              
              
              
              
              
              
              
              
              $
              1,062,030Net
      interest income
              
              
              
              
              
              $
              14,999
              
              
              
              
              
              
              
              
              
              
              $
              14,500Interest
      rate spread
              
              
              
              
              
              
              
              
              
              
              3.01
              %
              
              
              
              
              
              
              
              
              
              
              2.66
              %Net
      interest-margin
              
              
              
              
              
              
              
              
              
              
              3.30
              %
              
              
              
              
              
              
              
              
              
              
              3.03
              %Percentage
      of average interest-earning assets to average interest-bearing
      liabilities
              
              
              
              
              
              
              
              
              
              
              111.66
              %
              
              
              
              
              
              
              
              
              
              
              113.14
              %





VOLUME/RATE
VARIANCE ANALYSIS





The
following table analyzes the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities for the three and six-month periods ended June 30,
2010 and 2009.  The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period’s
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period’s volume), and (iii) net change (the sum of the previous
columns).  The change attributable to both rate and volume (changes in
rate multiplied by changes in volume) has been allocated equally to both the
changes attributable to volume and the changes attributable to
rate.




-31-




Rate/Volume
      AnalysisThree
      Months Ended June 30,
                2010
      vs. 2009
                (in
      Thousands)Increase
      (Decrease) Due toVolume
              
              
              Rate
              
              
              TotalInterest
      IncomeLoan
      portfolio
              
              
              (732
              )
              
              
              201
              
              
              
              (531
              )Investment
      Securities
              
              
              (188
              )
              
              
              (8
              )
              
              
              (196
              )Fed
      funds and other interest-earning assets
              
              
              2
              
              
              
              1
              
              
              
              3Total
      interest-earning assets
              
              
              (918
              )
              
              
              194
              
              
              
              (724
              )Interest
      ExpenseInterest-bearing
      NOW
              
              
              324
              
              
              
              294
              
              
              
              618Money
      market and savings
              
              
              4
              
              
              
              (85
              )
              
              
              (81
              )Time
      deposits
              
              
              (384
              )
              
              
              (991
              )
              
              
              (1,374
              )Short-term
      borrowings
              
              
              (381
              )
              
              
              (2
              )
              
              
              (382
              )Long-term
      debt
              
              
              285
              
              
              
              (59
              )
              
              
              226Total
      interest-bearing liabilities
              
              
              (152
              )
              
              
              (842
              )
              
              
              (993
              )Net
      interest income
              
              
              (766
              )
              
              
              1,036
              
              
              
              269





Rate/Volume
      AnalysisSix
      Months Ended June 30,
                2010
      vs. 2009
                (in
      Thousands)Increase
      (Decrease) Due toVolume
              
              
              Rate
              
              
              TotalInterest
      IncomeLoan
      portfolio
              
              
              (929
              )
              
              
              (194
              )
              
              
              (1,123
              )Investment
      Securities
              
              
              (143
              )
              
              
              (116
              )
              
              
              (259
              )Fed
      funds and other interest-earning assets
              
              
              3
              
              
              
              3
              
              
              
              6Total
      interest-earning assets
              
              
              (1,069
              )
              
              
              (307
              )
              
              
              (1,376
              )Interest
      ExpenseInterest-bearing
      NOW
              
              
              567
              
              
              
              579
              
              
              
              1,146Money
      market and savings
              
              
              (57
              )
              
              
              (113
              )
              
              
              (170
              )Time
      deposits
              
              
              (1,041
              )
              
              
              (1,669
              )
              
              
              (2,710
              )Short-term
      borrowings
              
              
              (416
              )
              
              
              (225
              )
              
              
              (639
              )Long-term
      debt
              
              
              392
              
              
              
              106
              
              
              
              498Total
      interest-bearing liabilities
              
              
              (555
              )
              
              
              (1,322
              )
              
              
              (1,875
              )Net
      interest income
              
              
              (514
              )
              
              
              1,015
              
              
              
              499
  -32-





NONPERFORMING
ASSETS





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




At
      June 30,
              
              
              At
      December 31,2010
              
              
              2009
              
              
              2009
              
              
              2008(Dollars
      in thousands)Nonaccrual
      loansConstruction
      and A&D
              
              $
              3,618
              
              
              $
              9,435
              
              
              $
              6,692
              
              
              $
              7,696Commercial
      real estate
              
              
              3,028
              
              
              
              543
              
              
              
              4,655
              
              
              
              365Residential
      mortgage
              
              
              4,348
              
              
              
              1,817
              
              
              
              2,758
              
              
              
              4,448Home
      equity lines and loans
              
              
              283
              
              
              
              316
              
              
              
              1,314
              
              
              
              82Commercial
      and industrial
              
              
              649
              
              
              
              1,199
              
              
              
              2,706
              
              
              
              503Consumer
              
              
              8
              
              
              
              25
              
              
              
              9
              
              
              
              -Total
      nonaccrual loans
              
              
              11,934
              
              
              
              13,335
              
              
              
              18,134
              
              
              
              13,094Accruing
      loans past due 90 days or more
              
              
              -
              
              
              
              -
              
              
              
              381
              
              
              
              -Total
      nonperforming loans
              
              
              11,934
              
              
              
              13,335
              
              
              
              18,515
              
              
              
              13,094Real
      estate owned
              
              
              14,122
              
              
              
              4,401
              
              
              
              6,306
              
              
              
              1,716Repossessed
      assets
              
              
              1,950
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
      nonperforming assets
              
              $
              28,006
              
              
              $
              17,736
              
              
              $
              24,821
              
              
              $
              14,810Restructured
      loans in accrual status not in categories listed above
              
              $
              11,451
              
              
              $
              4,482
              
              
              $
              13,691
              
              
              $
              -Allowance
      for loan losses
              
              $
              18,348
              
              
              $
              13,144
              
              
              $
              17,567
              
              
              $
              12,585Nonperforming
      loans to period end loans
              
              
              1.68
              %
              
              
              1.72
              %
              
              
              2.44
              %
              
              
              1.53
              %Allowance
      for loan losses to period end loans
              
              
              2.59
              %
              
              
              1.70
              %
              
              
              2.31
              %
              
              
              1.60
              %Allowance
      for loan losses to nonperforming loans
              
              
              154
              %
              
              
              99
              %
              
              
              95
              %
              
              
              96
              %Nonperforming
      loans to period end total assets
              
              
              1.21
              %
              
              
              1.65
              %
              
              
              1.79
              %
              
              
              1.35
              %Nonperforming
      assets to period end total assets
              
              
              2.84
              %
              
              
              1.65
              %
              
              
              2.40
              %
              
              
              1.67
              %


The table
below summarizes our nonperforming loan portfolio by region.  The
Company considers our total footprint to be comprised of three primary
regions:  the Triangle region which encompasses our Wake and Johnston
county offices, the Sandhills region which encompasses our Lee and Moore county
offices and the Wilmington region.




-33-




Nonperforming
      Loans by RegionAs
      of June 30, 2010Loans
                Outstanding
              
              
              %
      of Total
                Loans
                Outstanding
              
              Nonperforming
                Loans
              
              
              Nonperforming
                Loans
      to
                Loans
                Outstadnding(Dollars
      in thousands)Triangle
      Region
              
              $
              418,204
              
              
              
              58.94
              %
              
              $
              5,447
              
              
              
              1.30
              %Sandhills
      Region
              
              
              110,072
              
              
              
              15.52
              %
              
              
              907
              
              
              
              0.82
              %Wilmington
      Region
              
              
              181,167
              
              
              
              25.54
              %
              
              
              5,580
              
              
              
              3.08
              %Total
      allowance
              
              $
              709,443
              
              
              
              100.00
              %
              
              $
              11,934
              
              
              
              1.68
              %




Our
financial statements are prepared on the accrual basis of accounting, including
the recognition of interest income on loans, unless we place a loan on
nonaccrual basis.  We account for loans on a nonaccrual basis when we
have serious doubts about the collectability of principal or
interest.  Generally, our policy is to place a loan on nonaccrual
status when the loan becomes past due 90 days.  We also place loans on
nonaccrual status in cases where we are uncertain whether the borrower can
satisfy the contractual terms of the loan agreement.  Amounts received
on nonaccrual loans generally are applied first to principal and then to
interest only after all principal has been collected.





The table
below summarizes performing restructured loans, which are classified as impaired
for purposes of the loan loss allowance calculation.





At
      June 31,
              
              
              At
      December 31,2010
              
              
              2009
              
              
              2009
              
              
              2008(Dollars
      in thousands)Performing
      restructured loans:Construction
      and A&D
              
              $
              2,500
              
              
              
              -
              
              
              $
              1,097
              
              
              
              -Commercial
      real estate
              
              
              4,148
              
              
              
              -
              
              
              
              6,286
              
              
              
              -Residential
      mortgage
              
              
              4,654
              
              
              
              4,261
              
              
              
              5,936
              
              
              
              -Home
      equity lines and loans
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Commercial
      and industrial
              
              
              149
              
              
              
              221
              
              
              
              372
              
              
              
              -Consumer
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
      performing restructured loans
              
              $
              11,451
              
              
              $
              4,482
              
              
              $
              13,691
              
              
              $
              -





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.  The Company will continue to closely monitor these loans and
will cease accruing interest on them if management believes that the borrowers
may not continue performing based on the restructured note terms. All TDRs are
considered to be impaired and are evaluated as such in the quarterly allowance
calculation. As of June 30, 2010, the allowance for loan losses allocated to
TDRs totaled $2.6 million.




-34-




Potential
problem loans are loans which are currently performing and are not included as
nonaccrual or restructured loans above, but about which we have serious doubts
as to the borrower’s ability to comply with present repayment
terms.  These loans are likely to be included later in nonaccrual,
past due or restructured loans, so they are considered by our management in
assessing the adequacy of our allowance for loan losses.  At June 30,
2010, we identified thirteen loans totaling $11.2 million as potential problems
loans.  Of the $11.2 million in potential problem loans, five loans
totaling $4.9 million are concentrated in the residential construction, land
acquisition and development sectors and three loans totaling $4.5 million are
commercial real estate. There were forty-one foreclosed properties valued at a
total of $14.1 million and fifty-seven nonaccrual loans totaling $11.9
million.  Foreclosed property is valued at fair value at the date of
foreclosure or acquisition. Interest foregone on nonaccrual and charged-off
loans for the six-month period ended June 30, 2010 was $1.3
million.





At June
30, 2009, we identified twenty-eight loans totaling $7.1 million as potential
problems loans.  Of the $7.1 million in potential problem loans,
seventeen loans totaling $6.2 million are concentrated in the residential
construction and land acquisition and development sectors. There were thirteen
foreclosed properties valued at a total of $4.4 million and eighty-three
nonaccrual loans totaling $13.3 million.  Foreclosed property is
valued at the lower of appraised value or the outstanding loan balance. Interest
foregone on nonaccrual loans for the six-month period ended June 30, 2009 was
$601,000.





ANALYSIS
OF ALLOWANCE FOR LOAN LOSSES





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





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





Management
has developed a model for evaluating the adequacy of the allowance for loan
losses.  The model uses the Company’s internal loan grading system to
segment each category of loans by risk class. The Company’s internal grading
system is compromised of nine different risk classifications.  Loans
possessing a risk class of 1 through 6 demonstrate various degrees of risk, but
each is considered to have the capacity to perform in accordance with the terms
of the loan.  Loans possessing a risk class of 7 to 9 are considered
impaired and are individually evaluated for impairment.  Additionally,
we are evaluating loans that migrate to a risk class 6 status and provide for
possible losses if the loan is unsecured or secured by a General Security
Agreement on business assets.





-35-


The
predetermined allowance percentages to be applied to loans possessing risk grade
1 through 6 are determined by using the historical charge-off percentages and
adding management’s qualitative factors.  For each individual loan
type, we calculate the average historical charge-off percentage over a five year
period.  The current year charge-offs are annualized and included as
one of the five years under consideration.  The resulting averages
represent a charge-off rate in a more normalized environment.  To
those averages, management adds qualitative factors which are more a reflection
of current economic conditions and trends.  Together, these two
components comprise the reserve.





Those
loans that are identified through the Company’s internal loan grading system as
impaired are evaluated individually.  Each loan is analyzed to
determine the net value of collateral, probability of charge-off and finally a
potential estimate of loss.  When management believes a real estate
collateral-supported loan will move from a risk grade 6 to a risk grade 7, a new
appraisal is ordered.  The analysis is performed using current
collateral values as opposed to values shown on appraisals which were obtained
at the time the loan was made.  If the analysis of a real estate
collateral-supported loan results in an estimated loss, a specific reserve is
recorded.  Loans with risk grade 7 and 8 are re-evaluated periodically
to determine the adequacy of specific reserves.  Fair values on real
estate collateral are subject to constant change and management makes certain
assumptions about how the age of an appraisal impacts current
value.  Loans with risk grade codes of 7 or 8 that are either
unsecured or secured by a general security agreement on business assets are
generally reserved for at 100% of the loan balance.





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





The
provision for the first half of 2010 was primarily due to the level of
charge-offs and the of credit quality deterioration due to current economic
conditions in our markets. The level of current year charge-offs, when
annualized and incorporated into our model to determine normalized historical
charge-off percentages, also had a impact on current quarter
provision.   The sectors of the loan portfolio being impacted
most by the economic climate are commercial real estate and residential
construction, land acquisition and development. Other factors influencing the
provision include net loan charge-offs.  For the six-month period
ended June 30, 2010, there were net loan charge-offs of $9.4 million compared
with $2.3 million at March 31, 2009.  The allowance for loan losses at
June 30, 2010 was $18.3 million, which represents 2.59% of total loans
outstanding compared to $13.1 million or 1.70% one year ago.





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





-36-


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




Allocation
      of Allowance for Loan LossesAt
      June 30,
              
              
              At
      December 31,2010
              
              
              2009Amount
              
              
              %
      of Total
                Loans
      (1)
              
              Amount
              
              
              %
      of Total
                Loans
      (1)(Dollars
      in thousands)Residential
      real estate loans
              
              $
              3,494
              
              
              
              12.64
              %
              
              $
              1,075
              
              
              
              12.73
              %Home
      equity loans and lines
              
              
              1,146
              
              
              
              8.52
              %
              
              
              1,134
              
              
              
              8.48
              %Commercial
      real estate loans
              
              
              5,068
              
              
              
              48.71
              %
              
              
              5,811
              
              
              
              47.28
              %Construction
      loans
              
              
              6,053
              
              
              
              22.17
              %
              
              
              6,439
              
              
              
              23.58
              %Commercial
      and industrial loans
              
              
              2,497
              
              
              
              7.33
              %
              
              
              2,854
              
              
              
              7.28
              %Loans
      to individuals
              
              
              90
              
              
              
              0.63
              %
              
              
              254
              
              
              
              0.65
              %Total
      allowance
              
              $
              18,348
              
              
              
              100.00
              %
              
              $
              17,567
              
              
              
              100.00
              %
  
 (1)
              Represents
      total of all outstanding loans in each category as a percent of total
      loans outstanding.
  -37-




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





Changes
      in Allowance for Loan LossesFor
      the Six-Month Period EndedJune 30,2010
              
              
              2009(Dollars
      in thousands)Balance
      at the beginning of the year
              
              $
              17,567
              
              
              $
              12,585Charge-offs:Commercial
      and industrial loans
              
              
              1,429
              
              
              
              616Commercial
      real estate loans
              
              
              3,134
              
              
              
              -Construction,
      acquisition and development
              
              
              2,304
              
              
              
              1,022Residential
      mortgage loans
              
              
              1,555
              
              
              
              768Home
      equity lines and loans
              
              
              1,151
              
              
              
              112Consumer
      loans
              
              
              56
              
              
              
              58Total
      charge-offs
              
              
              9,629
              
              
              
              2,576RecoveriesCommercial
      and industrial loans
              
              
              122
              
              
              
              28Commercial
      real estate
              
              
              -
              
              
              
              -Construction,
      acquisition and development
              
              
              7
              
              
              
              269Residential
      mortgage loans
              
              
              -
              
              
              
              9Home
      equity lines and loans
              
              
              91
              
              
              
              -Consumer
      loans
              
              
              -
              
              
              
              -Total
      recoveries
              
              
              220
              
              
              
              306Net
      charge-offs
              
              
              9,409
              
              
              
              2,270Provision
      for loan losses
              
              
              10,190
              
              
              
              2,829Balance
      at the end of the period
              
              $
              18,348
              
              
              $
              13,144Total
      loans outstanding at period-end
              
              $
              709,443
              
              
              $
              775,301Average
      loans outstanding for the period
              
              $
              744,047
              
              
              $
              785,832Allowance
      for loan losses to total loans outstanding
              
              
              2.59
              %
              
              
              1.70
              %Annualized
      ratio of net charge-offs to average loans outstanding
              
              
              2.55
              %
              
              
              0.58
              %





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, Federal Reserve 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.





-38-


As of
June 30, 2010, liquid assets (cash and due from banks, interest-earning deposits
with banks, fed funds sold and investment securities available for sale) were
approximately $226.9 million, which represents 23% of total assets and 31% of
total deposits. Supplementing this liquidity, the Company has available lines of
credit from various correspondent banks of approximately $389.4 million of which
$163.5 million is outstanding.  Outstanding commitments for
undisbursed lines of credit, letters of credit and undisbursed investment
commitments amounted to approximately $120.4 million.  Management
intends to fund anticipated loan closings and operational needs through cash and
cash equivalents on hand, brokered deposits, scheduled principal repayments from
the loan and securities portfolios, and anticipated increases in deposits and
borrowings.  Certificates of deposit represented 56% of the Company’s
total deposits at June 30, 2010 and 61% at December 31, 2009. The Company’s
growth strategy will include marketing efforts focused at increasing the
relative volume of transaction deposit accounts; however, time deposits will
continue to play an important role in the Company’s funding strategy.
Certificates of deposit of $100,000 or more represented 47% and 50% of the
Company’s total deposits at June 30, 2010 and December 31, 2009,
respectively.  While these deposits are generally considered rate
sensitive and the Company will need to pay competitive rates to retain these
deposits at maturity, there are other subjective factors that will determine the
Company’s continued retention of those deposits.





Under
federal capital regulations, Crescent Financial Corporation must satisfy certain
minimum leverage ratio requirements and risk-based capital requirements. At June
30, 2010, the Company’s equity to asset ratio is 8.84%.  The Company’s
ratios of Tier 1 capital to risk-weighted assets and total capital to risk-based
assets are 11.44% and 13.65%, respectively.  The bank subsidiary is
required to maintain capital adequacy ratios.  Crescent State Bank has
Tier I capital to risk-weighted assets and total capital to risk-based
assets ratios of 11.32% and 13.52%, 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.





-39-





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, 2009.





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 June 30,
2010. Based on that evaluation, the Company’s Chief Executive Officer and
Principal Financial Officer concluded that the Company’s disclosure controls and
procedures were effective, as of June 30, 2010, to provide reasonable assurance
that information required to be disclosed by the Company in the reports filed or
submitted by it under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms, and to
provide reasonable assurance that information required to be disclosed by the
Company in such reports is accumulated and communicated to the Company’s
management, including its principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosure.





The
Company assesses the adequacy of its internal control over financial reporting
quarterly and enhances its controls in response to internal control assessments
and internal and external audit and regulatory recommendations. There have been
no changes in the Company’s internal controls during the quarter ended June 30,
2010 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.




-40-




Part
II. OTHER INFORMATION





Item
1. Legal Proceedings.




None that
are material.





Item
1a. Risk Factors.




Not
Applicable.








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




None.





Item
3. Defaults Upon Senior Debt.




None.





Item
4. (Removed and Reserved)





Item
5. Other Information.




None.





Item
6. Exhibits





(a)
            Exhibits.





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





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





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





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





-41-




SIGNATURES





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




CRESCENT
      FINANCIAL CORPORATIONDate: August
      12, 2010
              By:
              /s/
      Michael G. CarltonMichael
      G. CarltonPresident
      and Chief Executive Officer





Date:
      August 12, 2010
              By:
              /s/
      Bruce W. ElderBruce
      W. ElderPrincipal
      Financial Officer
  -42-