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, 2007**





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





Commission
      File Number 000-32951





**CRESCENT
      FINANCIAL CORPORATION**


(Exact
      name of registrant as specified in its charter)


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




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


**27513**


(Address
      of principal executive offices)


(Zip
      Code)





**(919)
      460-7770**


(Registrant’s
      telephone number, including area code)





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


Yes
x No
o





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


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





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


Yes
o No
x





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





**Common
      Stock, $1.00 par value**


**9,295,161
      shares outstanding as of August 8, 2007**





-1-




**Part
      I. Financial Information**


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




-2-







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




**Item
      1 - Financial Statements**





***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


***CONSOLIDATED
      BALANCE SHEETS***




June
                  30, 2007
              
              December
                  31,(Unaudited)
              
              2006***ASSETS**Cash
                  and due from banks
              
              $
              14,349,753
              
              $
              14,295,053Interest-earning
                  deposits with banks
              
              
              1,021,369
              
              
              763,057Federal
                  funds sold
              
              
              16,664,000
              
              
              92,000Investment
                  securities available for sale at fair value
              
              
              88,240,014
              
              
              84,722,892Loans
              
              
              608,318,522
              
              
              549,818,548Allowance
                  for loan losses
              
              
              (7,536,000
              )
              
              (6,945,000
              )NET
                  LOANS
              
              
              600,782,522
              
              
              542,873,548Accrued
                  interest receivable
              
              
              3,421,909
              
              
              3,045,840Federal
                  Home Loan Bank stock
              
              
              4,270,700
              
              
              3,582,800Bank
                  premises and equipment
              
              
              6,922,720
              
              
              5,907,664Investment
                  in life insurance
              
              
              8,947,179
              
              
              5,683,493Goodwill
              
              
              30,233,049
              
              
              30,225,549Other
                  assets
              
              
              7,368,741
              
              
              6,717,324TOTAL
                  ASSETS
              
              $
              782,221,956
              
              $
              697,909,220LIABILITIES
                  AND STOCKHOLDERS’ EQUITYLIABILITIESDepositsDemand
              
              $
              81,180,972
              
              $
              70,420,392Savings
              
              
              101,429,072
              
              
              78,379,431Money
                  market and NOW
              
              
              97,146,661
              
              
              97,343,128Time
              
              
              338,056,699
              
              
              295,738,729TOTAL
                  DEPOSITS
              
              
              617,813,404
              
              
              541,881,680Short-term
                  borrowings
              
              
              -
              
              
              24,451,000Long-term
                  borrowings
              
              
              75,248,000
              
              
              45,248,000Accrued
                  expenses and other liabilities
              
              
              3,117,771
              
              
              3,294,562TOTAL
                  LIABILITIES
              
              
              696,179,175
              
              
              614,875,242STOCKHOLDERS’
                  EQUITYPreferred
                  stock, no par value, 5,000,000 shares authorized, none
                  outstanding;
              
              
              -
              
              
              -Common
                  stock, $1 par value, 20,000,000 shares authorized; 9,187,468 shares
                  outstanding June 30, 2007; 8,265,136 shares outstanding December
                  31,
                  2006
              
              
              9,187,468
              
              
              8,265,136Additional
                  paid-in capital
              
              
              72,553,975
              
              
              62,659,201Retained
                  earnings
              
              
              5,284,737
              
              
              12,610,588Accumulated
                  other comprehensive loss (Note D)
              
              
              (983,399
              )
              
              (500,947
              )TOTAL
                  STOCKHOLDERS’ EQUITY
              
              
              86,042,781
              
              
              83,033,978COMMITMENTS
                  (Note B)TOTAL
                  LIABILITIES ANDSTOCKHOLDERS’
                  EQUITY
              
              $
              782,221,956
              
              $
              697,909,220




*
      Derived
      from audited consolidated financial statements.





See
      accompanying notes to consolidated financial statements





-3-




***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


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


***Three
      and Six Month Periods Ended June 30, 2007 and 2006***





Three-month
                  Periods
              
              Six-month
                  PeriodsEnded
                  June 30,
              
              Ended
                  June 30,2007
              
              2006
              
              2007
              
              2006INTEREST
                  INCOMELoans
              
              $
              12,330,915
              
              $
              7,018,938
              
              $
              23,906,309
              
              $
              13,452,263Investment
                  securities available for sale
              
              
              1,095,955
              
              
              724,415
              
              
              2,156,411
              
              
              1,387,627Federal
                  funds sold and interest-bearing deposits
              
              
              175,058
              
              
              51,218
              
              
              296,453
              
              
              55,846TOTAL
                  INTEREST INCOME
              
              
              13,601,928
              
              
              7,794,571
              
              
              26,359,173
              
              
              14,895,736INTEREST
                  EXPENSEDeposits
              
              
              5,964,960
              
              
              2,830,884
              
              
              11,525,960
              
              
              5,222,138Short-term
                  borrowings
              
              
              208,871
              
              
              212,964
              
              
              499,006
              
              
              445,444Long-term
                  borrowings
              
              
              858,664
              
              
              534,236
              
              
              1,520,599
              
              
              937,268TOTAL
                  INTEREST EXPENSE
              
              
              7,032,495
              
              
              3,578,084
              
              
              13,545,565
              
              
              6,604,850NET
                  INTEREST INCOME
              
              
              6,569,433
              
              
              4,216,487
              
              
              12,813,608
              
              
              8,290,886PROVISION
                  FOR LOAN LOSSES
              
              
              322,449
              
              
              164,341
              
              
              681,596
              
              
              434,641NET
                  INTEREST INCOME AFTERPROVISION
                  FOR LOAN LOSSES
              
              
              6,246,984
              
              
              4,052,146
              
              
              12,132,012
              
              
              7,856,245NON-INTEREST
                  INCOMEMortgage
                  loan origination revenue
              
              
              135,494
              
              
              165,047
              
              
              250,501
              
              
              310,467Fees
                  on deposit accounts
              
              
              321,990
              
              
              307,876
              
              
              669,644
              
              
              625,543Earnings
                  on life insurance
              
              
              99,910
              
              
              56,916
              
              
              183,379
              
              
              113,261Gain
                  (loss) on sale or disposal of assets
              
              
              -
              
              
              -
              
              
              (941
              )
              
              (127
              )Other
              
              
              89,919
              
              
              89,626
              
              
              173,610
              
              
              165,998TOTAL
                  NON-INTEREST INCOME
              
              
              647,313
              
              
              619,466
              
              
              1,276,193
              
              
              1,215,142NON-INTEREST
                  EXPENSESalaries
                  and employee benefits
              
              
              2,535,287
              
              
              1,669,940
              
              
              4,939,586
              
              
              3,239,049Occupancy
                  and equipment
              
              
              563,949
              
              
              489,213
              
              
              1,111,886
              
              
              958,531Data
                  processing
              
              
              256,530
              
              
              185,653
              
              
              517,255
              
              
              368,445Other
              
              
              1,267,364
              
              
              759,239
              
              
              2,274,801
              
              
              1,408,847TOTAL
                  NON-INTEREST EXPENSE
              
              
              4,623,130
              
              
              3,104,045
              
              
              8,843,528
              
              
              5,974,872INCOME
                  BEFORE INCOME TAXES
              
              
              2,271,167
              
              
              1,567,567
              
              
              4,564,677
              
              
              3,096,515INCOME
                  TAXES
              
              
              822,900
              
              
              564,100
              
              
              1,650,800
              
              
              1,110,600NET
                  INCOME
              
              $
              1,448,267
              
              $
              1,003,467
              
              $
              2,913,877
              
              $
              1,985,915NET
                  INCOME PER COMMON SHAREBasic
              
              $
              .16
              
              $
              .16
              
              $
              .32
              
              $
              .31Diluted
              
              $
              .15
              
              $
              .15
              
              $
              .30
              
              $
              .30WEIGHTED
                  AVERAGE COMMONSHARES
                  OUTSTANDING (Note C)Basic
              
              
              9,140,356
              
              
              6,372,323
              
              
              9,117,004
              
              
              6,368,607Diluted
              
              
              9,626,134
              
              
              6,628,300
              
              
              9,620,185
              
              
              6,620,671





See
      accompanying notes to consolidated financial statements





-4-





***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


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


***Six
      Months Ended June 30, 2007 and 2006***


2007
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  income
              
              $
              2,913,877
              
              $
              1,985,915Adjustments
                  to reconcile net income to net cash used by operating
                  activitiesDepreciation
              
              
              352,486
              
              
              343,277Provision
                  for loan losses
              
              
              681,596
              
              
              434,641Deferred
                  income taxes
              
              
              (308,000
              )
              
              (114,150
              )Loss
                  on sale or disposal of assets
              
              
              941
              
              
              127Net
                  amortization (accretion) on securities
              
              
              (46,262
              )
              
              17,321Increase
                  in cash value of life insurance
              
              
              (163,686
              )
              
              (99,516
              )Stock
                  based compensation
              
              
              84,988
              
              
              71,536Change
                  in assets and liabilities(Increase)
                  in accrued interest receivable
              
              
              (376,069
              )
              
              (378,073
              )(Increase)
                  in other assets
              
              
              (45,162
              )
              
              (784,041
              )Increase
                  in accrued interest payable
              
              
              301,737
              
              
              253,111(Decrease)
                  in other liabilities
              
              
              (478,528
              )
              
              (389,294
              )TOTAL
                  ADJUSTMENTS
              
              
              4,041
              
              
              (645,061
              )NET
                  CASH PROVIDED BY OPERATING ACTIVITIES
              
              
              2,917,918
              
              
              1,340,854CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchases
                  of securities available for sale
              
              
              (9,456,156
              )
              
              (12,820,461
              )Principal
                  repayments of securities available for sale
              
              
              5,204,588
              
              
              2,858,032Purchase
                  of Federal Home Loan Bank stock
              
              
              (687,900
              )
              
              (938,300
              )Net
                  increase in loans
              
              
              (58,590,570
              )
              
              (36,865,677
              )Investment
                  in life insurance
              
              
              (3,100,000
              )
              
              -Net
                  cash provided in business combination
              
              
              (7,500
              )
              
              -Purchases
                  of bank premises and equipment
              
              
              (1,368,482
              )
              
              (566,344
              )NET
                  CASH USED BY INVESTING ACTIVITIES
              
              
              (68,006,020
              )
              
              (48,332,750
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESNet
                  increase in deposits:Non-interest
                  bearing demand
              
              
              10,760,580
              
              
              5,349,153Savings
              
              
              23,049,641
              
              
              24,299,432Money
                  market and NOW
              
              
              (196,467
              )
              
              (2,352,784
              )Time
                  deposits
              
              
              42,317,970
              
              
              20,252,768Net
                  increase (decrease) in short-term borrowings
              
              
              (24,451,000
              )
              
              1,035,847Net
                  increase in long-term borrowings
              
              
              30,000,000
              
              
              10,000,000Proceeds
                  from the issuance of stock
              
              
              364,677
              
              
              133,372Cash
                  paid in lieu of fractional shares
              
              
              (7,687
              )
              
              (9,477
              )Excess
                  tax benefits from stock options exercised
              
              
              135,400
              
              
              20,100NET
                  CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              81,973,114
              
              
              58,728,411NET
                  INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              16,885,012
              
              
              11,736,515CASH
                  AND CASH EQUIVALENTS, BEGINNING OF PERIOD
              
              
              15,150,110
              
              
              9,471,507CASH
                  AND CASH EQUIVALENTS, END OF PERIOD
              
              $
              32,035,122
              
              $
              21,208,022




See
      accompanying notes to consolidated financial statements





-5-




***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


***Notes
      to Consolidated Financial Statements***





**NOTE
      A - BASIS OF PRESENTATION**




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





The
      organization and business of the Company, accounting policies followed by the
      Company and other information are contained in the notes to the consolidated
      financial statements filed as part of the Company’s 2006 annual report on Form
      10-K. This quarterly report should be read in conjunction with such annual
      report.





**NOTE
      B - COMMITMENTS**




At
      June
      30, 2007, commitments are as follows


Undisbursed
                  lines of credit
              
              $
              180,517,000Stand-by
                  letters of credit
              
              
              5,572,000Undisbursed
                  commitment to purchase additionalinvestment
                  in Small Business Investment Corporation
              
              
              413,000




**NOTE
      C - PER SHARE RESULTS**


On
      April
      18, 2007, the Company declared a 10% stock dividend payable on May 22, 2007
      to
      stockholders of record May 11, 2007. Weighted average share and per share data
      for the periods presented have been adjusted to reflect the effects of the
      stock
      dividend. Basic and diluted net income per common share have been computed
      by
      dividing net income for each period by the weighted average number of shares
      of
      common stock outstanding during each period after retroactively adjusting for
      this stock dividend.




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




-6-


***CRESCENT
      FINANCIAL CORPORATION AND SUBSIDIARY***


***Notes
      to Consolidated Financial Statements***


Three
                  months ended
              
              Six
                  months endedJune
                  30,
              
              June
                  30,2007
              
              2006
              
              2007
              
              2006Weighted
                  average number of sharesused
                  in computing basic net incomeper
                  share
              
              
              9,140,356
              
              
              6,372,323
              
              
              9,117,004
              
              
              6,368,607Effect
                  of dilutive stock options
              
              
              485,778
              
              
              255,977
              
              
              503,181
              
              
              252,064Weighted
                  average number of sharesused
                  in computing diluted net incomeper
                  share
              
              
              9,626,134
              
              
              6,628,300
              
              
              9,620,185
              
              
              6,620,671




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




**NOTE
      D - COMPREHENSIVE INCOME**




For
      the
      three months ended June 30, 2007 and 2006, total comprehensive income,
      consisting of net income and unrealized securities gains and losses, net of
      taxes, was approximately $634,000 and $478,000, respectively. For
      the
      six months ended June 30, 2007 and 2006, total comprehensive income was
      approximately $2,431,000 and $1,311,000, respectively.





**NOTE
      E - INCOME TAXES**




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





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





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





Crescent’s
      federal and state income tax returns are open and subject to examination from
      the 2003 tax return year and forward.





**NOTE
      F - RECENT ACCOUNTING PRONOUNCEMENTS**




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




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




-7-




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




-8-





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





Management’s
      discussion and analysis is intended to assist readers in the understanding
      and
      evaluation of the financial condition and consolidated results of operations
      of
      Crescent Financial Corporation (the “Company”). The analysis includes detailed
      discussions for each of the factors affecting Crescent Financial Corporation’s
      operating results and financial condition for the periods ended June 30, 2007
      and 2006. It should be read in conjunction with the audited consolidated
      financial statements and accompanying notes included in this report and the
      supplemental financial data appearing throughout this discussion and analysis.
      Because the Company has no operations and conducts no business on its own other
      than owning Crescent State Bank, the discussion contained in this Management's
      Discussion and Analysis concerns primarily the business of the Bank. However,
      for ease of reading and because the financial statements are presented on a
      consolidated basis, the Company and the Bank are collectively referred to herein
      as the Company unless otherwise noted. All significant intercompany transactions
      and balances are eliminated in consolidation.





**COMPARISON
      OF FINANCIAL CONDITION AT JUNE 30, 2007 AND**


**DECEMBER
      31, 2006**





Total
      assets at June 30, 2007 increased by $84.3 million or 12% to $782.2 million
      compared with $697.9 million at December 31, 2006. Earning assets at June 30,
      2007 totaled $718.5 million or 92% of total assets compared with $639.0 million
      or 91% at December 31, 2006. Components of earning assets at June 30, 2007
      are
      $608.3 million in gross loans, $92.5 million in investment securities and
      Federal Home Loan Bank (FHLB) stock, $16.7 million in federal funds sold, and
      $1.0 million in interest bearing deposits with correspondent banks. Earning
      assets at December 31, 2006 consisted of $549.8 million in gross loans, $88.3
      million in investment securities and FHLB stock and $855,000 in overnight
      investments and interest bearing deposits. Total deposits and stockholders’
equity at June 30, 2007 were $617.8 million and $86.0 million, respectively,
      compared to $541.9 million and $83.0 million at December 31, 2006.





Gross
      loans outstanding at June 30, 2007 increased by $58.5 million or 11% to $608.3
      million compared to $549.8 million reported at December 31, 2006. The
      composition of the loan portfolio, by category, as of June 30, 2007 is 54%
      commercial mortgage loans, 24% construction loans, 11% commercial loans, 7%
      home
      equity loans and lines, 3% residential mortgage loans and 1% consumer loans.
      The
      construction and acquisition/development category showed the most growth during
      the first half of 2007 increasing $34.6 million or 31% from $109.8 million
      to
      $144.2 million. Other loan categories experiencing growth during the six-month
      period include commercial real estate mortgage loans increasing by $22.5 million
      or 7% to $326.9 million, home equity loans and lines increasing by $1.7 million
      or 13% to $44.4 million, commercial and industrial loans increasing by $1.3
      million or 2% to $69.1 million, and consumer loans increasing by $1.3 million
      or
      25% to $6.2 million. Residential mortgage loans declined $2.7 million from
      $20.2
      million to $17.5 million. The composition of the loan portfolio, by category,
      as
      of December 31, 2006 was 55% commercial mortgage loans, 20% construction loans,
      12% commercial loans, 8% home equity loans and lines, 4% residential real estate
      mortgage loans and 1% consumer loans.





The
      Company had an allowance for loan losses at June 30, 2007 of $7.5 million or
      1.24% of total outstanding loans compared to $6.9 million or 1.26% of total
      outstanding loans at December 31, 2006. At June 30, 2007, there were five
      loans totaling $599,000 in non-accrual status. There were no loans past due
      90
      days or more and still accruing interest at June 30, 2007. Non-performing loans
      as a percentage of total loans at June 30, 2007 were 0.10%. At December 31,
      2006, there were two loans totaling $135,000 in non accrual status and no loans
      past due 90 days or more and still accruing interest. Non-performing loans
      as a
      percentage of total loans at December 31, 2006 were 0.02%. For a more detailed
      discussion, see the section entitled Non-Performing Assets.




-9-




The
      Company has investment securities with an amortized cost of $89.8 million at
      June 30, 2007. All investments are accounted for as available for sale under
      Financial Accounting Standards Board (FASB) No. 115 and are presented at their
      fair market value of $88.2 million compared with $84.7 million at December
      31,
      2006. At June 30, 2007, there were no securities considered other than
      temporarily impaired. The Company’s investment in debt securities consists of
      U.S. Government agency securities, collateralized mortgage obligations,
      mortgage-backed securities, municipal bonds and other marketable equity
      securities. The increase during the first six months of 2007 consisted of $9.5
      million in new purchases and $46,000 in net accretion of discounts less $5.2
      million in principal re-payments and a $780,000 decline in the fair value of
      the
      portfolio.





The
      Company owned $4.3 million of Federal Home Loan Bank (FHLB) stock at June 30,
      2007 compared to $3.6 million at December 31, 2006. As a member of the FHLB,
      the
      Company is required to maintain a certain level of FHLB stock based on asset
      size and outstanding borrowed funds.





There
      were $16.7 million in Federal funds sold at June 30, 2007 compared to $92,000
      at
      December 31, 2006. This accumulation of overnight investment funds will be
      deployed early in the third quarter into higher yielding earning assets or
      used
      to reduce the level of higher cost liabilities.





Interest-earning
      deposits held at correspondent banks increased by approximately $258,000 from
      $763,000 at December 31, 2006 to $1.0 million at June 30, 2007. The increase
      represents principal and interest payments from the investment portfolio waiting
      to be re-invested.





Non-earning
      and other assets increased by approximately $5.4 million between December 31,
      2006 and June 30, 2007. The largest component of the increase was in bank owned
      life insurance. The Company made an additional investment of $3.1 million during
      the first six months of the year. Other assets experiencing increases between
      December 31, 2006 and June 30, 2007 include bank premises and equipment,
      interest receivable, deferred tax asset and cash and non-interest bearing
      deposits with correspondent banks.





Total
      deposits increased by $75.9 million between December 31, 2006 and June 30,
      2007
      from $541.9 million to $617.8 million. The largest increase occurred in the
      time
      deposit category, which grew by $42.3 million 14% to $338.0 million at June
      30,
      2007 from $295.7 million at year end 2006. The increase is due, in part, to
      the
      dependency of the Company on wholesale forms of deposits to fund balance sheet
      growth. Increases to other deposit categories were as follows: savings account
      balances by $23.0 million or 29% million to $101.4 million, non-interest bearing
      demand deposits by $10.8 million or 15% to $81.2 million and money market
      deposits by $908,000 or 2% to $60.4 million. Interest-bearing demand deposits
      declined by $1.1 million or 3% to $36.7 million. The introduction of a new
      high-yielding relationship savings product caused some disintermediation between
      interest-bearing demand and savings.





The
      composition of the deposit base, by category, at June 30, 2007 is as follows:
      55% time deposits, 16% savings deposits, 13% non-interest-bearing demand
      deposits, 10% money market and 6% interest-bearing demand deposits. The
      composition of the deposit base, by category, at December 31, 2006 was 55%
      time deposits, 14% savings deposits, 13% non-interest-bearing demand deposits,
      11% money market and 7% interest-bearing demand deposits. Time deposits of
      $100,000 or more totaled $271.5 million at June 30, 2007 compared to $229.8
      million at December 31, 2006. The Company uses brokered certificates of deposit
      as an alternative funding source. Brokered deposits represent a source of fixed
      rate funds priced competitively with FHLB borrowings, but do not require
      collateralization like FHLB borrowings. Brokered deposits were $172.2 million
      at
      June 30, 2007 compared with $141.7 million at December 31, 2006.





The
      Company had $75.2 million of long-term debt outstanding at June 30, 2007
      compared to $45.2 million at December 31, 2006. The long-term debt is comprised
      of $67.0 million in FHLB term advances and $8.2 million in junior subordinated
      debt. At June 30, 2007, the Company had no short-term debt outstanding compared
      to $24.5 million at December 31, 2006. Short-term borrowings consist of FHLB
      term advances with remaining maturities of less than one year and Federal funds
      purchased from correspondent banks.




-10-




Accrued
      interest payable and other liabilities decreased by $177,000 from $3.3 million
      at December 31, 2006 to $3.1 million at June 30, 2007.





Between
      December 31, 2006 and June 30, 2007, total stockholders’ equity rose by $3.0
      million. The increase resulted from net income for the first six months of
      $2.9
      million plus $365,000 in new stock issuance pursuant to the exercise of stock
      options and $85,000 in stock based compensation expense less unrealized losses
      on available for sale securities of $482,000. The Company distributed a 10%
      stock dividend on May 22, 2007. Retained earnings was reduced by the fair value
      of the stock dividend, as determined by using the adjusted stock price on the
      date of declaration, and the common stock and additional paid in capital
      accounts were adjusted to reflect the new shares issued.




**COMPARISON
      OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2007 AND
      2006**





**Net
      Income.** **** Net
      income for the three-month period ended June 30, 2007 was $1.4 million or 44%
      higher than net income of $1.0 million for the three-month period ended June
      30,
      2006. Diluted earnings per share for both periods was $.15. Annualized return
      on
      average assets declined to 0.76% from 0.88% for the prior period. The decline
      was primarily due to a lower net interest margin resulting from the competitive
      loan pricing environment, a flat yield curve and higher non-interest expenses
      Return on average equity for the current period was 6.73% compared to 9.33%
      for
      the prior period. Return on average equity declined due to the lower return
      on
      assets and the additional shares issued in conjunction with the acquisition
      of
      Port City Capital Bank in August 2006.





**Net
      Interest Income.** Net
      interest income increased by $2.4 million or 56% from $4.2 million for the
      prior
      three-month period to $6.6 million for the three-month period ended June 30,
      2007. Total interest income for the current three month period benefited from
      a
      higher volume of earning assets and a higher yield earned on those assets.
      Total
      interest expense from deposits and other borrowings increased due to growth
      of
      interest-bearing liabilities used to fund the higher volume of assets coupled
      with an increase in the interest rates at which the funding could be obtained.
      The Company’s net interest margin decreased from 3.95% to 3.73% due to a greater
      dependency on interest-bearing liabilities to fund balance sheet growth and
      the
      shape of the interest rate yield curve.





Total
      interest income increased by $5.8 million for the current three-month period
      compared to the same period from the prior year. Total interest income rose
      from
      $7.8 million to $13.6 million. The increase was the result of an additional
      $5.2
      million due to the growth in total average earning assets and a $560,000
      increase due to higher yields realized on earning assets. Total interest expense
      for the current period rose by $3.4 million from $3.6 million to $7.0 million.
      The increase was the result of a $2.7 million increase due to growth in
      interest-bearing funds and a $737,000 increase due to the higher cost of money.





Total
      average earning assets increased $277.9 million or 65% from an average of $427.8
      million for the prior year three-month period to an average of $705.7 million
      for the three-month period ended June 30, 2007. Approximately $153.9 million
      of
      the increase is attributable to the acquisition of Port City Capital Bank of
      Wilmington, North Carolina in August, 2006. The average balance of loans
      outstanding during the current quarter was $599.5 million, a $239.4 million
      or
      66% increase over the $360.1 million of average outstanding loans for the prior
      period. The average balance of the investment securities portfolio for the
      three-month period ended June 30, 2007 was $91.2 million, increasing by $27.7
      million or 44% compared to an average of $63.5 million at June 30, 2006. The
      average balance of federal funds sold and other earning assets increased to
      $14.9 million for the current three-month period compared to $4.2 million for
      the prior period.




-11-




Average
      interest-bearing liabilities increased by $244.3 million or 68% from $361.6
      million for the quarter ended June 30, 2006 to $605.9 million for the current
      quarter. The acquisition accounted for $129.4 million of the total increase.
      Total interest-bearing deposits increased by $218.5 million or 72% from $304.6
      million to $523.1 million. Time deposits experienced the largest increase
      averaging $332.0 million during the current year period compared to $201.9
      million for the prior period. Total borrowings increased by 45% or $25.9 million
      from $56.9 million to $82.8 million.





Net
      interest margin is interest income earned on loans, securities and other earning
      assets, less interest expense paid on deposits and borrowings, expressed as
      a
      percentage of total average earning assets. The net interest margin for the
      three-month period ended June 30, 2007 was 3.73% compared to 3.95% for the
      three-month period ended June 30, 2006. The average yield on earning assets
      for
      the current three-month period increased 42 basis points to 7.73% compared
      with
      7.31% for the prior year period, while the average cost of interest-bearing
      funds increased by 69 basis points to 4.66% from 3.97%. The interest rate
      spread, which is the difference between the average yield on earning assets
      and
      the cost of interest-bearing funds, decreased by 26 basis points from 3.34%
      for
      the quarter ended June 30, 2006 to 3.08% for the quarter ended June 30, 2007.
      The percentage of interest earning assets to average interest-bearing
      liabilities decreased from 118.30% for the prior year period to 116.45% for
      the
      three months ended June 30, 2007. A decrease in the ratio of average earning
      assets to average interest-bearing liabilities indicates an increased dependency
      on interest-bearing forms of funding to meet the demand of earning asset
      growth.





Between
      July 1, 2004 and July 5, 2006, the Federal Reserve (the “Fed”) increased
      short-term interest rates seventeen times for a total of 425 basis points.
      Interest rates have stabilized over the last twelve months. While several
      factors influence the level of intermediate and long-term interest rates,
      increases in short-term interest rates would generally result in a more parallel
      shift in the entire yield curve across all investment horizons. The current
      rate
      increases did not impact intermediate and long-term rates in the typical manner,
      as those rates continued to trade in very tight ranges to levels seen prior
      to
      July 2004. The result has been a flat to inverted yield curve across investment
      time horizons. Rates on longer term assets have been at or lower than those
      on
      overnight and other short-term investments.




Approximately
      54% of the Company’s loan portfolio has variable rate pricing based on the Prime
      lending rate or LIBOR (London Inter Bank Offering Rate). As short-term rates
      have risen, variable rate loans have repriced upward resulting in a higher
      yield
      on average earning assets. While the yield on the variable portion of existing
      loans was rising with rate increases, rates on new loans have increased
      substantially. The volume of new loan originations outpaced the generation
      of
      lower cost core deposits causing the Company to rely more heavily on savings
      and
      brokered certificates of deposit resulting in a higher cost of funds. The
      Company expects to continue to experience net interest margin compression in
      the
      current stable rate environment. In rising or falling interest rate
      environments, the Company would expect moderate expansion or contraction of
      margin, respectively.




**Provision
      for Loan Losses.** The
      Company’s provision for loan losses for the three-month period ended June 30,
      2007 was $322,000 compared to $164,000 for the same period in 2006. Provision
      for loan losses is charged to income to bring the allowance for loan losses
      to a
      level deemed appropriate by management based on factors discussed under
“Analysis of Allowance for Loan Losses.” The increase in the loan loss provision
      is primarily due to growth in balances of total loans outstanding during the
      second quarter of 2007, although the analysis discussion outlines additional
      factors impacting the provision. The allowance for loan losses was $7.5 million
      at June 30, 2007, representing 1.24% of total outstanding loans.





**Non-Interest
      Income.** For
      the
      three-month period ended June 30, 2007, non-interest income increased by $28,000
      to $647,000 compared to $619,000 for the same period in 2006. Categories
      experiencing increases over the prior period include earnings on cash value
      of
      bank owned life insurance ($43,000), brokerage referral revenue ($20,000),
      service charges on deposit accounts ($12,000) and customer service fees
      ($2,000). Brokerage referral fees are included in other miscellaneous income.
      Mortgage origination fees decreased by $30,000 to $135,000 for the current
      period from $165,000 for the prior period. The decline is indicative of a
      slowdown in new and existing home sales over the past twelve
      months.




-12-




**Non-Interest
      Expenses.** Non-interest
      expenses increased by $1.5 million or 49% from $3.1 million for the prior year
      three-month period to $4.6 million for the current period. The largest component
      of non-interest expense for the current period was personnel expense. Salaries
      and benefits expense increased by $865,000 or 52% to $2.5 million for the
      current year period compared to $1.7 million for the same period in the prior
      year. As is the case for all non-interest expenses, the increase in salary
      and
      compensation expense is largely due to the addition of our new Wilmington Main
      Office (the former Port City Capital Bank). The Company also filled several
      important operational and compliance positions during 2007. Management
      anticipates personnel expense to continue to increase as we identify new
      opportunities for expansion.




Occupancy
      and equipment expenses increased by $75,000 or 15% from $489,000 for the
      three-month period ended June 30, 2006 to $564,000 for the current year period.
      The increase is primarily due to recurring expenses of the new Wilmington Main
      Office. Data processing costs also increased by 38% to $257,000 for the current
      period from $186,000 for the prior year period. The Company outsources its
      data
      processing and expenses are closely tied to transaction and account volumes.
      Through June 15, 2007, the Wilmington Main Office ran under a separate data
      processing system. As the Company continues to grow in accordance with its
      strategic plan, management expects both occupancy and data processing costs
      to
      increase.





Other
      non-interest expenses increased by $509,000 to $1.3 million for the second
      quarter of 2007 compared with $759,000 for the prior year quarter. The increase
      was primarily a result of the Company’s continued growth into the Wilmington
      market and includes approximately $190,000 of non-recurring expenses associated
      with merging Port City Capital Bank into Crescent State Bank and professional
      fees associated with a compliance review. The largest components of other
      non-interest expenses include professional fees and services, office supplies
      and printing, advertising, and loan related fees. Management expects that as
      the
      complexity and size of the Company increases, expenses associated with these
      categories will continue to increase.





**Provision
      for Income Taxes.** The
      Company recorded income tax expense of $823,000 for the three-months ended
      June
      30, 2007 compared with $564,000 for the prior year period. The effective tax
      rate for the three-month period ended June 30, 2007 was 36.2% compared with
      36.0% for the prior year period. The increase in the effective tax rate is
      attributable to a smaller percentage of income coming from tax exempt sources
      and the non-tax deductibility of the expensing of the fair value of stock
      options pursuant to FASB 123R.





**COMPARISON
      OF RESULTS OF OPERATIONS FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2007 AND
      2006**





**Net
      Income.** Net
      income for the six-month period ended June 30, 2007 was $2,914,000 or $.30
      per
      diluted share compared to $1,986,000 or $0.30 per diluted share for the
      six-month period ended June 30, 2006. Diluted earnings per share did not show
      the same percentage increase as net income due to the issuance of 2,676,000
      shares, adjusted for the 11-for-10 stock split paid on May 22, 2007, pursuant
      to
      the Port City Capital Bank acquisition. Annualized return on average assets
      was
      0.79% and 0.91% for the two periods ended June 30, 2007 and 2006, respectively.
      The decline in return on assets was primarily attributed to a lower net interest
      margin resulting from the shape of the yield curve, the higher cost of funding
      earning asset growth and an increase in non-interest expenses. Return on average
      equity for the current period was 6.89% compared to 9.36% for the prior period.
      Return on average equity decreased due to a lower return on average assets
      and
      the increased equity resulting from the Port City Capital Bank acquisition.




**Net
      Interest Income.** Net
      interest income increased by $4.5 million or 55% from $8.3 million for the
      six-month period ended June 30, 2006 to $12.8 million for the current six-month
      period. Growth in both earning assets and interest bearing liabilities resulted
      in increases in both total interest income and total interest expense in the
      current period.




-13-




Total
      interest income was $26.4 million for the current six-month period compared
      to
      $14.9 million for the prior year period, an increase of $11.5 million or 77%.
      The total increase was comprised of a $10.1 million increase due to growth
      in
      average earning assets and a $1.4 million increase due to the rising average
      yield earned on those assets. Total interest expense increased by $6.9 million
      or 105% from $6.6 million for the prior year period to $13.5 million for the
      current period. The increase was the result of a $5.1 million increase due
      to
      growth in interest-bearing liabilities and a $1.8 million increase due to the
      rising cost of funds.





Total
      average earning assets increased $269.1 million or 65% from an average of $415.9
      million as of June 30, 2006 to an average of $685.0 million for the six-month
      period ended June 30, 2007. The average balance of loans outstanding during
      the
      current six-month period was $582.8 million reflecting a $230.8 million or
      66%
      increase over the $352.0 million for the prior year period. The average balance
      of the investment securities portfolio for the current period was $90.1 million,
      increasing by $28.5 million or 47% compared to an average of $61.6 million
      at
      June 30, 2006. The average balance of federal funds sold and other earning
      assets increased to $12.2 million for the six-month period ended June 30, 2007
      compared to $2.3 million for the prior period.





Total
      average interest-bearing liabilities increased by $237.1 million or 68% from
      an
      average of $350.3 million for the period ended June 30, 2006 to $587.4 million
      for the current six-month period. Average interest-bearing deposits increased
      by
      $214.9 million or 73% growing from $296.2 million at June 30, 2006 to $511.1
      million at June 30, 2007. Total average borrowings increased by $22.1 million
      or
      41% to $76.2 million for the current six-month period from $54.1 million for
      the
      prior year period.





Net
      interest margin is interest income earned on loans, securities and other earning
      assets, less interest expense paid on deposits and borrowings, expressed as
      a
      percentage of total average earning assets. The net interest margin for the
      six-month period ended June 30, 2007 was 3.77% compared to 4.02% for the prior
      year six-month period. The average yield on earning assets for the current
      six-month period increased by 54 basis points to 7.76% compared with 7.22%
      for
      the prior year period, while the average cost of interest-bearing funds
      increased by 85 basis points to 4.65% from 3.80%. The spread between the rates
      paid on earning assets and the cost of interest-bearing funds decreased by
      31
      basis points from 3.42% to 3.11%. The Company’s reliance on interest-bearing
      liabilities to fund earning asset growth increased as the percentage of interest
      earning assets to interest bearing liabilities declined from 118.73% to
      116.62%.





Between
      July 1, 2004 and June 30, 2006, the Federal Reserve (the “Fed”) increased
      short-term interest rates 425 basis points. The increases in short-term interest
      rates did not have a significant impact on intermediate and long-term interest
      rates. The result has been a rate environment where short-term rates are higher
      than longer-term rates (creating a flat or inverted yield curve). For the past
      twelve months, short-term interest rates have remained stable and there
      continues to be no movement in intermediate and long-term rates. While the
      initial increases did have a favorable impact on our variable rate loan
      portfolio, the cost to fund growth in new loans has become increasingly
      expensive.





Over
      the
      two year period since rates began to increase, a larger portion of our new
      loan
      production has been geared towards fixed rate product. Total loans tied to
      either the Prime rate of interest or the LIBOR have declined from 68% at June
      30, 2004 to 54% at June 30, 2007. Many of these fixed rate loans are in the
      commercial real estate mortgage category. Loans of this type typically receive
      very favorable pricing based off the ten year US Treasury note. Additionally,
      there is a significant amount of competition for these loans, which also tends
      to drive pricing down. Because of the inverted yield curve, the interest rate
      spread on a large segment of new loan production is much tighter than that
      experienced over the last several years.




-14-




The
      volume of new loan originations continues to outpace the generation of lower
      cost core deposits causing the Company to rely more heavily on savings and
      brokered certificates of deposit resulting in a higher cost of funds. The
      Company expects to continue to experience net interest margin compression in
      the
      current stable rate environment. In rising or falling interest rate
      environments, the Company would expect moderate expansion or contraction of
      margin, respectively.




**Provision
      for Loan Losses.** The
      Company’s provision for loan losses for the six-month period ended June 30, 2007
      was $682,000 compared to $435,000 for the same period in 2006. Provision for
      loan losses is charged to income to bring the allowance for loan losses to
      a
      level deemed appropriate by management based on factors discussed under
“Analysis of Allowance for Loan Losses.” The decreased loan loss provision for
      the current six-month period is primarily due to the decrease in net loan growth
      in the current period compared to that of the prior year period. See the section
      entitled “Non Performing Assets” for more details. The allowance for loan losses
      was $7.5 million at June 30, 2007, representing 1.24% of total outstanding
      loans.





**Non-Interest
      Income.** For
      the
      six-month period ended June 30, 2007, non-interest income increased by $61,000
      to $1.3 million. The largest components of non-interest income in the first
      half
      of 2007 were $546,000 in customer service fees, $251,000 in mortgage loan
      origination fees, $183,000 increase in cash surrender value on life insurance,
      $123,000 in service charges and fees on deposit accounts, and $70,000 in
      investment referral fees. Investment referral fees are included in other
      miscellaneous income.





For
      the
      six-month period ended June 30, 2006, non-interest income consisted of $538,000
      in customer service fees, $310,000 in mortgage loan origination fees, $113,000
      increase in cash surrender value on life insurance, $87,000 in service charges
      and fees on deposit accounts, and $43,000 in investment referral fees.





**Non-Interest
      Expenses.** Non-interest
      expenses increased by 48% to $8.8 million for the six-month period ended June
      30, 2007 compared with $6.0 million for the same period ended June 30, 2006.
      The
      Company acquired Port City Capital Bank in August 2006, so the six-month period
      ended June 30, 2006 does not include any non-interest expenses associated with
      our new Wilmington Main Office.





The
      largest component of non-interest expense for the current period was personnel
      expense. Salaries and benefits expense was $4.9 million for the current
      six-month period compared to $3.2 million for the same period in the prior
      year.
      Management anticipates personnel expense to continue to increase as
      opportunities to hire quality employees present themselves and we expand into
      new markets. Occupancy and equipment expenses increased by $153,000 or 16%
      from
      $958,000 for the six-month period ended June 30, 2006 to $1.1 million for the
      current year period. The increase is primarily the result of the Wilmington
      Main
      Office. Data processing costs increased from $368,000 for the prior year
      six-month period to $517,000 for the current six-month period. The Company
      outsources its data processing and expenses are closely tied to transaction
      and
      account volumes, and include the monthly costs associated with data line
      connectivity between offices. As the Company continues to grow in accordance
      with its strategic plan, management expects both occupancy and data processing
      costs to increase.





Other
      non-interest expenses increased by $866,000 to $2.3 million for the first half
      of 2007 compared with $1.4 million for the first half of the prior year. The
      increase was primarily a result of the Company’s continued growth. The largest
      components of other non-interest expenses include professional fees and
      services, office supplies and printing, advertising, and loan related fees.
      Management expects that as the complexity and size of the Company increases,
      expenses associated with these categories will continue to increase.
      Approximately $218,000 of non-interest expense for the six-month period ended
      June 30, 2007 were non-recurring in nature resulting from the conversion of
      Port
      City Capital Bank into Crescent State Bank and other professional services
      performed in conjunction with a regulatory compliance review.




-15-




**Provision
      for Income Taxes.** The
      Company recorded income tax expense of $1.7 million during the six-months ended
      June 30, 2007 compared to $1.1 million for the prior year period. The effective
      tax rates for the two periods were 36.2% and 35.9%, respectively. The increase
      is due to a smaller percentage of income earned from tax exempt sources and
      the
      non-tax deductibility of the expensing of the fair value of stock options
      pursuant to FASB 123R.




-16-




**NET
      INTEREST INCOME**





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


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


For
                  the Three Months Ended June 30,2007
              
              2006Average
              
              
              
              Average
              
              Average
              
              
              
              AverageBalance
              
              Interest
              
              Yield/Cost
              
              Balance
              
              Interest
              
              Yield/CostInterest-earnings
                  assetsLoan
                  portfolio
              
              $
              599,535
              
              $
              12,331
              
              
              8.25
              %
              $
              360,136
              
              $
              7,019
              
              
              7.82
              %Investment
                  securities
              
              
              91,207
              
              
              1,096
              
              
              4.81
              %
              
              63,466
              
              
              724
              
              
              4.56
              %Fed
                  funds and other interest-earning assets
              
              
              14,913
              
              
              175
              
              
              4.71
              %
              
              4,161
              
              
              51
              
              
              4.92
              %Total
                  interest-earning assets
              
              
              705,655
              
              
              13,602
              
              
              7.73
              %
              
              427,763
              
              
              7,794
              
              
              7.31
              %Noninterest-bearing
                  assets
              
              
              61,520
              
              
              
              
              
              
              
              
              27,051Total
                  Assets
              
              $
              767,175
              
              
              
              
              
              
              
              $
              454,814Interest-bearing
                  liabilitiesInterest-bearing
                  NOW
              
              $
              34,532
              
              
              99
              
              
              1.15
              %
              $
              37,883
              
              
              160
              
              
              1.69
              %Money
                  market and savings
              
              
              156,615
              
              
              1,646
              
              
              4.22
              %
              
              64,835
              
              
              574
              
              
              3.55
              %Time
                  deposits
              
              
              332,000
              
              
              4,220
              
              
              5.10
              %
              
              201,944
              
              
              2,097
              
              
              4.17
              %Short-term
                  borrowings
              
              
              17,886
              
              
              209
              
              
              4.69
              %
              
              16,694
              
              
              213
              
              
              5.12
              %Long-term
                  debt
              
              
              64,918
              
              
              859
              
              
              5.23
              %
              
              40,248
              
              
              534
              
              
              5.25
              %Total
                  interest-bearing liabilities
              
              
              605,951
              
              
              7,033
              
              
              4.66
              %
              
              361,604
              
              
              3,578
              
              
              3.97
              %Non-interest
                  bearing deposits
              
              
              71,849
              
              
              
              
              
              
              
              
              48,397Other
                  liabilities
              
              
              3,063
              
              
              
              
              
              
              
              
              1,685Total
                  Liabilities
              
              
              680,863
              
              
              
              
              
              
              
              
              411,686Stockholders'
                  Equity
              
              
              86,312
              
              
              
              
              
              
              
              
              43,128Total
                  Liabilities & Stockholders' Equity
              
              $
              767,175
              
              
              
              
              
              
              
              $
              454,814Net
                  interest income
              
              
              
              
              $
              6,569
              
              
              
              
              
              
              
              $
              4,216Interest
                  rate spread
              
              
              
              
              
              
              
              
              3.08
              %
              
              
              
              
              
              
              
              3.34
              %Net
                  interest-margin
              
              
              
              
              
              
              
              
              3.73
              %
              
              
              
              
              
              
              
              3.95
              %Percentage
                  of average interest-earning assetsto
                  average interest-bearing liabilities
              
              
              
              
              
              
              
              
              116.45
              %
              
              
              
              
              
              
              
              118.30
              %




-17-


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


For
                  the Six Months Ended June 30,2007
              
              2006Average
              
              
              
              Average
              
              Average
              
              
              
              AverageBalance
              
              Interest
              
              Yield/Cost
              
              Balance
              
              Interest
              
              Yield/CostInterest-earnings
                  assetsLoan
                  portfolio
              
              $
              582,774
              
              $
              23,906
              
              
              8.27
              %
              $
              352,022
              
              $
              13,452
              
              
              7.71
              %Investment
                  securities
              
              
              90,060
              
              
              2,156
              
              
              4.79
              %
              
              61,603
              
              
              1,388
              
              
              4.51
              %Fed
                  funds and other interest-earning assets
              
              
              12,196
              
              
              297
              
              
              4.91
              %
              
              2,297
              
              
              56
              
              
              4.92
              %Total
                  earning assets
              
              
              685,030
              
              
              26,359
              
              
              7.76
              %
              
              415,922
              
              
              14,896
              
              
              7.22
              %Noninterest-bearing
                  assets
              
              
              60,993
              
              
              
              
              
              
              
              
              25,815Total
                  Assets
              
              $
              746,023
              
              
              
              
              
              
              
              $
              441,737Interest-bearing
                  liabilitiesInterest-bearing
                  NOW
              
              $
              34,608
              
              
              197
              
              
              1.15
              %
              $
              38,318
              
              
              307
              
              
              1.62
              %Money
                  market and savings
              
              
              153,730
              
              
              3,223
              
              
              4.23
              %
              
              60,730
              
              
              1,000
              
              
              3.32
              %Time
                  deposits
              
              
              322,801
              
              
              8,106
              
              
              5.06
              %
              
              197,142
              
              
              3,915
              
              
              4.00
              %Short-term
                  borrowings
              
              
              19,841
              
              
              499
              
              
              5.07
              %
              
              18,411
              
              
              445
              
              
              4.87
              %Long-term
                  debt
              
              
              56,408
              
              
              1,520
              
              
              5.36
              %
              
              35,718
              
              
              938
              
              
              5.22
              %Total
                  interest-bearing liabilities
              
              
              587,388
              
              
              13,545
              
              
              4.65
              %
              
              350,319
              
              
              6,605
              
              
              3.80
              %Non
                  interest-bearing deposits
              
              
              70,258
              
              
              
              
              
              
              
              
              46,964Other
                  liabilities
              
              
              3,093
              
              
              
              
              
              
              
              
              1,653Total
                  Liabilities
              
              
              660,739
              
              
              
              
              
              
              
              
              398,936Stockholders'
                  Equity
              
              
              85,284
              
              
              
              
              
              
              
              
              42,801Total
                  Liabilities & Stockholders' Equity
              
              $
              746,023
              
              
              
              
              
              
              
              $
              441,737Net
                  interest income
              
              
              
              
              $
              12,814
              
              
              
              
              
              
              
              $
              8,291Interest
                  rate spread
              
              
              
              
              
              
              
              
              3.11
              %
              
              
              
              
              
              
              
              3.42
              %Net
                  margin
              
              
              
              
              
              
              
              
              3.77
              %
              
              
              
              
              
              
              
              4.02
              %Percentage
                  of average interest-earningassets
                  to average interest bearingliabilities
              
              
              
              
              
              
              
              
              116.62
              %
              
              
              
              
              
              
              
              118.73
              %








**VOLUME/RATE
      VARIANCE ANALYSIS**





The
      following tables analyze the dollar amount of changes in interest income and
      interest expense for major components of interest-earning assets and
      interest-bearing liabilities for the three and six-month periods ended June
      30,
      2007 and 2006. The table distinguishes between (i) changes attributable to
      volume (changes in volume multiplied by the prior period’s rate), (ii) changes
      attributable to rate (changes in rate multiplied by the prior period’s volume),
      and (iii) net change (the sum of the previous columns). The change attributable
      to both rate and volume (changes in rate multiplied by changes in volume) has
      been allocated proportionately to both the changes attributable to volume and
      the changes attributable to rate.





-18-




Rate/Volume
        Analysis




Three
                  Months Ended June 30,2007
                  vs. 2006(in
                  Thousands)Increase
                  (Decrease) Due toVolume
              
              Rate
              
              Total**Interest
                  Income**Loan
                  portfolio
              
              
              4,795
              
              
              517
              
              
              5,312Investment
                  Securities
              
              
              324
              
              
              48
              
              
              372Fed
                  funds and other interest-earning assets
              
              
              129
              
              
              (5
              )
              
              124Total
                  interest-earning assets
              
              
              5,248
              
              
              560
              
              
              5,808**Interest
                  Expense**Interest-bearing
                  NOW
              
              
              (12
              )
              
              (49
              )
              
              (61
              )Money
                  market and savings
              
              
              889
              
              
              183
              
              
              1,072Time
                  deposits
              
              
              1,502
              
              
              622
              
              
              2,124Short-term
                  borrowings
              
              
              15
              
              
              (19
              )
              
              (4
              )Long-term
                  debt
              
              
              324
              
              
              0
              
              
              324Total
                  interest-bearing liabilities
              
              
              2,718
              
              
              737
              
              
              3,455**Net
                  interest income**
              
              
              2,530
              
              
              (177
              )
              
              2,353
  Rate/Volume
        Analysis


Six
                  Months Ended June 30,2007
                  vs. 2006(in
                  Thousands)Increase
                  (Decrease) Due toVolume
              
              Rate
              
              Total**Interest
                  Income**Loan
                  portfolio
              
              
              9,142
              
              
              1,312
              
              
              10,454Investment
                  Securities
              
              
              658
              
              
              110
              
              
              768Fed
                  funds and other interest-earning assets
              
              
              241
              
              
              0
              
              
              241Total
                  interest-earning assets
              
              
              10,041
              
              
              1,422
              
              
              11,463**Interest
                  Expense**Interest-bearing
                  NOW
              
              
              (26
              )
              
              (85
              )
              
              (111
              )Money
                  market and savings
              
              
              1,741
              
              
              482
              
              
              2,223Time
                  deposits
              
              
              2,825
              
              
              1,366
              
              
              4,191Short-term
                  borrowings
              
              
              36
              
              
              19
              
              
              55Long-term
                  debt
              
              
              547
              
              
              35
              
              
              582Total
                  interest-bearing liabilities
              
              
              5,123
              
              
              1,817
              
              
              6,940**Net
                  interest income**
              
              
              4,918
              
              
              (395
              )
              
              4,523
 -19-





**NONPERFORMING
      ASSETS**





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


At
                  June 30,
              
              At
                  December 31,2007
              
              2006
              
              2006
              
              2005(Dollars
                  in thousands)Nonaccrual
                  loans
              
              $
              599
              
              $
              263
              
              $
              135
              
              $
              26Restructured
                  loans
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  nonperforming loans
              
              
              599
              
              
              263
              
              
              135
              
              
              26Real
                  estate owned
              
              
              98
              
              
              22
              
              
              98
              
              
              22Repossessed
                  assets
              
              
              14
              
              
              -
              
              
              -
              
              
              -Total
                  nonperforming assets
              
              $
              711
              
              $
              285
              
              $
              233
              
              $
              48Accruing
                  loans past due90
                  days or more
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Allowance
                  for loan losses
              
              
              7,536
              
              
              4,772
              
              
              6,945
              
              
              4,351Nonperforming
                  loans toperiod
                  end loans
              
              
              0.10
              %
              
              0.07
              %
              
              0.02
              %
              
              0.01
              %Allowance
                  for loan lossesto
                  period end loans
              
              
              1.24
              %
              
              1.31
              %
              
              1.26
              %
              
              1.33
              %Allowance
                  for loan lossesto
                  nonperforming loans
              
              
              1,059
              %
              
              1,818
              %
              
              5,145
              %
              
              16,961
              %Nonperforming
                  assetsto
                  total assets
              
              
              0.09
              %
              
              0.06
              %
              
              0.03
              %
              
              0.01
              %Nonperforming
                  assets and loanspast
                  due 90 days or more tototal
                  assets
              
              
              0.09
              %
              
              0.06
              %
              
              0.03
              %
              
              0.01
              %





Our
      financial statements are prepared on the accrual basis of accounting, including
      the recognition of interest income on loans, unless we place a loan on
      nonaccrual basis. We account for loans on a nonaccrual basis when we have
      serious doubts about the collectibility of principal or interest. Generally,
      our
      policy is to place a loan on nonaccrual status when the loan becomes past due
      90
      days. We also place loans on nonaccrual status in cases where we are uncertain
      whether the borrower can satisfy the contractual terms of the loan agreement.
      Amounts received on nonaccrual loans generally are applied first to principal
      and then to interest only after all principal has been collected. Restructured
      loans are those for which concessions, including the reduction of interest
      rates
      below a rate otherwise available to that borrower or the deferral of interest
      or
      principal have been granted due to the borrower’s weakened financial condition.
      We accrue interest on restructured loans at the restructured rates when we
      anticipate that no loss of original principal will occur. Potential problem
      loans are loans which are currently performing and are not included as
      nonaccrual or restructured loans above, but about which we have serious doubts
      as to the borrower’s ability to comply with present repayment terms. These loans
      are likely to be included later in nonaccrual, past due or restructured loans,
      so they are considered by our management in assessing the adequacy of our
      allowance for loan losses. At June 30, 2007, we identified thirteen loans in
      the
      aggregate amount of $1.1 million as potential problem loans. Management has
      evaluated these credits and estimated the potential losses net of the collateral
      value for these loans. A specific amount has been reserved in the allowance
      for
      loan losses for these loans.





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





At
      June
      30, 2006, there
      was
      one foreclosed property valued at $22,000 and three nonaccrual loans totaling
      $263,000. Foreclosed property is valued at the lower of appraised value or
      the
      outstanding loan balance. Interest foregone on nonaccrual loans for the
      six-month period ended June 30, 2006 was approximately $3,475.




-20-




**ANALYSIS
      OF ALLOWANCE FOR LOAN LOSSES**





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





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





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





Those
      loans that are identified through the Company’s internal loan grading system as
      possessing characteristics which in the opinion of management suggest the
      highest degree of inherent risk are evaluated individually in accordance with *Statement
      of Financial Accounting Standards (* SFAS *)
      114, Accounting by Creditors for Impairment of a Loan* .
      Each
      loan is analyzed to determine the net value of collateral, probability of
      charge-off and finally a potential estimate of loss. Loans meeting the criteria
      for individual evaluation are specifically reserved for based management’s
      analysis.





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





The
      primary reason for increases to the allowance for loan losses has been growth
      in
      total outstanding loans; however, there were other factors influencing the
      provision. For the six-month period ended June 30, 2007, there have been $92,000
      in net loan charge-offs and are $599,000 in non-accrual loans compared with
      $14,000 in net loan charge-offs and $263,000 in non-accrual loans at June 30,
      2006. The allowance for loan losses at June 30, 2007 was $7.5 million, which
      represents 1.24% of total outstanding loans compared to $4.8 million and 1.31%
      for the prior year. The allowance for loan losses as a percentage of total
      outstanding loans declined from the prior year partially as a result of
      refinements to the allowance methodology that incorporates both recent
      regulatory guidance and the availability of increased historical information.





-21-


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





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





Allocation
                of Allowance for Loan LossesAt
                June 30,
            
            
            At
                December 31,2007
            
            
            2006Amount
            
            
            %
                    of Total
                  Loans
                    (1)
            
            
            Amount
            
            
            %
                    of Total
                  Loans
                    (1)(Dollars
                in thousands)Residential
                real estate loans
            
            $
            122
            
            
            2.87
            %
            $
            121
            
            
            3.67
            %Home
                equity loans and lines
            
            
            319
            
            
            7.29
            %
            
            269
            
            
            7.76
            %Commercial
                mortgage loans
            
            
            3,534
            
            
            53.76
            %
            
            3,920
            
            
            55.36
            %Construction
                loans
            
            
            1,750
            
            
            23.73
            %
            
            1,379
            
            
            19.99
            %Commercial
                and industrial loans
            
            
            1,653
            
            
            11.33
            %
            
            1,161
            
            
            12.32
            %Loans
                to individuals
            
            
            158
            
            
            1.02
            %
            
            95
            
            
            0.90
            %Total
                allowance
            
            $
            7,536
            
            
            100.00
            %
            $
            6,945
            
            
            100.00
            %(1)
                Represents total of all outstanding loans in each category as a percent
                of
                total loans outstanding




-22-


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


Changes
                    in Allowance for Loan LossesFor
                  the Six-Month Periods Ended June 30,2007
              
              2006(Dollars
                  in thousands)Balance
                  at the beginning of the year
              
              $
              6,945
              
              $
              4,351Charge-offs:Commercial
                  and industrial loans
              
              
              88
              
              
              14Loans
                  to individuals
              
              
              4
              
              
              -Total
                  charge-offs
              
              
              92
              
              
              14Recoveries
              
              
              1
              
              
              -Net
                  charge-offs (recoveries)
              
              
              91
              
              
              14Provision
                  for loan losses
              
              
              682
              
              
              435Balance
                  at the end of the year
              
              $
              7,536
              
              $
              4,772Total
                  loans outstanding at period-end
              
              $
              608,319
              
              $
              365,174Average
                  loans outstanding for the period
              
              $
              582,774
              
              $
              352,022Allowance
                  for loan losses tototal loans outstanding
              
              
              1.24
              %
              
              1.31
              %Ratio
                  of net charge-offs to average loans outstanding
              
              
              0.02
              %
              
              0.00
              %




**LIQUIDITY
      AND CAPITAL RESOURCES**





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





As
      of
      June 30, 2007, liquid assets (cash and due from banks, interest-earning deposits
      with banks, fed funds sold, and investment securities available for sale) were
      approximately $124.6 million, which represents 16% of total assets and 21%
      of
      total deposits. Supplementing this liquidity, the Company has available lines
      of
      credit from various correspondent banks of approximately $205.0 million of
      which
      $67.0 million is outstanding at June 30, 2007. At June 30, 2007, outstanding
      commitments for undisbursed lines of credit, letters of credit and undisbursed
      investment commitments amounted to approximately $188.0 million. Management
      intends to fund anticipated loan closings and operational needs through cash
      and
      cash equivalents on hand, brokered deposits, scheduled principal repayments
      from
      the loan and securities portfolios, and anticipated increases in deposits and
      borrowings. Certificates of deposits represented 55% of the Company’s total
      deposits at both June 30, 2006 and December 31, 2006. The Company’s growth
      strategy will include marketing efforts focused at increasing the relative
      volume of low cost transaction deposit accounts; however, time deposits will
      continue to play an important role in the Company’s funding strategy.
      Certificates of deposit of $100,000 or more represented 44% of the Company’s
      total deposits at June 30, 2007 and 42% at December 31, 2006. While these
      deposits are generally considered rate sensitive and the Company will need
      to
      pay competitive rates to retain these deposits at maturity, there are other
      subjective factors that will determine the Company’s continued retention of
      those deposits.





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Under
      federal capital regulations, Crescent State Bank must satisfy certain minimum
      leverage ratio requirements and risk-based capital requirements. At June 30,
      2007, the Bank’s equity to asset ratio was 11.85%. All capital ratios place the
      Bank in excess of the minimum required to be deemed a well-capitalized bank
      by
      regulatory measures. The Bank’s ratios of Tier I capital to risk-weighted
      assets and total capital to risk-based assets at June 30, 2006 were 9.19% and
      10.30%, respectively. The Company is also required to maintain capital adequacy
      ratios. At June 30, 2007, the Company’s ratios of Tier 1 capital to
      risk-weighted assets and total capital to risk-based assets were 9.39% and
      10.51%, respectively.





**IMPACT
      OF INFLATION AND CHANGING PRICES**





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





**FORWARD-LOOKING
      INFORMATION**





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




-24-


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





The
      Company’s primary market risk is interest rate risk. Interest rate risk is the
      result of differing maturities or repricing intervals of interest earning assets
      and interest bearing liabilities and the fact that rates on these financial
      instruments do not change uniformly. These conditions may impact the earnings
      generated by the Company’s interest earning assets or the cost of its interest
      bearing liabilities, thus directly impacting the Company’s overall earnings. The
      Company’s management actively monitors and manages interest rate risk. One way
      this is accomplished is through the development of and adherence to the
      Company’s asset/liability policy. This policy sets forth management’s strategy
      for matching the risk characteristics of the Company’s interest earning assets
      and liabilities so as to mitigate the effect of changes in the rate environment.
      The Company’s market risk profile has not changed significantly since December
      31, 2006.





**Item
      4T. Controls and Procedures**





Crescent
      Financial Corporation’s management, with the participation of the Chief
      Executive Officer and Principal Financial Officer, has evaluated the
      effectiveness of the Company’s disclosure controls and procedures as of June 30,
      2007. Based on that evaluation, the Company’s Chief Executive Officer and
      Principal Financial Officer concluded that the Company’s disclosure controls and
      procedures were effective, as of June 30, 2007, to provide reasonable assurance
      that information required to be disclosed by the Company in the reports filed
      or
      submitted by it under the Exchange Act is recorded, processed, summarized and
      reported within the time periods specified in the SEC’s rules and forms, and to
      provide reasonable assurance that information required to be disclosed by the
      Company in such reports is accumulated and communicated to the Company’s
      management, including its principal executive officer and principal financial
      officer, as appropriate to allow timely decisions regarding required disclosure.





The
      Company assesses the adequacy of its internal control over financial reporting
      quarterly and enhances its controls in response to internal control assessments
      and internal and external audit and regulatory recommendations. There have
      been
      no changes in the Company’s internal controls during the quarter ended June 30,
      2007 or through the date of this Quarterly Report on Form 10-Q that have
      materially affected, or are reasonably likely to materially affect, the
      Company’s internal control over financial reporting.




-25-





**Part
                II.**
              **OTHER
                  INFORMATION**  **Item
                1.**
              **Legal
                  Proceedings.** None.  **Item
                1a.**
              **Risk
                Factors.** There
                have been no material changes in our risk factors from those disclosed
                in
                our Annual Report on Form 10-K for the year ended December 31,
                2006.  **Item
                2.**
              **Unregistered
                Sales of Equity Securities and Use of
                Proceeds.** None.  **Item
                3.**
              ******Defaults
                  Upon Senior Debt.** None.  **Item
                4.**
              **Submission
                  of Matters to a Vote of Security
                  Holders**  The
          Annual Meeting of the Stockholders was held on May 22, 2007. Of 8,301,868
          shares
          entitled to vote at the meeting, 6,565,001 shares voted. The following
          matters
          were voted on at the meeting:
  1.
                Election
                    of Directors
 The
            following individuals were elected to various
            terms:




Nominee
            
            Term
            
            For
            
            Against
            
            WithheldSheila
                Hale Ogle
            
            
            Three
                Years
            
            
            6,448,548
            
            
            -
            
            
            116,453Jon
                S. Rufty
            
            
            Three
                Years
            
            
            6,429,258
            
            
            -
            
            
            135,743Jon
                T. Vincent
            
            
            Three
                Years
            
            
            6,449,789
            
            
            -
            
            
            115,212Stephen
                K. Zaytoun
            
            
            Three
                Years
            
            
            6,430,551
            
            
            -
            
            
            134,450Brent
                D. Barringer
            
            
            Two
                Years
            
            
            6,448,294
            
            
            -
            
            
            116,707Charles
                A. Paul, III
            
            
            Two
                Years
            
            
            6,449,789
            
            
            -
            
            
            115,212William
                H. Cameron
            
            
            One
                Year
            
            
            6,449,789
            
            
            -
            
            
            115,212





The
      following directors continue in office after the meeting: Michael G. Carlton,
      Bruce I. Howell, James A Lucas, Jr., Kenneth A. Lucas and Francis R. Quis,
      Jr.





2.
            Ratification
                of Appointment of Independent Public
                Accountants





Management’s
      appointment of Dixon Hughes PLLC as the Company’s independent public accountants
      for 2007 was approved with 6,509,807 shares voting for, 38,151 shares voting
      against, and 17,043 shares abstaining.


**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





-26-


**SIGNATURES**




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





**CRESCENT
                FINANCIAL CORPORATION**Date:
              August 8, 2007
            By:
            /s/ Michael
              G. CarltonMichael
              G. CarltonPresident
              and Chief Executive Officer





Date:
              August 8, 2007
            By:
            /s/ Bruce
              W. ElderBruce
              W. ElderPrincipal
              Financial Officer





-27-