The following is our discussion and analysis of certain significant factors that have affected our financial position and operating results and those of our subsidiaries, Lowcountry National Bank and First National Bank of Nassau County, during the periods included in the accompanying financial statements.
This commentary should be read in conjunction with the financial statements and the related notes and the other statistical information included in this report.

This report contains "forward-looking statements" relating to, without limitation, future economic performance, plans and objectives of management for future operations, and projections of revenues and other financial items that are based on the beliefs of management, as well as assumptions made by and information currently available to management. The words "may," "will," "anticipate," "should," "would," "believe," "contemplate," "expect," "estimate," "continue," and "intend," as well as other similar words and expressions of the future, are intended to identify forward-looking statements. Our actual results may differ materially from the results discussed in the forward-looking statements, and our operating performance each quarter is subject to various risks and uncertainties that are discussed in detail in our filings with the Securities and Exchange Commission, including, without limitation:

·

significant increases in competitive pressure in the banking and financial services industries;

·

changes in the interest rate environment which could reduce anticipated or actual margins;

·

changes in political conditions or the legislative or regulatory environment;

·

general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;

·

changes occurring in business conditions and inflation;

·

changes in technology;

·

the level of allowance for loan loss;

·

the rate of delinquencies and amounts of charge-offs;

·

the rates of loan growth;

·

adverse changes in asset quality and resulting credit risk-related losses and expenses;

·

changes in monetary and tax policies;

·

loss of consumer confidence and economic disruptions resulting from terrorist activities;

·

changes in the securities markets; and

·

other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.

Overview

The following discussion describes our results of operations for the quarter ended March 31, 2008 as compared to the quarter ended March 31, 2007 and also analyzes our financial condition as of March 31, 2008 as compared to December 31, 2007. Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb possible losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating income. In the following section we have included a detailed discussion of this process.

In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this non-interest income, as well as our non-interest expense, in the following discussion.

The following discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.

Critical Accounting Policies

We have adopted various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 2007, as filed on our annual report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by us which have a material impact on the carrying value of certain assets and liabilities.
We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the credit worthiness of borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses, the impact of current events, and conditions, and other factors impacting the level of probable inherent losses. Under different conditions or using different assumptions, the actual amount of credit losses incurred by us may be different from management's estimates provided in our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.

Results of Operations

Net Interest Income

Our level of net interest income is determined by the level of our earning assets, primarily loans outstanding, and the management of our net interest margin. For the quarter ended March 31, 2008, net interest income totaled $2,643,000 as compared to $3,235,000 for the quarter ended March 31, 2007 for a decrease of $592,000. Total interest income decreased by $731,000, or 10%, to $6,565,000 for the three months ended March 31, 2008 compared to $7,296,000 for the three months ended March 31, 2007. Interest and fees on loans decreased by $612,000, or 10%, to $5,408,000 in the three months ended March 31, 2008 from $6,020,000 in the three months ended March 31, 2007. Total interest expense decreased by $138,000, or 3%, to $3,923,000 for the three months ended March 31, 2008 compared to $4,061,000 for the same period in 2007. The decrease in net interest income is due to an immediate decrease in the rate earned on a substantial portion of our interest-earning assets following interest rate cuts by the Federal Reserve during the first quarter of 2008, which was partially offset by a gradual decrease in the rate paid for interest-earning liabilities.
The net interest margin realized on earning assets and the interest rate spread were 2.61% and 2.15%, respectively, for the three months ended March 31, 2008.
The net interest margin and the interest rate spread were 3.32% and 2.77%, respectively, for the three months ended March 31, 2007.

Interest Rate Sensitivity and Asset Liability Management

Interest rate sensitivity measures the timing and magnitude of the repricing of assets compared with the repricing of liabilities and is an important part of asset/liability management of a financial institution. The objective of interest rate sensitivity management is to generate stable growth in net interest income, and to control the risks associated with interest rate movements. Management constantly reviews interest rate risk exposure and the expected interest rate environment so that adjustments in interest rate sensitivity can be timely made. Since the assets and liabilities of the company are primarily monetary in nature (payable in fixed, determinable amounts), the performance of the company is affected more by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same.

Net interest income is the primary component of net income for financial institutions. Net interest income is affected by the timing and magnitude of repricing of as well as the mix of interest sensitive and noninterest sensitive assets and liabilities. "Gap" is a static measurement of the difference between the contractual maturities or repricing dates of interest sensitive assets and interest sensitive liabilities within the following twelve months. Gap is an attempt to predict the behavior of the company's net interest income in general terms during periods of movement in interest rates. In general, if the company is asset sensitive, more of its interest sensitive assets are expected to reprice within twelve months than its interest sensitive liabilities over the same period. In a rising interest rate environment, assets repricing more quickly are expected to enhance net interest income. Alternatively, decreasing interest rates would be expected to have the opposite effect on net interest income since assets would theoretically be repricing at lower interest rates more quickly than interest sensitive liabilities. Although it can be used as a general predictor, gap as a predictor of movements in net interest income has limitations due to the static nature of its definition and due to its inherent assumption that all assets will reprice immediately and fully at the contractually designated time. At March 31, 2008, the Company, as measured by gap, and adjusted for its expectations of changes in interest bearing categories that might not move completely in tandem with changing interest rates, is liability sensitive when measured at three months and also liability sensitive when cumulatively measured at one year. Management has several tools available to it to evaluate and affect interest rate risk, including deposit pricing policies and changes in the mix of various types of assets and liabilities. The company also forecasts its sensitivity to interest rate changes using modeling software. For more information on asset-liability management, see the annual report on Form 10-K filed with the Securities and Exchange Commission.

Provision and Allowance for Loan Losses

The provision for loan losses is the charge to operating income that management believes is necessary to maintain the allowance for possible loan losses at an adequate level. The provision charged to expense was $122,500 for the three months ended March 31, 2008, as compared to $15,000 for the three months ended March 31, 2007. The increase in the provision for the year is related to the increase in the loan portfolio and by management's assessment of problem loans in the portfolio. The loan portfolio, net of loan losses, increased by $15,254,000 during the three months ended March 31, 2008 from $277,638,000 at December 31, 2007. The allowance for loan losses totaled $3,606,000, or 1.22% of gross loans outstanding at March 31, 2008, as compared to $3,653,000, or 1.30% of gross loans outstanding at December 31, 2007. The decrease in the allowance as a percent of gross loans outstanding is due to a combination of a $170,000 charge off against the reserve and the impact of additions to the reserve for portfolio loan growth at a rate of 0.80% of the balance of loans added to the portfolio. The majority of the loans added to the portfolio during the three months ended March 31, 2008 were residential real estate loans, which have a lower risk profile than other loan types. This lower risk profile of loans added to the portfolio along with other qualitative factors were involved in management's assessment of risk in the loan portfolio as the basis to determine an appropriate level of additional loss provision for portfolio growth.

There are risks inherent in making all loans, including risks with respect to the period of time over which loans may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers, and, in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral. We maintain an allowance for loan losses based on, among other things, historical experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Our judgment about the adequacy of the allowance is based upon a number of assumptions about future events which we believe to be reasonable, but which may not prove to be accurate.

Noninterest Income

Noninterest income for the three months ended March 31, 2008 totaled $1,420,000, as compared to $571,000 for the three months ended March 31, 2007. The largest increase was in gains on mortgage loans sold, which increased $649,000 to $740,000 for the quarter ended March 31, 2008 compared to $91,000 for the same period of 2007. Also, during the first quarter of 2008 sales of securities available for sale contributed a non-recurring gain of $207,000.

This dramatic increase to gains on mortgage loans sold reflects the success of the Company's wholesale mortgage lending division which started operations in September 2007. During the three months ended March 31, 2008, the division funded $115.3 million and sold $107.1 million of residential real estate mortgage loans. As of March 31, 2008 the division had a total of $40.6 million of loans in process with interest rate lock commitments. Typically we expect between 60% and 70% of these loans to be approved and funded in the next 30 days. We have entered into best efforts forward sales commitments for all these loans in process in order to eliminate any interest rate risk. For more information on wholesale mortgage banking, see the annual report on Form 10-K filed with the Securities and Exchange Commission.

Noninterest Expense

Total noninterest expense for the three months ended March 31, 2008 was $3,341,000, as compared to $2,555,000 for the same period in 2007, primarily as a result of the addition of the wholesale mortgage division in Atlanta. Salary and benefits expense increased $524,000 due to salary expenses related to our new branch in Atlanta and higher health insurance costs during the period.
Other operating expenses were $1,028,000 for the three months ended March 31, 2008, as compared to $787,000 for the three months ended March 31, 2007.

Income Taxes

The income tax expense for the three months ended March 31, 2008 was $211,000 compared to an income tax expense of $431,000 for the same period in 2007. The effective tax rate was 35% for the three months ended March 31, 2008 and 35% for the three month period of 2007.

Net Income

The combination of the above factors resulted in net income of $388,000 for the three months ended March 31, 2008, compared to net income for the three months ended March 31, 2007 of $805,000. Basic earnings per share were $.15 for the three months ended March 31, 2008, compared to $.32 for the three months ended March 31, 2007. In 2008, diluted earnings per share totaled $.14 for the three months ended March 31, 2008, compared to $.29 per share for the three month period ended March 31, 2007.

Financial Condition

During the first three months of 2008, total assets increased $11,987,000, or 2.78%, when compared to December 31, 2007. The primary source of growth in assets was in the loan portfolio, which increased $15,206,000, or 5.41%, during the first three months of 2008. Loans held for sale also increased $9,507,000, or 46.25%, during the first quarter of 2008. During the first three months of 2008, total liabilities increased $12,016,000, or 3.12%, when compared to December 31, 2007. The primary source of growth in liabilities was total deposits, which increased $7,691,000, or 2.22%, from the December 31, 2007 amount of $345,847,000.

Investment Securities

Investment securities available for sale decreased to $80,922,000 at March 31, 2008 from $87,171,000 at December 31, 2007. The decrease in investment securities was due to sales, calls and maturities during the first quarter.

Premises and Equipment

Premises and equipment, net of depreciation, totaled $8,104,000 at March 31, 2008. The decrease of $73,000 from the December 31, 2007 amount of $8,176,000 was due to depreciation.

Loans

Gross loans totaled $296,497,000 at March 31, 2008, an increase of $15,206,000,
or 5.41%, since December 31, 2007.  The largest increase in loans was in real
estate-mortgage residential loans, which increased $8,621,000, or 12.54%, to
$77,393,000 at March 31, 2008.  Balances within the major loans receivable
categories as of March 31, 2008 and December 31, 2007 were as follows:

                                          March 31, 2008     December 31, 2007
      Commercial and financial            $   10,868,000    $       10,235,000
      Agricultural                               176,000               519,000
      Real estate - construction             133,382,000           129,607,000
      Real estate - mortgage, farmland            94,000                94,000
      Real estate - mortgage, residential     77,393,000            68,772,000
      Real estate - mortgage, commercial      69,345,000            68,281,000
      Consumer installment loans               4,647,000             2,626,000
      Other                                      592,000             1,157,000
      Gross loans                         $  296,497,000    $      281,291,000

Risk Elements in the Loan Portfolio


The following is a summary of risk elements in the loan portfolio:


                                                     March 31, 2008       December 31, 2007

Loans: Nonaccrual loans                             $     1,929,000      $        2,018,000

Accruing loans more than 90 days past due           $         4,000      $           69,000

Other real estate and repossessions                 $       171,000      $          319,000

Other loans identified by internal review mechanism
Impaired                                            $     1,633,000      $        1,561,000

Activity in the Allowance for Loan Losses is as follows:

                                                                  March 31,
                                                           2008               2007
Balance, January 1,                                   $   3,653,000      $   3,475,000
 Provision for loan losses for the period                   123,000             15,000
 Net loans (charged off) recovered for the period          (170,000)           (32,000)

 Balance, end of period                               $   3,606,000      $   3,458,000

 Gross loans outstanding, end of period               $ 296,497,000      $ 276,849,000

 Allowance for loan losses to gross loans outstanding          1.22%              1.25%

Deposits

At March 31, 2008, total deposits increased by $7,691,000, or 2.22%, from December 31, 2007. Noninterest-bearing demand deposits increased $615,000, or 2.45%, and interest-bearing deposits increased $7,075,000, or 2.21%. Of the $127,984,000 in certificates of deposit $100,000 and over at March 31, 2008, $19,339,000 were brokered deposits. Of the $91,458,000 of other time deposits outstanding at March 31, 2008, $2,822,000 were brokered deposits. These are issued in individual's names and in the names of trustees with balances participated out to others.

Balances within the major deposit categories as of March 31, 2008 and December 31, 2007 were as follows:

                                                      March 31, 2008            December 31, 2007
Noninterest-bearing demand deposits                  $       25,763,000           $          25,147,000
Interest-bearing demand deposits                            105,304,000                     102,674,000
Savings deposits                                              3,029,000                       2,952,000
Certificates of deposit $100,000 and over                   127,984,000                     124,595,000
Other time deposits                                          91,458,000                      90,479,000
                                                     $      353,538,000           $         345,847,000

FHLB Advances


At March 31, 2008, the Company had advances outstanding from the FHLB in the
amount of $30,372,741.  Advances outstanding are shown in the following table:


                                                           FHLB Advances Outstanding
Type Advance                            Balance      Interest           Maturity            Convertible
                                                       Rate               Date                  Date
Fixed rate                           $  1,000,000       5.02%      February 17, 2009
Fixed rate                              5,000,000       5.65%           June 1, 2011
Convertible fixed rate advance          1,500,000       4.05%      September 7, 2012     September 8, 2008
Convertible fixed rate advance         10,000,000       4.25%           May 21, 2014          May 21, 2009
Convertible fixed rate advance          5,000,000       3.71%          June 24, 2015         June 24, 2010
Convertible fixed rate advance          2,000,000       3.69%      September 7, 2017          June 7, 2008
Variable rate                           5,900,000       3.00%
Less purchase accounting adjustments      (27,259)
                                     $ 30,372,741
Total                                                   4.13%

Junior Subordinated Debentures

In May 2004, Coastal Banking Company Statutory Trust I issued $3.0 million of trust preferred securities with a maturity of July 23, 2034. In accordance with FASB Interpretation Number ("FIN") 46(R), the Trust has not been consolidated in the Company's financial statements. The proceeds from the issuance of the trust preferred securities were used by the Trust to purchase $3,093,000 of the Company's junior subordinated debentures, which pay interest at a floating rate equal to 3 month LIBOR plus 275 basis points. The Company used the proceeds from the sale of the junior subordinated debentures for general purposes, primarily to provide capital to Lowcountry National Bank. The debentures represent the sole asset of the Trust.

In June 2006, Coastal Banking Company Statutory Trust II issued $4.0 million of trust preferred securities with a maturity of September 30, 2036. In accordance with FASB Interpretation Number ("FIN") 46(R), the Trust has not been consolidated in the Company's financial statements. The proceeds from the issuance of the trust preferred securities were used by the Trust to purchase $4,124,000 of the Company's junior subordinated debentures, which pay interest at a fixed rate of 7.18% until September 30, 2011 and a variable rate thereafter equal to 3 month LIBOR plus 160 basis points. The Company used the proceeds from the sale of the junior subordinated debentures for general purposes, primarily to provide capital to the Banks. The debentures represent the sole asset of the Trust.

For more information, see our 10-K for the year ended December 31, 2007.

Liquidity and Capital Resources

Liquidity

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. Our liquidity needs include items such as the funding of loans and purchases of operating assets. We meet our liquidity needs through scheduled maturities of loans and investments on the asset side and through pricing policies on the liability side for interest-bearing deposit accounts. The level of liquidity is measured by the loan-to-total deposit ratio which was 84% at March 31, 2008 and 81% at December 31, 2007.

Off-Balance Sheet Arrangements

The Banks are parties to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and loans sold with representations and warranties. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The contractual amounts of those instruments reflect the extent of involvement the Banks have in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. The Banks' loans are primarily collateralized by residential and other real properties, automobiles, savings deposits, accounts receivable, inventory and equipment.

Standby letters of credit are written conditional commitments issued by the Banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. Most letters of credit extend for less than one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

. . .