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 June 30, 2008 as compared to the quarter ended June 30, 2007 and our results for the six months ended June 30, 2008 and 2007. The following discussion also analyzes our financial condition as of June 30, 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 probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. 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 six months ended June 30, 2008, net interest income totaled $5,220,000, as compared to $6,433,000 for the same period in 2007 for a decrease of $1,213,000. Total interest income decreased by $1,779,000 or 12.20%, to $12,799,000 for the six months ended June 30, 2008 compared to $14,578,000 for the six months ended June 30, 2007. Interest and fees on loans decreased by $1,270,000, or 10.70%, to $10,606,000 in the six months ended June 30, 2008 from $11,876,000 in the six months ended June 30, 2007. Total interest expense decreased by $566,000, or 6.94%, to $7,579,000 for the six months ended June 30, 2008 compared to $8,145,000 for the same period in 2007. The net interest margin realized on earning assets and the interest rate spread were 2.56% and 2.11%, respectively, for the six months ended June 30, 2008. The net interest margin and the interest rate spread were 3.34% and 2.90%, respectively, for the six months ended June 30, 2007.

For the quarter ended June 30, 2008, net interest income totaled $2,577,000, as compared to $3,198,000 for the quarter ended June 30, 2007 for a decrease of $621,000. Total interest income decreased by $1,048,000 or 14.40%, to $6,234,000 for the three months ended June 30, 2008 compared to $7,282,000 for the three months ended June 30, 2007. Interest and fees on loans decreased by $658,000, or 11.24%, to $5,198,000 in the three months ended June 30, 2008 from $5,856,000 in the three months ended June 30, 2007. Total interest expense decreased by $427,000, or 10.47%, to $3,657,000 for the three months ended June 30, 2008 compared to $4,084,000 for the same period in 2007. The decrease in net interest income for the quarter ended June 30, 2008 and the six months ended June 30, 2008, 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-bearing liabilities.
The net interest margin realized on earning assets and the interest rate spread were 2.49% and 2.07%, respectively, for the three months ended June 30, 2008. The net interest margin and the interest rate spread were 3.32% and 2.87%, respectively, for the three months ended June 30, 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 made on a timely basis. 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 June 30, 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 slightly asset sensitive when measured at three months and is 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 earnings that management believes is necessary to maintain the allowance for possible loan losses at an adequate level. The provision charged to expense was $1,019,000 for the six months ended June 30, 2008, as compared to $15,000 for the six months ended June 30, 2007. The provision charged to expense for the quarter ended June 30, 2008 was $896,000, as compared to no provision for the quarter ended June 30, 2007. Of the $1,019,000 provision during the first six months of 2008, $682,000 was due to specific reserves on one SBA loan and two residential construction borrowers, $266,000 was due to providing a general reserve increase on loan portfolio growth, and the remaining $71,000 was the result of management's assessment of overall portfolio credit quality and other economic factors. The loan portfolio, net of provision for loan losses, increased by $25,720,000 during the six months ended June 30, 2008 from $277,638,000 at December 31, 2007. The allowance for loan losses totaled $4,503,000, or 1.46% of gross loans outstanding at June 30, 2008, as compared to $3,653,000, or 1.30% of gross loans outstanding at December 31, 2007.

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 six months ended June 30, 2008 totaled $2,724,000, as compared to $1,043,000 for the six months ended June 30, 2007. The largest single factor behind this $1,681,000 increase in noninterest income was the $1,522,000 gain on sale of residential mortgage loans generated by the wholesale mortgage banking division during the first six months of 2008. This division was not in operation during the first six months of 2007, so the entire gain on sale of residential mortgage loans in 2008 reflects a year over year increase.
Also, in March 2008 a swap transaction of securities available for sale was completed to reduce the market value risk in a rising interest rate environment.
In addition to lowering the market value risk on securities available for sale, this swap transaction resulted in recognition of a non-recurring gain of $207,000. And finally, service charges on deposit accounts increased $139,000 during the six months ended June 30, 2008 to $355,000 compared to $216,000 for the same period in 2007 reflecting changes to fee levels and policies adopted in November 2007.

Noninterest income for the three months ended June 30, 2008 totaled $1,305,000, as compared to $472,000 for the three months ended June 30, 2007. As with the comparison above, the largest increase in noninterest income between the same quarters year over year was caused by the $783,000 gain on sale of residential mortgage loans generated by the wholesale banking division during the three months ended June 30, 2008. The other significant increase in noninterest income occurred in service charges on deposit accounts which were $75,000 higher during the three months ended June 30, 2008 at $184,000 when compared to $109,000 for the same period in 2007.

Noninterest Expense

Total noninterest expense for the six months ended June 30, 2008 was $7,376,000, as compared to $5,204,000 for the same period in 2007. The largest single factor behind this $2,172,000 increase in noninterest expense was the $1,415,000 in noninterest expenses incurred by the wholesale mortgage banking division during the first half of 2008. This division was not in operation during the first six months of 2007, so the entire amount of noninterest expense incurred by the wholesale mortgage banking division reflects a year over year increase.
The other significant factor in the year over year increase in noninterest expense was the impact of a one-time charge of $508,000 to salaries and employee benefits to recognize the retirement benefits due to Mr. Randy Kohn upon his retirement as President of the Company on April 30, 2008. Excluding the impact of the wholesale mortgage banking expenses and the non-recurring retirement benefits charge, noninterest expense was $5,453,000 for the first half of 2008, an increase of $249,000 or 4.8% from the same period in 2007.

Total noninterest expense for the three months ended June 30, 2008 was $4,034,000, as compared to $2,649,000 for the same period in 2007. As with the above comparison, the largest contributor to this $1,385,000 increase in noninterest expense between the same quarters year over year was the $780,000 in noninterest expenses incurred by the wholesale mortgage banking division during the three months ended June 30, 2008. The previously described non-recurring benefits charge of $508,000 during the three months ended June 30, 2008 was the other significant reason for the increase in noninterest expense in the first half of 2008 when compared to the same period in 2007. Excluding the impact of the wholesale mortgage banking expenses and the non-recurring benefits charge, noninterest expense was $2,746,000 for the three months ended June 30, 2008, an increase of $97,000 or 3.7% from the same period in 2007.

Wholesale Mortgage Banking Division

The wholesale mortgage banking division began operations in September 2007, so comparisons of the results during the three and six months ended June 30, 2008 to the same periods in 2007 are not meaningful. The primary source of direct income generated by this division is the gain on sale of mortgage loans which was $783,000 and $1,522,000 for the three and six months ended June 30, 2008, respectively. The direct noninterest expenses incurred by the wholesale division were $780,000 and $1,415,000 for the three and six months ended June 30, 2008, respectively.

Beyond the impact of the noninterest income and expense from this division, the Banks earn interest income at the respective note rates on the balance of loans originated by the division from the time the loan is funded until it is sold to a secondary market investor. The average outstanding daily balance of wholesale residential mortgage loans available for sale was $22,432,000 for the six months ended June 30, 2008 and $24,648,000 for the three months ended June 30, 2008. The interest income earned on these loans available for sale was $358,000 and $643,000 during the three and six months ended June 30, 2008, respectively.

Income Taxes

The income tax benefit for the six months ended June 30, 2008 was $261,000 compared to an income tax expense of $787,000 for the same period in 2007. Income tax benefit was $472,000 for the quarter ended June 30, 2008 compared to income tax expense of $356,000 for the same period in 2007. The effective tax rate was 58% for the six months ended June 30, 2008 and 45% for the three months ended June 30, 2008. The effective tax rate was 35% for the three and six months ended June 30, 2007. The unusually high effective tax rates for 2008 reflect the impact of permanent book-to-tax differences from tax exempt income on bank owned life insurance and municipal securities. The tax benefit from these tax preference items is relatively large when compared to the lower level of earnings which results in an unusually high effective tax benefit rate.

Net Income (Loss)

The impact of the factors described above resulted in a net loss of $190,000 for the six months ended June 30, 2008, compared to net income of $1,470,000 for the six months ended June 30, 2007. Excluding the impact of the non-recurring charge for Mr. Kohn's retirement benefits, net income from core operations was $146,000 for the first six months of 2008. The net loss for the quarter ended June 30, 2008 was $577,000 compared to net income of $665,000 for the quarter ended June 30, 2007. Excluding the impact of the non-recurring charge for Mr. Kohn's retirement benefits, the net loss from core operations was $242,000 for the three months ended June 30, 2008. Beyond the non-recurring retirement benefits charge, the primary cause of the net loss for the three months ended June 30, 2008 was from the impact of increasing the Banks provision for loan losses as described in more detail above.

The basic and diluted (loss) per share was $(.07) for the six months ended June 30, 2008, compared to basic and diluted earnings per share of $0.58 and $0.54, respectively, for the same period in 2007. For the three months ended June 30, 2008 the basic and diluted (loss) per share was $(.23), compared to basic and diluted earnings per share of $.25 and $.23, respectively, for the same period in 2007.

The net after-tax impact of Mr. Kohn's non-recurring retirement benefits on basic and diluted earnings (loss) was $0.13 per share. Excluding the non-recurring retirement benefits to Mr. Kohn, basic and diluted earnings (loss) per share from core operations were $0.06 for the six months ended June 30, 2008 and $(0.10) for the three months ended June 30, 2008.

Financial Condition

During the first half of 2008, total assets increased $16,054,000, or 3.72%, when compared to December 31, 2007. The primary source of growth in assets was in the loan portfolio, which increased $26,571,000, or 9.45%, during the first half of 2008. This was partially offset by a decrease in investment securities of $10,416,000, or 11.95%, during the first half of 2008. Total liabilities increased $16,857,000 or 4.38% during the first half of 2008 when compared to December 31, 2007. The primary source of growth in liabilities was in other borrowings, which increased $10,800,000, or 40.34% in the first half of 2008.
Total deposits also increased $7,758,000, or 2.24%, from the December 31, 2007 amount of $345,847,000.

Investment Securities

Investment securities available for sale decreased to $76,755,000 at June 30, 2008 from $87,171,000 at December 31, 2007. This decrease was due to scheduled calls and maturities of investment securities. The only investment securities that were sold during the first six months of 2008 were concurrently replaced with purchases of securities at similar values as part of a swap transaction.
The purpose of the transaction was to replace fixed rate mortgage backed securities with adjustable rate mortgage backed securities in order to reduce the market value risk exposure in the event of an upward movement in interest rates.

Premises and Equipment

Premises and equipment, net of depreciation, totaled $8,016,000 at June 30, 2008. The decrease of $160,000 from the December 31, 2007 amount of $8,176,000 was due to regular depreciation of assets.

Loans

Gross loans totaled $307,861,000 at June 30, 2008, an increase of $26,570,000,
or 9.45%, since December 31, 2007.  The largest increase in loans was in real
estate-mortgage, residential loans, which increased $22,338,000, or 32.48%, to
$91,110,000 at June 30, 2008.  Balances within the major loans receivable
categories as of June 30, 2008 and December 31, 2007 were as follows:

                                                  June 30,        December 31,
                                                    2008              2007
      Commercial and financial                  $  10,352,000     $  10,235,000
      Agricultural                                    287,000           519,000
      Real estate - construction, commercial       80,756,000        80,512,000
      Real estate - construction, residential      47,586,000        49,095,000
      Real estate - mortgage, farmland                 93,000            94,000
      Real estate - mortgage, residential          91,110,000        68,772,000
      Real estate - mortgage, commercial           72,222,000        68,281,000
      Consumer installment loans                    5,059,000         2,626,000
      Other                                           396,000         1,157,000
      Gross loans                               $ 307,861,000     $ 281,291,000

Risk Elements in the Loan Portfolio

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

                                                                   June 30,        December 31,
                                                                     2008              2007
Loans: Nonaccrual loans                                           $ 5,005,000     $    2,018,000

Accruing loans more than 90 days past due                         $   440,000     $       69,000

Other real estate and repossessions                               $   131,000     $      319,000

Other loans identified by internal review mechanism as impaired   $ 3,086,000     $    1,561,000

Activity in the Allowance for Loan Losses is as follows:

                                                                          June 30,
                                                                   2008              2007
 Balance, January 1,                                           $   3,653,000     $   3,475,000
 Provision (for loan losses) for the period                        1,019,000            15,000
 Net loans charged off for the period                               (169,000 )         (44,000 )

 Balance, end of period                                        $   4,503,000     $   3,446,000

 Gross loans outstanding, end of period                        $ 307,861,000     $ 281,291,000

 Allowance for loan losses to gross loans outstanding                   1.46 %            1.22 %

Deposits

At June 30, 2008, total deposits increased by $7,758,000, or 2.24%, from December 31, 2007. Noninterest-bearing demand deposits decreased $581,000, or 2.31%, and interest-bearing deposits increased $8,338,000, or 2.60%. Of the $137,758,000 in certificates of deposit $100,000 and over at June 30, 2008, $16,980,000 were brokered deposits. Of the $86,569,000 of other time deposits outstanding at June 30, 2008, $2,178,000 were brokered deposits. These are issued in individual's names and in the names of trustees with balances participated out to others. At December 31, 2007, of the $124,595,000 in certificates of deposit $100,000 and over, $20,535,000 were brokered deposits.
Of the $90,479,000 of other time deposits at December 31, 2007, $3,613,000 were brokered deposits. This represents a $4,990,000 or 20.7% decrease during the first six months of 2008 in the level of total brokered deposits held by the Banks and is reflective of our efforts to decrease reliance on brokered deposits in favor of growth in retail deposits.

Balances within the major deposit categories as of June 30, 2008 and December 31, 2007 were as follows:

. . .