10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Form 10-K

(Mark One)

xAnnual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2007

or

oTransition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from            to          

Commission file no. 000-22503

BEACH FIRST NATIONAL BANCSHARES, INC.

(Name of Registrant as Specified in Its Charter)

South Carolina	57-1030117
(State or Other Jurisdiction	(I.R.S. Employer
of Incorporation or Organization)	Identification No.)

3751 Grissom Pkwy, Suite 100
Myrtle Beach, South Carolina	29577
(Address of Principal Executive Offices)	(Zip Code)

(843) 626-2265

Issuer’s Telephone Number, Including Area Code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common stock, $1.00 par value per share	NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o No x.

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

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

The aggregate market value of the voting stock held by non-affiliates (shareholders holding less than 5% of an outstanding class of stock, excluding directors and executive officers), as of June 29, 2007, was approximately $79.2 million.  This calculation was based on the common stock closing price on June 29, 2007 of $22.42.

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: On March 11, 2008, 4,845,018 shares of the issuer’s common stock, par value $1.00 per share, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The Company’s Annual Report to Shareholders for the year ended December 31, 2007 is incorporated by reference in this Form 10-K in Part II, Items 6, 7, 7A and 8.  The Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 21, 2008 is incorporated by reference in this Form 10-K in Part III, Items 10 through 14.

Part I

Item 1. Business

This Report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are based on many assumptions and estimates and are not guarantees of future performance. Actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors, some of which are beyond our control. The words “may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in any forward-looking statements include, but are not limited to those described below under “Risk Factors.”

General Overview

The main office is located at the corner of Grissom Parkway and 38th Avenue in Myrtle Beach, South Carolina.  In June 2001, the first branch office was opened at the northwest corner of the intersection of S.C. Highway 544 and U.S. Highway 17 in Surfside Beach, South Carolina, followed by the second branch office in November 2002 at the Gator Hole Shopping Center in North Myrtle Beach, South Carolina.  In February 2003, the bank opened its third branch overall and first location on Hilton Head Island, South Carolina, at Pineland Station.  In July 2004, the fourth branch office opened in the Litchfield/Pawleys Island area at the Litchfield Market Village. In January 2005, the fifth branch office and second location on Hilton Head Island opened in The Village at Wexford. At December 31, 2007, the division had six loan production offices in South Carolina, North Carolina, and Virginia. The South Carolina office in Little River includes the mortgage operation’s staff. The North Carolina offices are in Raleigh and Gastonia, and the three offices in Virginia are located in Burke, Fredericksburg, and Sterling.  In December 2006, the Company moved into its new corporate headquarters and plans to expand operations to serve other coastal areas of South Carolina. The Company maintains an internet web site at http://www.beachfirst.com.  The information on the Company’s website is not incorporated by reference into this report.

Marketing Focus

Most of the banks in the Grand Strand and on Hilton Head Island are local branches of regional, super-regional, and large national banks.  Larger banks have certain advantages in competing for large corporate business, including higher lending limits and the ability to offer services in other areas of South Carolina and the Southeast.  As a result, the Company generally does not attempt to compete for large corporate banking relationships but concentrates its efforts on individuals and small- to medium-sized businesses.  The Company believes it can fill this void in the community banking market in the Myrtle Beach and Hilton Head Island areas.

Operating and Growth Strategy

The Company’s goal is to build long-term shareholder value by being the leading community bank along the Grand Strand and on Hilton Head Island.  The Company intends to achieve this goal by increasing asset size through internal growth, providing personalized service with a community focus, retaining high caliber and motivated employees, maintaining high asset quality, offering customers a variety of products and services, and selectively adding new branches.

Deposit Products

The Company’s principal source of funding is core deposits, of which approximately 90.0% were obtained from within our core markets as of December 31, 2007.  The Company offers a full range of services, including checking accounts, commercial accounts, savings accounts, money market accounts, certificates of deposit, and other time deposits.  The Company regularly reviews its deposit rates to ensure it remains competitive.  Due to the seasonal nature of the Company’s market, deposit growth is generally strongest during the summer months and loan demand usually reaches its peak during the winter months.  Thus, the Company historically has a more favorable liquidity position during the summer months.  To meet loan demand and liquidity needs during the winter months, the Company typically offers special rates on deposits.

Other Financial Services

The Company offers NetTeller Internet banking with PowerPay bill payment and cash management services.  With NetTeller and PowerPay, customers can perform a variety of banking functions from their home or office computer. 

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Customers with these services can view images of checks, deposits, and past statements, transfer funds between accounts, download information to money management software packages, and pay bills.  The Company offers online cash management services, remote deposit capture, business internet banking, ACH or electronic transactions, wire origination, sweep accounts, merchant services, and consolidated account analysis to streamline a business customer’s operations.  Our goal with technology-oriented products such as remote deposit capture is to supplement our high level of service by offering customers a virtual key to the bank.

The Company offers other bank services, including safe deposit boxes, direct deposit, merchant services, and Visa Check Cards.  The Company earns fees for most of these services, including debit and credit card transactions, sales of checks, wire transfers, and ATM transaction fees.  The Company is associated with the STAR, Cirrus, and Plus ATM networks, which give customers access to their funds throughout the country.

Lending Activities

General.  The Company emphasizes a range of lending services, including real estate, commercial, consumer loans, home equity lines of credit, and loans to small-to-mid-size businesses in the Grand Strand and Hilton Head Island markets.  At December 31, 2007, the Company had loans that were secured by real estate of approximately $441.5 million, or 86.5% of the loan portfolio, commercial loans of $60.4 million, and consumer loans of $8.5 million.  As of December 31, 2007, there were no loans 90 day or more past due still accruing interest, and the Company had no restructured loans.

The Bank’s lending activities are subject to a variety of lending limits imposed by federal law.  In general, the Bank is subject to a legal limit on loans to a single borrower equal to 15% of the Bank’s capital and unimpaired surplus.  This limit will increase or decrease as the Bank’s capital increases or decreases.  Based upon the capitalization of the Bank at December 31, 2007, our legal lending limit was approximately $9.0 million.  The Bank is able to sell participations in our larger loans to other financial institutions, which allows us to manage the risk involved in these loans and to meet the lending needs of our customers.  The Company strives to maintain a diversified loan portfolio and limit the amount to any single customer.  As of December 31, 2007, our 10 largest customer loan relationships represented approximately $56.3 million, or 11.1% of the loan portfolio.  The Company’s single largest relationship is $6.5 million.

At December 31, 2007, the Company had average total loans of $458.7 million, representing 85.2% of our average earning assets.  The Company maintains a strong credit culture and employs veteran bankers with knowledge of its markets.

Loans secured by real estate. The majority of the Company’s loans are secured by some form of real estate.  Real estate loans are subject to the same general risks as other loans and are particularly sensitive to fluctuations in the economy and the value of real estate.  Fluctuations in the value of real estate, as well as other factors arising after a loan has been made, could negatively affect a borrower’s cash flow, creditworthiness, and ability to repay the loan.

·Commercial Real Estate Mortgages. These loans are secured by commercial property. The Company reduces credit risk in the commercial real estate portfolio by emphasizing loans for owner-occupied properties where the loan-to-value ratio, established by independent appraisals, does not exceed 80%.   The underwriting of a loan includes evaluation of such factors as existing credit, cash flow analysis, value of any collateral, personal guaranties, and other factors.  The Company typically reviews the personal financial statements and tax returns of the principal owners and requires personal guarantees.  At December 31, 2007, commercial real estate loans (other than construction loans) amounted to $331.4 million, or approximately 65.0%, of our loan portfolio. This includes various types of business purpose loans secured by commercial real estate.

·Real Estate Construction Loans.  The Company offers primarily adjustable rates on residential and commercial construction loans to builders, developers, and consumers who wish to build their own homes.  The duration of our construction loans are generally limited to no more than 18 months, although payments may be structured on a longer basis or amortized if necessary.  Construction loans generally carry a higher degree of risk than long-term financing of existing properties, because repayment depends on the ultimate completion of the project or home and usually on the sale of the property or permanent financing.  Specific risks include cost overruns, mismanaged construction, mismanaged draw requests, pre-sale commitment fall-out, inferior or improper construction techniques, economic changes or downturns during construction, rising interest rates which may prevent sale of the property, and failure to sell completed projects in a timely manner.

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The Company attempts to reduce the risk associated with construction loans by typically requiring personal guarantees, obtaining third party inspections, requiring a percentage of pre-sales, and keeping the loan-to-value ratio of the completed projects at or below 80%. At December 31, 2007, construction loans amounted to $64.0 million, or 12.5 % of our total loan portfolio.

·Consumer Real Estate Loans. The Company originates traditional first and second mortgage residential real estate loans and home equity loans.  Home equity lines of credit typically have terms of fifteen years or less and the Company generally limits the extension of credit to 90% of the available equity of each property.  The Company typically sells a portion of its consumer retail mortgage loans to investors.  The Company limits the loan-to-value ratio on residential real estate loans it keeps to 80%.  At December 31, 2007, the total residential real estate loans (other than construction loans) amounted to $46.1 million, or 9.0% of our loan portfolio. Of this total amount, the Company had $6.5 million of mortgage loans held for sale, and $21.4 million of home equity loans at December 31, 2007.

Commercial Business Loans.  The Company makes loans for commercial purposes in various lines of businesses, including retail, service industries, and the professional service area.  Commercial loans are generally considered to have greater risk than first or second mortgages on real estate because commercial loans may be unsecured or, if they are secured, the value of the collateral may be difficult to assess and more likely to decrease than real estate.  Where possible the Company includes real estate collateral as a secondary source of repayment on commercial business loans. At December 31, 2007, commercial business loans amounted to $60.4 million, or 11.8% of our total loan portfolio.

The Company offers small business loans utilizing government enhancements such as the Small Business Administration’s (“SBA”) 7 (a) program and SBA’s 504 programs.  These loans typically are partially guaranteed by the government, which helps to reduce their risk.  SBA loans generally carry a 75% guarantee of the loan.

Consumer Loans.  The Company makes a variety of loans to individuals for personal and household purposes, including secured and unsecured installment loans, credit cards, and revolving lines of credit.  Consumer loans are underwritten based on the borrower’s income, current debt level, past credit history, and the availability and value of collateral.  Consumer rates are both fixed and variable with various terms depending on the product type.  Our installment loans typically amortize over periods up to 60 months.  The Company offers consumer loans with a single maturity date when a specific source of repayment is available.  The Company typically requires monthly payments of interest and a portion of the principal on its revolving loan products and credit cards.  Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or if they are secured, the value of the collateral may be difficult to assess and more likely to decrease in value than real estate.  At December 31, 2007, consumer loans amounted to $8.5 million, or 1.7% of our loan portfolio.

Credit Administration and Loan Review. The Company emphasizes a strong credit culture focused on safety and soundness. The Company employs experienced relationship managers with solid knowledge of the markets. The Company maintains a continuous internal loan review system and engages an independent consultant on an annual basis to review loan files to confirm its loan grading system and to identify any issues that may need improvement. Each loan officer is responsible for managing his or her own loan portfolio, regardless of whether other individuals or committees joined in the approval. This responsibility continues until the loan is repaid. The compensation of our lending officers is dependent, in part, on the asset quality of their loan portfolios.

Underwriting Procedures, Collateral, and Risk.  The Company uses established credit policies and procedures when underwriting each type of loan.  Although there are minor variances in the characteristics and criteria for each loan type, which variances may require additional underwriting procedures, the Company generally evaluates borrowers using the following defined criteria:

·Character — the Company determines that the borrower has sound character and integrity by examining the borrower’s history.

·Capital — the Company evaluates the borrower’s overall financial strength, as well as the equity investment in the asset being financed.

·Collateral — the Company determines whether the collateral is adequate from the standpoint of quality, marketability, value and income potential.

·Capacity — the Company evaluates the borrower’s ability to service the debt.

·Conditions — the Company underwrites the credit in light of the effects of external factors, such as economic conditions and industry trends.

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It is the Company’s practice to obtain collateral for most loans to mitigate the risk associated with lending and to generally limit its loan-to-value ratio to 80%.  The Company obtains a security interest in real estate for loans secured by real estate, including construction and development loans, and other commercial loans.  For commercial loans, the Company typically obtains security interests in equipment and other company assets.  For consumer loans used to purchase vehicles, the Company obtains appropriate title documentation.  For secured loans that are not associated with real estate, or for which the mortgaged real estate does not provide an acceptable loan-to-value ratio, the Company obtains other available collateral such as stocks and bonds.

Each type of loan carries a credit risk, simply defined as the potential that the borrower will not be willing or able to repay the debt.  While real estate loans have various risks common to all types of loans, certain types of real estate loans have specific risk characteristics that vary according to the collateral type securing the loan and the terms and repayment sources for the loan.  Real estate loans are all sensitive to fluctuations in the value of the real estate securing the loan.  In addition, commercial real estate loans have risk that the primary source of repayment will be insufficient to service the debt.  Construction and development real estate loans generally carry a higher degree of risk than long term financing of existing properties.  These projects are usually dependent on the completion of the project on schedule and within cost estimates and on the timely sale of the property.  Inferior or improper construction techniques, cost overruns, changes in economic conditions during the construction and marketing period, and rising interest rates which may slow the sale of the property are all risks unique to this type of loan.  Residential mortgage loans, in contrast to commercial real estate loans, generally have longer terms and may have fixed or adjustable interest rates.  Commercial loans primarily have risk that the primary source of repayment will be insufficient to service the debt.  Often this occurs as the result of changes in local economic conditions or in the industry in which the borrower operates which impact cash flow or collateral value.  Consumer loans, other than home equity loan products, are generally considered to have more risk than loans to individuals secured by first or second mortgages on real estate due to dependence on the borrower’s employment status as the sole source of repayment.  By following defined underwriting criteria as noted above, the Company seeks to reduce these risks.  Additionally, the Company reduces the risk that the underlying collateral may not be sufficient to pay the outstanding balance by using appraisals or taking other steps to determine that the value of the collateral is adequate, and lending amounts based upon lower loan-to-value ratios.  The Company controls risk by reducing concentration of its  loan portfolio in any one type of loan.  A concentration of credit report based upon NAICS codes, collateral codes, and other factors are reviewed on a quarterly basis by the Board of Directors.

Loan Approval. Certain credit risks are inherent in making loans. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers. The Company attempts to mitigate these risks by adhering to internal credit policies and procedures. These policies and procedures include officer and customer lending limits, a multi-layered approval process for larger loans, documentation examination, and follow-up procedures for any exceptions to credit policies. Our loan approval policies provide for various levels of officer lending authority. Individual loan authorities are granted based on historical performance and experience. When the amount of aggregate loans to a single borrower exceeds an individual officer’s lending authority or the executive internal loan committee limit, then the Board of Directors’ loan committee may approve the loan up to the Bank’s legal lending limit. The Company does not make any loans to any of its directors or executive officers unless the loan is approved by the loan committee and reviewed by the Board of Directors. These loans are made on terms that are not more favorable to the director or executive officer than would be available to a person not affiliated with us. The Company takes steps to protect against losses due to hurricanes and weather by requiring customers to carry appropriate insurance.

Competition

The Myrtle Beach and Hilton Head Island markets are highly competitive markets. The competition among financial institutions is based on a variety of factors, including interest rates on deposits and loans, service charges, quality of services, and convenience of banking facilities.  The Company also competes with other financial institutions including securities firms, savings and loans, insurance companies, credit unions, leasing companies, and finance companies.  The Company believes it has competed effectively in the market by offering quality and personal service to small to medium sized businesses and individuals.

Employees

At December 31, 2007, the Company employed a total of 152 full-time and part-time employees and believes that the relations with its employees are good.

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SUPERVISION AND REGULATION

Both the company and the bank are subject to extensive state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory oversight of virtually all aspects of our operations.  These laws and regulations are generally intended to protect depositors and borrowers, not shareholders.  Changes in applicable laws or regulations may have a material effect on our business and prospects.  The Company’s operations may be affected by legislative changes and the policies of various regulatory authorities.  It cannot predict the effect that fiscal or monetary policies or new federal or state legislation may have on its business and earnings in the future.

Beach First National Bancshares, Inc.

The Company owns 100% of the outstanding capital stock of the Bank, and therefore is considered to be a bank holding company under the federal Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”).  As a result, the Company is primarily subject to the supervision, examination and reporting requirements of the Board of Governors of the Federal Reserve (the “Federal Reserve”) under the Bank Holding Company Act and its regulations promulgated there under.  Moreover, as a bank holding company of a bank located in South Carolina, the Company also is subject to the South Carolina Banking and Branching Efficiency Act.

Permitted Activities.  Under the Bank Holding Company Act, a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in, activities such as  banking or managing or controlling banks,    furnishing services to or performing services for its subsidiaries, and other activities that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.

Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:

·factoring accounts receivable

·making, acquiring, brokering or servicing loans and related activities

·leasing personal or real property

·operating a non-bank depository institution (such as a savings association, trust company functions, financial and investment advisory activities)

·conducting discount securities brokerage activities

·underwriting and dealing in government obligations and money market instruments

·providing specified management consulting and counseling activities

·performing selected data processing services and support services

·acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions performing selected insurance underwriting activities.

As a bank holding company the Company also can elect to be treated as a “financial holding company,” which would allow the Company to engage in a broader array of activities.  In sum, a financial holding company can engage in activities that are financial in nature or incidental or complementary to financial activities, including insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, underwriting services and limited merchant banking activities.  The Company has not sought financial holding company status, but may elect such status in the future as its business matures.  If the Company were to elect financial holding company status, each insured depository institution the Company controls would have to be well capitalized, well managed, and have at least a satisfactory rating under the Community Reinvestment Act (CRA), discussed below.

The Federal Reserve has the authority to order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of it or any of its bank subsidiaries.

Change in Control.  In addition, and subject to certain exceptions, the Bank Holding Company Act and the Change in Bank Control Act, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company.  Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of a bank holding company.  Control is rebuttably presumed to exist if a person acquires 10% or  more, but less than 25%, of any class of voting securities and either the company has registered securities under Section 12 of the Securities Exchange Act of 1934 or no other person owns a greater percentage of that class of voting securities

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immediately after the transaction. In certain cases, a company may also be presumed to have control under the BHCA if it acquires 5% or more of any class of voting securities of a bank holding company. Our common stock is registered under Section 12 of the Securities Exchange Act. The regulations provide a procedure for rebutting control when ownership of any class of voting securities is below 25%.

Source of Strength.  In accordance with Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances in which the Company might not otherwise do so.  Under the Bank Holding Company Act, the Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary, other than a non-bank subsidiary of a bank, upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any depository institution subsidiary of a bank holding company.  Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or non-bank subsidiaries if the agency determines that divestiture may aid the depository institution’s financial condition.    Further, any loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and certain other indebtedness of the subsidiary bank.  In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank at a certain level would be assumed by the bankruptcy trustee and entitled to priority payment.

Capital Requirements.  The Federal Reserve Board imposes certain capital requirements on the bank holding company under the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-the weighted assets.  These requirements are essentially the same as those that apply to the Bank and are described below under “Beach First National Bank - Capital Regulations.”  Subject to these capital requirements and certain other restrictions, the Company is able to borrow money to make a capital contribution to the bank, and these loans may be repaid from dividends paid from the Bank to the Company.  Our ability to pay dividends depends on the Bank’s ability to pay dividends to us, which is subject to regulatory restrictions as described below in “Beach First National Bank — Dividends.”  The Company is also able to raise capital for contribution to the Bank by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws.

South Carolina State Regulation.  As a South Carolina bank holding company under the South Carolina Banking and Branching Efficiency Act, the Company is subject to limitations on sale or merger and to regulation by the South Carolina Board of Financial Institutions (the “S.C. Board”).  The Company is not required to obtain the approval of the S.C. Board prior to acquiring the capital stock of a national bank, but the Company must notify the S. C. Board at least 15 days prior to doing so.  The Company must receive the S. C. Board’s approval prior to engaging in the acquisition of a South Carolina state chartered bank or another South Carolina bank holding company.

Beach First National Bank (Bank)

Bank operates as a national banking association incorporated under the laws of the United States and subject to examination by the Office of the Comptroller of the Currency (the “OCC”) .  Deposits in a regulated banks (bank) are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to a maximum amount, which is currently $100,000 for each non-retirement depositor and $250,000 for certain retirement-account depositors.  Accordingly, the FDIC also has enforcement authority over the Bank.  Together, the OCC and the FDIC regulate or monitor virtually all areas of a bank’s operations, including:

·security devices and procedures;

·adequacy of capitalization and loss reserves;

·loans;

·investments;

·borrowings;

·deposits;

·mergers;

·issuances of securities;

·payment of dividends;

·interest rates payable on deposits;

·interest rates or fees chargeable on loans;

·establishment of branches;

·corporate reorganizations;

·maintenance of books and records; and

·adequacy of staff training to carry on safe lending and deposit gathering practices.

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The OCC requires that the Bank maintain specified capital ratios of capital to assets and imposes limitations on the Bank’s aggregate investment in real estate, bank premises, and furniture and fixtures.  Two categories of regulatory capital are used in calculating these ratios—Tier 1 capital and total capital.  Tier 1 capital generally includes common equity, retained earnings, a limited amount of qualifying preferred stock, and qualifying minority interests in consolidated subsidiaries, reduced by goodwill and certain other intangible assets, such as core deposit intangibles, and certain other assets.  Total capital generally consists of Tier 1 capital plus Tier 2 capital, which includes the allowance for loan losses, preferred stock that did not qualify as Tier 1 capital, certain types of subordinated debt and a limited amount of other items.

The Bank is required to calculate three ratios: the ratio of Tier 1 capital to risk-weighted assets, the ratio of Total capital to risk-weighted assets, and the “leverage ratio,” which is the ratio of Tier 1 capital to assets on a non-risk-adjusted basis. For the two ratios of capital to risk-weighted assets, certain assets, such as cash and U.S. Treasury securities, have a zero risk weighting. Others, such as commercial and consumer loans, have a 100% risk weighting. Some assets, notably purchase-money loans secured by first-liens on residential real property, are risk-weighted at 50%. Assets also include amounts that represent the potential funding of off-balance sheet obligations such as loan commitments and letters of credit. These potential assets are assigned to risk categories in the same manner as funded assets. The total assets in each category are multiplied by the appropriate risk weighting to determine risk-adjusted assets for the capital calculations.

The minimum capital ratios for both the company and the Bank are generally 8% for total capital, 4% for Tier 1 capital and 4% for leverage.  To be eligible to be classified as “well-capitalized,” the Bank must generally maintain a total capital ratio of 10% or more, a Tier 1 capital ratio of 6% or more, and a leverage ratio of 5% or more.  Certain implications of the regulatory capital classification system are discussed in greater detail below.

Prompt Corrective Action.  The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) established a “prompt corrective action” program in which every bank is placed in one of five regulatory categories, depending primarily on its regulatory capital levels.  The OCC and the other federal banking regulators are permitted to take increasingly severe action as a bank’s capital position or financial condition declines below the “Adequately Capitalized” level described below.  Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s leverage ratio reaches two percent. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital.  The OCC’s regulations set forth five capital categories, each with specific regulatory consequences.  The categories are:

·Well Capitalized — The institution exceeds the required minimum level for each relevant capital measure.  A well capitalized institution is one (i) having a total capital ratio of 10% or greater, (ii) having a tier 1 capital ratio of 6% or greater, (iii) having a leverage capital ratio of 5% or greater and (iv) that is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.

·Adequately Capitalized — The institution meets the required minimum level for each relevant capital measure.  No capital distribution may be made that would result in the institution becoming undercapitalized.  An adequately capitalized institution is one (i) having a total capital ratio of 8% or greater, (ii) having a tier 1 capital ratio of 4% or greater and (iii) having a leverage capital ratio of 4% or greater or a leverage capital ratio of 3% or greater if the institution is rated composite 1 under the CAMELS (Capital, Assets, Management, Earnings, Liquidity and Sensitivity to market risk) rating system.

·Undercapitalized — The institution fails to meet the required minimum level for any relevant capital measure.  An undercapitalized institution is one (i) having a total capital ratio of less than 8% or (ii) having a tier 1 capital ratio of less than 4% or (iii) having a leverage capital ratio of less than 4%, or if the institution is rated a composite 1 under the CAMEL rating system, a leverage capital ratio of less than 3%.

·Significantly Undercapitalized — The institution is significantly below the required minimum level for any relevant capital measure.  A significantly undercapitalized institution is one (i) having a total capital ratio of less than 6% or (ii) having a tier 1 capital ratio of less than 3% or (iii) having a leverage capital ratio of less than 3%.

·Critically Undercapitalized — The institution fails to meet a critical capital level set by the appropriate federal banking agency.  A critically undercapitalized institution is one having a ratio of tangible equity to total assets that is equal to or less than 2%.

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If the OCC determines, after notice and an opportunity for hearing, that a bank is in an unsafe or unsound condition, the regulator is authorized to reclassify the bank to the next lower capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition.

If a bank is not well capitalized, it cannot accept brokered deposits without prior FDIC approval and, if approval is granted, cannot offer an effective yield in excess of 75 basis points on interests paid on deposits of comparable size and maturity in such institution’s normal market area for deposits accepted from within its normal market area, or national rate paid on deposits of comparable size and maturity for deposits accepted outside the bank’s normal market area.  Moreover, if a bank becomes less than adequately capitalized, it must adopt a capital restoration plan acceptable to the OCC that is subject to a limited performance guarantee by the corporation.  The bank also would become subject to increased regulatory oversight, and is increasingly restricted in the scope of its permissible activities.  Each company having control over an undercapitalized institution also must provide a limited guarantee that the institution will comply with its capital restoration plan.  Except under limited circumstances consistent with an accepted capital restoration plan, an undercapitalized institution may not grow.  An undercapitalized institution may not acquire another institution, establish additional branch offices or engage in any new line of business unless determined by the appropriate Federal banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective action.  The appropriate federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized institution fails to submit an acceptable capital restoration plan or fails in any material respect to implement a plan accepted by the agency.  A critically undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs and for loss of its charter to conduct banking activities.

An insured depository institution may not pay a management fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the payment, the institution, would be undercapitalized.  In addition, an institution cannot make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized.  Thus, if payment of such a management fee or the making of such would cause a bank to become undercapitalized, it could not pay a management fee or dividend to us.

As of December 31, 2007, the Bank was deemed to be “well capitalized.”

Standards for Safety and Soundness.     The FDIA also requires the federal banking regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset growth. The agencies also must prescribe standards for asset quality, earnings, and stock valuation, as well as standards for compensation, fees and benefits.  The federal banking agencies have adopted regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness to implement these required standards. These guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired.  Under the regulations, if the OCC determines that the Bank fails to meet any standards prescribed by the guidelines, the agency may require the Bank to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the OCC.  The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans.

Regulatory Examination.     The OCC also requires the Bank to prepare annual reports on the Bank’s financial condition and to conduct an annual audit of its financial affairs in compliance with its minimum standards and procedures.

All insured institutions must undergo regular on-site examinations by their appropriate banking agency.  The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate federal banking agency against each institution or affiliate as it deems necessary or appropriate.  Insured institutions are required to submit annual reports to the FDIC, their federal regulatory agency, and state supervisor when applicable.  The FDIC has developed a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any other report of any insured depository institution.  The federal banking regulatory agencies to prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating, among other things, to the following:

·internal controls;

·information systems and audit systems;

·loan documentation;

·credit underwriting;

·interest rate risk exposure; and

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·asset quality.

Deposit Insurance and Assessments.  Deposits at the Bank are insured by the Deposit Insurance Fund (the “DIF”) as administered by the FDIC, up to the applicable limits established by law—generally $100,000 per accountholder and $250,000 for certain retirement accountholders.  In November 2006, the FDIC adopted final regulations that set the deposit insurance assessment rates that took effect in 2007.  The FDIC uses a risk-based assessment system that assigns insured depository institutions to one of four risk categories based on three primary sources of information—supervisory risk ratings for all institutions, financial ratios for most institutions, including the Company, and long-term debt issuer ratings for large institutions that have such ratings.  The new premium rate structure imposes a minimum assessment of from five to seven cents for every $100 of domestic deposits on institutions that are assigned to the lowest risk category.  This category is expected to encompass substantially all insured institutions, including the Bank.  A one time assessment credit is available to offset up to 100% of the 2007 assessment.  Any remaining credit can be used to offset up to 90% of subsequent annual assessments through 2010.  For institutions assigned to higher risk categories, the premium that took effect in 2007 ranges from ten cents to forty-three cents per $100 of deposits.

The FDIC also collects a deposit-based assessment from insured financial institutions on behalf of The Financing Corporation (FICO).  The funds from these assessments are used to service debt issued by FICO in its capacity as a financial vehicle for the Federal Savings and Loan Insurance Corporation.  The FICO assessment rate is set quarterly and in 2006 ranged from 1.32 cents to 1.24 cents per $100 of assessable deposits.  For the first quarter of 2007, the FICO assessment rate was 1.22 cents per $100 of assessable deposits.

Transactions with Affiliates and Insiders.  The Company is a legal entity separate and distinct from the Bank and its other subsidiaries.  Various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company or its non-bank subsidiaries.  The Company and the Bank are subject to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W.  Section 23A of the Federal Reserve Act places limits on the amount of loans or extensions of credit to, or investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of affiliates.  The aggregate of all covered transactions is limited in amount, as to any one affiliate, to 10% of the Bank’s capital and surplus and, as to all affiliates combined, to 20% of the Bank’s capital and surplus.  Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements.  The Bank is forbidden to purchase low quality assets from an affiliate.

Section 23B of the Federal Reserve Act, among other things, prohibits an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve Board decides to treat these subsidiaries as affiliates. The regulation also limits the amount of loans that can be purchased by a bank from an affiliate to not more than 100% of the bank’s capital and surplus.

The Bank is also subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests.  Such extensions of credit (i) must be made on substantially the same terms, including interest rates, and collateral, as those prevailing at the time for comparable transactions with third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features.

Dividends.  The Company’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank.  Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company.  As a general rule, the amount of a dividend may not exceed, without prior regulatory approval, the sum of net income in the calendar year to date and the retained net earnings of the immediately preceding two calendar years.  A depository institution may not pay any dividend if payment would cause the institution to become undercapitalized or if it already is undercapitalized.  The OCC may prevent the payment of a dividend if it determines that the payment would be an unsafe and unsound banking practice.  The OCC also has advised that a national bank should generally pay dividends only out of current operating earnings.

Branching.  National banks are required by the National Bank Act to adhere to branch office banking laws applicable to state banks in the states in which they are located.  Under current South Carolina law, the Bank may open branch offices throughout South Carolina with the prior approval of the OCC.  In addition, with prior regulatory approval, the Bank is able to acquire existing banking operations in South Carolina.   Furthermore, federal legislation permits interstate branching, including out-of-state acquisitions by bank holding companies, interstate branching by banks if allowed by

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state law, and interstate merging by banks.  South Carolina law, with limited exceptions, currently permits branching across state lines only through interstate mergers.

Anti-Tying Restrictions.  Under amendments to the BHCA and Federal Reserve regulations, a bank is prohibited from engaging in certain tying or reciprocity arrangements with its customers.  In general, a bank may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for these on the condition that (i) the customer obtain or provide some additional credit, property, or services from or to the bank, the bank holding company or subsidiaries thereof or (ii) the customer may not obtain some other credit, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended.  Certain arrangements are permissible: a bank may offer combined-balance products and may otherwise offer more favorable terms if a customer obtains two or more traditional bank products; and certain foreign transactions are exempt from the general rule.  A bank holding company or any bank affiliate also is subject to anti-tying requirements in connection with electronic benefit transfer services.

Community Reinvestment Act.  The Community Reinvestment Act requires that the OCC evaluate the record of the Bank in meeting the credit needs of its local community, including low and moderate income neighborhoods.  These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility.  Failure to adequately meet these criteria could impose additional requirements and limitations on the Bank.

Finance Subsidiaries.  Under the Gramm-Leach-Bliley Act (the “GLBA”), subject to certain conditions imposed by their respective banking regulators, national and state-chartered banks are permitted to form “financial subsidiaries” that may conduct financial or incidental activities, thereby permitting bank subsidiaries to engage in certain activities that previously were impermissible.  The GLBA imposes several safeguards and restrictions on financial subsidiaries, including that the parent bank’s equity investment in the financial subsidiary be deducted from the bank’s assets and tangible equity for purposes of calculating the bank’s capital adequacy.   In addition, the GLBA imposes new restrictions on transactions between a bank and its financial subsidiaries similar to restrictions applicable to transactions between banks and non-bank affiliates.

Consumer Protection Regulations.  Activities of the Bank are subject to a variety of statutes and regulations designed to protect consumers.  Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates.  The Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as:

·the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

·the Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

·the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

·the Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;

·the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and

·the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The deposit operations of the Bank also are subject to:

·the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and

·the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that Act, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

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Enforcement Powers.  The Bank and its “institution-affiliated parties,” including its management, employees agents independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs, are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a government agency.  These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports.  Civil penalties may be as high as $1,000,000 a day for such violations.  Criminal penalties for some financial institution crimes have been increased to twenty years.  In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties.  Possible enforcement actions include the termination of deposit insurance.  Furthermore, banking agencies’ power to issue cease-and-desist orders were expanded.  Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss.  A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.

Anti-Money Laundering.  Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. The Company and the Bank are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and “knowing your customer” in their dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and recent laws provide law enforcement authorities with increased access to financial information maintained by banks. Anti-money laundering obligations have been substantially strengthened as a result of the USA Patriot Act, enacted in 2001 and renewed in 2006. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications. The regulatory authorities have been active in imposing “cease and desist” orders and money penalty sanctions against institutions found to be violating these obligations.

USA PATRIOT Act/Bank Secrecy Act.  Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function.  The USA PATRIOT Act, amended, in part, the Bank Secrecy Act and provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering by enhancing anti-money laundering and financial transparency laws, as well as enhanced information collection tools and enforcement mechanics for the U.S. government, including: (i) requiring standards for verifying customer identification at account opening; (ii) rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (iii) reports by nonfinancial trades and businesses filed with the Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and (iv) filing suspicious activities reports if a bank believes a customer may be violating U.S. laws and regulations and requires enhanced due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons.  Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.

Under the USA PATRIOT Act, the FBI can send to the banking regulatory agencies lists of the names of persons suspected of involvement in terrorist activities.  The Bank can be requested, to search its records for any relationships or transactions with persons on those lists.  If the Bank finds any relationships or transactions, it must file a suspicious activity report and contact the FBI.

The Office of Foreign Assets Control (“OFAC”), which is a division of the U.S. Department of the Treasury, is responsible for helping to insure that United States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress.  OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts.  If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account, file a suspicious activity report and notify the FBI.  The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications.  The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files.  The Bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.

Privacy and Credit Reporting.  Financial institutions are required to disclose their policies for collecting and protecting confidential information.  Customers generally may prevent financial institutions from sharing nonpublic personal financial

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information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer.  Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers.  It is the Bank’s policy not to disclose any personal information unless required by law.  The OCC and the federal banking agencies have prescribed standards for maintaining the security and confidentiality of consumer information.  The Bank is subject to such standards, as well as standards for notifying consumers in the event of a security breach.

Like other lending institutions, the Bank utilizes credit bureau data in its underwriting activities.  Use of such data is regulated under the Federal Credit Reporting Act on a uniform, nationwide basis, including credit reporting, prescreening, sharing of information between affiliates, and the use of credit data.  The Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”) permits states to enact identity theft laws that are not inconsistent with the conduct required by the provisions of the FACT Act.

Check 21.  The Check Clearing for the 21st Century Act gives “substitute checks,” such as a digital image of a check and copies made from that image, the same legal standing as the original paper check.  Some of the major provisions include:

·allowing check truncation without making it mandatory;

·demanding that every financial institution communicate to accountholders in writing a description of its substitute check processing program and their rights under the law;

·legalizing substitutions for and replacements of paper checks without agreement from consumers;

·retaining in place the previously mandated electronic collection and return of checks between financial institutions only when individual agreements are in place;

·requiring that when accountholders request verification, financial institutions produce the original check (or a copy that accurately represents the original) and demonstrate that the account debit was accurate and valid; and

·requiring the re-crediting of funds to an individual’s account on the next business day after a consumer proves that the financial institution has erred.

Effect of Governmental Monetary Policies.  Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies.  The Federal Reserve Bank’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession.  The monetary policies of the Federal Reserve Board have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits.  It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.

Proposed Legislation and Regulatory Action.  New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations, and competitive relationships of the nation’s financial institutions.  We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

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Item 1A.  Risk Factors

The Company’s recent operating results may not be indicative of future operating results.

The Company may not be able to sustain its historical rate of growth and may not even be able to grow the business at all. Because of our relatively small size and short operating history, it will be difficult for us to generate similar earnings growth as the Company continues to expand, and consequently our historical results of operations will not necessarily be indicative of our future operations. Various factors, such as economic conditions, regulatory and legislative considerations, and competition, may also impede our ability to expand our market presence. If the Company experiences a significant decrease in its historical rate of growth, its results of operations and financial condition may be adversely affected because a high percentage of its operating costs are fixed expenses.

The Company’s decisions regarding credit risk and reserves for loan losses may materially and adversely affect its business.

Making loans and other extensions of credit is an essential element of the Company’s business.  Although the Company seeks to mitigate risks inherent in lending by adhering to specific underwriting practices, the Company anticipates that not all of its loans and other extensions of credit will be repaid.  The risk of nonpayment is affected by a number of factors, including the duration of the credit, credit risks of a particular customer, changes in economic and industry conditions, and, in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.

The Company attempts to maintain an appropriate allowance for loan losses to provide for potential losses in its loan portfolio.  The Company periodically determines the amount of the allowance based on consideration of several factors, including an ongoing review of the quality, mix, and size of its overall loan portfolio, its historical loan loss experience, evaluation of economic conditions, regular reviews of loan delinquencies and loan portfolio quality, the amount and quality of collateral, including guarantees, securing the loans, and concentration of credit risk.

There is no precise method of predicting credit losses; therefore, the Company faces the risk that charge-offs in future periods will exceed its allowance for loan losses and that additional increases in the allowance for loan losses will be required.  These risks will likely increase as the Bank’s average loan size continues to increase.  Additions to the allowance for loan losses would result in a decrease of our net income, and possibly our capital.

Lack of seasoning of a portion of the Company’s loan portfolio may increase the risk of credit defaults in the future.

Due to the rapid growth of the Bank and the type of loans originated in the past several years, a portion of the loan portfolio and the lending relationships are of relatively recent origin.  In general, new loans have more uncertainty in terms of credit quality until they have been outstanding for a period of time, a process the Company refers to as “seasoning.”  As a result, a portfolio of older loans will usually behave more predictably than a newer loan portfolio.  Because the Company’s loan portfolio has some unseasoned loans, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes seasoned.  If delinquencies and defaults increase, the Company may be required to increase its provision for loan losses, which would adversely affect its results of operations and financial condition.

An economic downturn, especially one affecting the Horry, Beaufort, and Georgetown counties, could reduce the Company’s customer base, level of deposits, and demand for financial products such as loans.

The Company’s success depends significantly upon the growth in population, income levels, deposits, new business growth, and housing starts in its markets, especially in Horry, Beaufort, and Georgetown County. If the communities in which the Company operates do not grow or if prevailing economic conditions are unfavorable, the Company’s business may not succeed. An economic downturn would likely contribute to the deterioration of the quality of the loan portfolio and reduce the level of deposits, which in turn would impact the Company’s business. Interest received on loans represented approximately 91.0% of our interest income for the year ended December 31, 2007. If an economic downturn occurs in the economy as a whole, or especially in the Horry, Beaufort, and Georgetown Counties, borrowers may be less likely to repay their loans as scheduled. Moreover, the value of real estate or other collateral that may secure the Company’s loans could be adversely affected. Unlike many larger institutions, the Company is not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies. An economic downturn could, therefore, result in losses that materially and adversely affect the Company’s business.

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Changes in prevailing interest rates may reduce profitability.

Results of operations depend in large part upon the level of the Company’s net interest income, which is the difference between interest income from interest-earning assets, such as loans and mortgage-backed securities, and interest expense on interest-bearing liabilities, such as deposits and other borrowings.  Depending on the terms and maturities of assets and liabilities, a significant change in interest rates could have a material adverse effect on profitability.  Many factors cause changes in interest rates, including governmental monetary policies and domestic and international economic and political conditions.  While the Company intends to manage the effects of changes in interest rates by adjusting the terms, maturities, and pricing of its assets and liabilities, the efforts may not be effective and its financial condition and results of operations could suffer.  The recent interest rate declines by the Federal Reserve have had an adverse impact on the Company’s net interest rate margin. The Company anticipates that it will be harmed from a declining interest rate environment in the short term (1-3 months) but is expected to benefit over a one year time period.   No assurance can be given as to when and in what direction the Federal Reserve will adjust interest rates or that the results the Company anticipates will actually occur.

The Company is dependent on key individuals and the loss of one or more of these key individuals could curtail growth and adversely affect its prospects.

Our success depends, in part, on the executive management group and the continued ability to attract and retain experienced loan personnel, as well as other management personnel.  The loss of the services of several key personnel could adversely affect the Company’s growth strategy and prospects to the extent the Company is unable to replace such personnel.

The Company is subject to extensive regulation that could limit or restrict its activities.

The Company operates in a highly regulated industry and is subject to examination, supervision, and comprehensive regulation by various regulatory agencies.  Compliance with regulations is costly and restricts certain activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of branches.  The Company is also subject to capitalization guidelines established by its regulators, which require it to maintain adequate capital to support growth.

The laws and regulations applicable to the banking industry could change at any time, and the Company cannot predict the effects of these changes on its business and profitability.  Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, the cost of compliance could adversely affect the Company’s ability to operate profitably.

The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission, have increased the scope, complexity, and costs of corporate governance, reporting, and disclosure practices.  The Company has experienced, and expects to continue to experience, greater compliance costs, including costs related to internal controls, as a result of the Sarbanes-Oxley Act.

The Company has evaluated its internal controls to allow management to report on its internal controls, and for its independent registered public accounting firm to attest to its internal controls for 2007.  Effective internal controls are necessary to produce reliable financial reports and are important to helping prevent financial fraud.

The Company’s continued pace of growth may require it to raise additional capital in the future, but that capital may not be available when it is needed.

The Company is required by regulatory authorities to maintain adequate levels of capital to support its operations.  To support continued growth, the Company may need to raise additional capital.  The ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside the Company’s control.  Accordingly, the Company cannot be assured of its ability to raise additional capital, if needed, on acceptable terms.  If the Company cannot raise additional capital when needed, its ability to further expand operations through internal growth and acquisitions could be materially impaired.  In addition, if the Company decides to raise additional equity capital, shareholder interest could be diluted.

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The Company faces strong competition for customers, which could prevent it from obtaining customers and may cause it to pay higher interest rates to attract customers.

The banking business is highly competitive.  The Company competes in attracting deposits and in making loans.     There is a risk that the Company will not be able to compete successfully with other financial institutions in its market, and that the Company may have to pay higher interest rates to attract deposits, resulting in reduced profitability.  In addition, competitors that are not depository institutions are generally not subject to the extensive regulations that apply to the Company.

The Company will face risks with respect to future expansion and acquisitions or mergers.

The Company may seek to expand into new markets, lines of business, or offer new products and services.  These activities would involve a number of risks, including:

·the use of estimates and judgments to evaluate credit, operations, management, and market risks with respect to expansion into a new market;

·the time and costs of evaluating new markets, hiring or retaining experienced local management, opening new offices, and the expenses until these activities generate sufficient volume to support the costs of the expansion;

·the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse effects on our results of operations; and

·the risk of loss of key employees and customers.

A significant portion of the Company’s  loan portfolio is secured by real estate, and events that negatively impact the real estate market could adversely affect the business.

A significant portion of our loan portfolio is secured by real estate.  As of December 31, 2007, approximately 86.5% of the Company’s loans had real estate as a primary or secondary component of collateral.  A weakening of the real estate market in the Company’s market area could result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans.  This could have an adverse effect on profitability and asset quality.  If the Company is required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, earnings and capital could be adversely affected.  Acts of nature, including hurricanes, tornados, earthquakes, fires and floods, which may cause uninsured damage and other loss of value to real estate that secure these loans, may also negatively impact financial condition.  High insurance rates and cancellation of insurance policies along the coast could represent an inherent risk in the loan portfolio.

A large percentage of the loans in our portfolio currently include exceptions to the Company’s loan policies and supervisory guidelines.

All of the company loans are subject to written loan policies adopted by the Board of Directors and supervisory guidelines imposed by regulators.  The Company’s loan policies are designed to reduce the risks associated with the loans by requiring Company personnel to perform certain tasks as part of the underwriting, pricing, and loan closing process.  Loans that do not fully comply with our loan policies are known as “exceptions.”  The Company categorizes exceptions as policy exceptions, financial statement exceptions and collateral exceptions.  As of December 31, 2007, approximately 17.5% of the loans in the portfolio included collateral exceptions to loan policies.  As a result of these exceptions, such loans may have a higher risk of loss than the loans that comply with the loan policies.  In addition, the Company may be subject to regulatory action by federal or state banking authorities if they believe the number of exceptions in the loan portfolio represents an unsafe banking practice.

The Company generally underwrites loans in the portfolio in accordance with its own internal underwriting guidelines and regulatory supervisory guidelines. In certain circumstances the Company has approved loans which exceed either its internal underwriting guidelines, supervisory guidelines, or both.  As of December 31, 2007, approximately $48.0 million of loans, or 80.3% of the Bank’s capital, had loan-to-value ratios that exceeded regulatory supervisory guidelines, of which 14 loans totaling approximately $1.8 million had loan-to-value ratios of 100% or more.  Supervisory limits on commercial loan to value exceptions are set at 30% of the Bank’s capital.  At December 31, 2007, $13.7 million of the commercial loans, or 22.6% of the Bank’s capital, exceeded the supervisory loan to value ratio.  The number of loans in the portfolio with loan-to-value ratios in excess of supervisory guidelines, internal guidelines, or both could increase the risk of delinquencies and defaults in the portfolio.

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Item 1B.  Unresolved Staff Comments:  Not applicable.

Item 2.    Properties.

The Company currently operates from a six branch network along the South Carolina coast. Our branch offices are located in Beaufort, Horry, and Georgetown Counties. The Company also has an operation center and six loan production offices located in South Carolina, North Carolina, and Virginia.

		Leased or
Type of Office	Location	Owned
Main office	3751 Grissom Parkway, Myrtle Beach, South Carolina 29577	Owned (1)
Branch	Highway 544 in the Sayebrook Village Shopping Center in Surfside Beach, which is south of Myrtle Beach	Leased (2)
Branch	Gator Hole Shopping Center at 710 Highway 17 North, North Myrtle Beach, which is in the northern end of the Grand Strand	Leased (2)
Branch	Willbrook Shopping Center in Pawleys Island, which is in Georgetown County at the southern end of the Grand Strand	Leased
Branch	Pineland Station Office Building at 430 William Hilton Parkway, Hilton Head Island	Leased
Branch	The Village at Wexford Shopping Center at 1000 William Hilton Parkway, Hilton Head Island	Leased
Bank operation facility	1509 North Kings Highway, Myrtle Beach, South Carolina, 29577	Leased
Loan Production Office	Mortgage Operations Center at 1384 Highway 17, Little River, South Carolina 29566	Leased
Loan Production Office	1005 Bullard Ct., Suite 107, Raleigh, North Carolina 27615	Leased
Loan Production Office	1519 South Marietta Street, Gastonia, North Carolina 28054	Leased
Loan Production Office	520 William Street Building at 520 William Street, Fredericksburg, Virginia 22401	Leased
Loan Production Office	Burke Town Shopping Plaza at 9554 Old Keene Mill Road, Burke, Virginia 22015	Leased
Loan Production Office	21351 Gentry Drive, Sterling, Virginia 20166	Leased

(1)The Company owns two-thirds of  the company that owns the building, and the bank leases from that company.

(2)The Company owns the building but leases the land.

The Company’s new headquarters, built in partnership with Nelson Mullins Riley & Scarborough, LLP (NMRS), opened in December 2006 at the corner of 38th Avenue North and Grissom Parkway.  The Company has moved the main office to this location and NMRS has relocated its Myrtle Beach legal office to the building.  The Company purchased the land for approximately $1.8 million, and contributed the land to BFNM Building, LLC, an entity of which the Company owns two-thirds and NMRS owns one-third.  The Company financed the construction project through a third-party lender with each of the owners being responsible for their respective interests in the project.  The total land and construction project cost was $8.8 million, exclusive of tenant improvements. The Company leases two-thirds of the building (approximately 30,000 square feet) from BFNM Building, LLC, the entity that owns the building.  Because the Company

17

only occupies approximately 12,000 square feet of space the Company lease, the Company intends to lease the other 18,000 square feet of its portion to outside tenants.  NMRS leases the remaining one-third of the building from BFNM Building, LLC, the entity that owns it.

The Company believes that all of its properties are adequately covered by insurance.

Item 3.        Legal Proceedings.

From time to time the Company is involved in legal proceedings and claims in the ordinary course of our business. The Company is not aware of any legal proceedings or claims pending or threatened that the Company expects to have a material adverse effect on its financial condition or results of operations.

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

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

18

Part II

Item 5.        Market for Common Equity and Related Stockholder Matters.

The Company’s common stock was approved for listing on The NASDAQ Global Market in June 2005 under the symbol “BFNB.” As of February 29, 2008, the Company had approximately 3,068 shareholders of record.  Unless otherwise noted, the following table shows the high and low closing sales prices published by NASDAQ for each quarter within the last two fiscal years.

	High	Low
Year end 2007:
First Quarter	24.45	19.30
Second Quarter	23.50	21.94
Third Quarter	22.48	17.01
Fourth Quarter	18.92	15.75
Year end 2006:
First Quarter*	17.03	16.68
Second Quarter*	17.08	16.94
Third Quarter	16.83	16.67
Fourth Quarter	19.89	18.90

* For the periods indicated, the table shows the reported high and low bid information (adjusted for stock splits) on the NASDAQ Global Market. Such prices are quotations, which reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

To date, the Company has not paid cash dividends on common stock.  The Company currently intends to retain earnings to support operations and finance expansion.  Cash and stock dividends are discussed regularly at the Board meetings.    All of the outstanding shares of common stock are entitled to share equally in dividends from funds legally available when, and if, declared by the Board of Directors.  The Company declared and paid a 3 for 2 stock split in 2006 and has not paid any cash dividends to date.

19

Item 6.  Selected Financial Data.

	Years Ended December 31,
	2007			2006			2005			2004			2003
	(Dollars and shares in thousands, except share amounts
Summary Balance Sheet Data:
Assets	$	605,988		$	520,201		$	397,389		$	242,091		$	165,093
Federal Funds sold and short term investments	566			14,011			25,521			463			4,599
Investment securities	65,678			68,475			43,976			36,183			11,882
Loans, net	496,497			392,849			307,424			189,060			133,852
Allowance for loan losses	(6,936		)	(5,888		)	(4,364		)	(2,422		)	(1,760		)
Deposits	464,198			416,357			310,894			203,169			138,100
Federal Funds purchased	11,382			—			—			—			—
Other borrowings	61,906			44,710			35,504			16,500			11,500
Junior subordinated debt	10,310			10,310			10,310			5,155			—
Shareholder’s equity	52,578			45,460			39,125			14,733			13,556
Summary Results of Operations Data:
Interest income	$	45,107		$	36,487		$	20,921		$	11,597		$	8,496
Interest expense	22,482			16,029			7,189			3,331			2,483
Net interest income	22,625			20,458			13,732			8,266			6,013
Provision for loan losses	2,046			2,174			2,184			1,340			713
Net Interest Income after provision for loan losses	20,579			18,284			11,548			6,926			5,300
Noninterest income	7,578			3,937			1,118			1,037			987
Noninterest expense	18,933			12,523			7,545			5,682			4,688
Income (loss) before taxes	9,224			9,698			5,121			2,281			1,599
Income tax expense (benefit)	3,347			3,502			1,761			845			590
Net income (loss)	$	5,877		$	6,196		$	3,360		$	1,436		$	1,009
Share Data:
Net income per share, basic	$	1.22		$	1.30		$	0.85		$	0.48		$	0.34
Net Income per share, diluted	$	1.18		$	1.27		$	0.83		$	0.46		$	0.33
Book value per share	$	10.85		$	9.53		$	8.23		$	5.41		$	7.42
Weighted average number of shares outstanding:
Basic	4,818			4,764			3,976			3,016			2,967
Diluted	4,977			4,875			4,060			3,134			3,023
Performance Ratios:
Return on average assets	1.04		%	1.33		%	1.08		%	0.70		%	0.70		%
Return on average equity	12.01		%	14.53		%	11.37		%	9.10		%	7.05		%
Net interest margin	4.20		%	4.62		%	4.60		%	4.30		%	4.51		%
Loan to deposit ratio	108.35		%	99.65		%	95.25		%	93.83		%	92.87		%
Efficiency ratio	62.69		%	51.33		%	50.81		%	56.86		%	65.52		%
Asset Quality Ratios:
Nonperforming assets, past due and restructured loans to total loans	0.57		%	0.40		%	0.36		%	0.04		%	0.27		%
Nonperforming assets, past due and restructured loan to total assets	0.48		%	0.32		%	0.30		%	0.03		%	0.22		%
Net Charge-offs to average total loans	0.21		%	0.17		%	0.10		%	0.43		%	0.20		%
Nonperforming loans to allowance for loan losses	41.85		%	27.59		%	25.46		%	3.18		%	20.80		%
Allowance for loan losses to total loans	1.36		%	1.43		%	1.40		%	1.26		%	1.30		%
Capital Ratios:
Average equity to average assets	8.67		%	9.18		%	9.48		%	7.71		%	9.87		%
Leverage ratio	11.20		%	12.20		%	13.80		%	10.10		%	9.90		%
Tier 1 risk-based capital ratio	12.70		%	13.80		%	16.00		%	10.50		%	10.30		%
Total risk-based capital ratio	14.00		%	15.20		%	17.40		%	12.20		%	11.20		%
Growth Ratios and Other Data:
Percentage change in net income	(5.5		)%	84.4		%	134.0		%	42.3		%	42.7		%
Percentage change in diluted net income per share	(7.1		)%	53.6		%	80.6		%	37.3		%	40.8		%
Percentage change in assets	16.5		%	30.9		%	64.1		%	46.6		%	39.4		%
Percentage change in loans	24.0		%	31.9		%	62.8		%	41.2		%	45.4		%
Percentage change in deposits	11.5		%	33.9		%	53.0		%	47.1		%	38.9		%
Percentage change in equity	15.6		%	44.3		%	87.3		%	10.3		%	5.6		%

20

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information required by Item 7 is hereby incorporated by reference from the Company’s annual report to shareholders for the year ended December 31, 2007.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

See the following information incorporated by reference into Item 7 from the Company’s annual report to shareholders for the year ended December 31, 2007: Management’s Discussion and Analysis of Financial Condition and Results of Operations — “Liquidity Management” and “Interest Rate Sensitivity.”

Item 8.    Financial Statements and Supplementary Data

The information required by Item 7 is hereby incorporated by reference from the Company’s annual report to shareholders for the year ended December 31, 2007.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.  Controls and Procedures

Disclosure Controls and Procedures

The Company’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934.  As of December 31, 2007, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  Based on that evaluation, management concluded that disclosure controls and procedures as of December 31, 2007 were effective in ensuring material information required to be disclosed in this Annual Report on Form 10-K was recorded, processed, summarized, and reported on a timely basis.  Additionally, there were no changes in internal controls during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Management’s responsibilities related to establishing and maintaining effective disclosure controls and procedures include maintaining effective internal controls over financial reporting that are designed to produce reliable financial statements in accordance with accounting principles generally accepted in the United States.  The Report on Management’s Assessment of Internal Control Over Financial Reporting is disclosed in the Company’s Annual Report on page 24 and is incorporated herein by reference.  Based on this assessment, management believes that, as of December 31, 2007, its system of internal control over financial reporting met the criteria described in such report and is effective.

Attestation Report of the Independent Registered Public Accounting Firm

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2007 has been audited by Elliott Davis LLC, an independent registered public accounting firm, as stated in its report, which is set forth on page 24-25 of the Annual Report and is incorporated herein by reference.

Item 9B. Other Information.  None.

21

Part III

Item 10.  Directors, Executive Officers and Corporate Governance

Additional information required by Item 10 is hereby incorporated by reference from the Company’s proxy statement for our 2008 Annual Meeting of Shareholders to be held on April 21, 2008.

The Company has adopted a Code of Ethics that applies to the Board of Directors, principal executive officer, principal financial officer, senior financial officers, and other executive officers in accordance with the Sarbanes-Oxley Corporate Responsibility Act of 2002. The Code of Ethics is available without charge to shareholders upon request. Shareholders should contact Chief Financial Officer, Gary S. Austin, at the main office to obtain a copy.

Item 11.  Executive Compensation

Information required by Item 11 is hereby incorporated by reference from the Company’s proxy statement for the 2008 Annual Meeting of Shareholders to be held on April 21, 2008.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth the equity compensation plan information at December 31, 2007.

Equity Compensation Plan Information

				Number of securities
				remaining available for
	Number of securities			future issuance under
	to be issued	Weighted-average		equity compensation plans
	upon exercise of	exercise price of		(c)
	outstanding options,	outstanding options,		(excluding securities
Plan Category	warrants and rights(a)	warrants and rights (b)		reflected in column(a))
Equity compensation plans approved by security holders	434,495	$	12.11	125,458
Equity compensation plans not approved by security holders	—	—		—
Total	434,495	$	12.11	125,458

Additional information required by Item 12 is hereby incorporated by reference from the Company’s proxy statement for the 2008 Annual Meeting of Shareholders to be held on April 21, 2008.

Item 13.  Certain Relationships and Related Transactions and Director Independence

Information required by Item 13 is hereby incorporated by reference from the Company’s proxy statement for the 2008 Annual Meeting of Shareholders to be held on April 21, 2008.

Item 14. Principal Accounting Fees and Services

Information required by Item 14 is hereby incorporated by reference from the Company’s proxy statement for the 2008 Annual Meeting of Shareholders to be held on April 21, 2008.

22

Part IV

Item 15.Exhibits, Financial Statement Schedules

(a)(1)  Financial Statements

The following consolidated financial statements are incorporated by reference from the Company’s annual report to shareholders for the year ended December 31, 2007, as provided in Item 8 above:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2007 and 2007

Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005

Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2007, 2006 and 2005

Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005

Notes to the Consolidated Financial Statements

(2) Financial Statement Schedules

These schedules have been omitted because they are not required, are not applicable or have been included in our consolidated financial statements.

(3) Exhibits

The following exhibits are required to be filed with this Report on Form 10-K by Item 601 of Regulation S-K.

3.1	Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement No. 33-95562 on Form S-1).
3.2	Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement No. 33-95562 on Form S-1).
3.3	Amended and Restated Bylaws Adopted October 17, 2007 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed October 22, 2007).
4.1.	Provisions in the Company’s Articles of Incorporation and Bylaws defining the rights of holders of the Company’s Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement No. 33-95562 on Form S-1).
4.2.	Form of Certificate of Common Stock (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement No. 33-95562 on Form S-1).
10.1	Employment Agreement of Walter E. Standish, III with the Company dated February 27, 2007 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed March 2, 2007).*
10.2	Description of the Director Deferred Compensation Plan (incorporated to Exhibit 10.1 to the Company’s Form 10-QSB filed with the SEC on November 14, 2002).*
10.3	Description of the Executive Deferred Compensation Plan (incorporated to Exhibit 10.2 to the Company’s Form 10-QSB filed with the SEC on November 14, 2002).*
10.4	Description of the Split Dollar Life Insurance Plan (incorporated to Exhibit 10.3 to the Company’s Form 10-QSB filed with the SEC on November 14, 2002).*
10.5	Beach First National Bancshares, Inc. 1997 Stock Option Plan and Form of Option Agreement (incorporated by reference to Exhibit 10.7 of the Company’s Form 10-KSB for the fiscal year ended December 31, 1996).*

23

10.6	Form of First Amendment to the Beach First National Bank Amended and Restated Salary Continuation Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed January 25, 2008).*
10.7	Form of First Amendment to the Beach First National Bank Amended and Restated Director Retirement Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed January 25, 2008).*
10.8	Form of First Amendment to the Beach First National Bank Split Dollar Policy Endorsement of the Split Dollar Agreement (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed January 25, 2008).*
10.9	Beach First National Bank Salary Continuation Agreement dated March 1, 2008 with Gary S. Austin (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed March 5, 2008).*
13	Annual Report to Shareholders for the year ended December 31, 2007.
21.1.	Subsidiaries of the Company
23.1	Consent of Independent Registered Public Accounting Firm.
24	Power of Attorney (contained on the signature page hereof).
31.1	Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer.
32	Section 1350 Certifications.

* Indicates Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K.

24

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		BEACH FIRST NATIONAL BANCSHARES, INC.
Date:	March 14, 2008	By:	/s/ Walter E. Standish, III
			Walter E. Standish, III
			President and Chief Executive Officer

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Walter E. Standish, III, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Michael Bert Anderson		March 14, 2008
Michael Bert Anderson	Director
/s/ Thomas P. Anderson		March 14, 2008
Thomas P. Anderson	Director
/s/ Orvis Bartlett Buie		March 14, 2008
Orvis Bartlett Buie	Director
Raymond E. Cleary III	Chairman and Director
/s/ E. Thomas Fulmer		March 14, 2008
E. Thomas Fulmer	Director
/s/ Michael D. Harrington		March 14, 2008
Michael D. Harrington	Director
/s/ Joe N. Jarrett, Jr.		March 14, 2008
Joe N. Jarrett, Jr.	Director
/s/ Richard E. Lester		March 14, 2008
Richard E. Lester	Director
/s/ Leigh Ammons Meese		March 14, 2008
Leigh Ammons Meese	Director

25

Rick H. Seagroves	Director
Don J. Smith	Director
Samuel Robert Spann, Jr.	Director
B. Larkin Spivey, Jr.	Director
/s/ Walter E. Standish, III		March 14, 2008
Walter E. Standish, III	President, CEO, and Director
/s/ James C. Yahnis		March 14, 2008
James C. Yahnis	Director
/s/ Gary S. Austin		March 14, 2008
Gary S. Austin	Chief Financial Officer and
	Principal Accounting Officer

26

Exhibit List:

3.1	Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement No. 33-95562 on Form S-1).
3.2	Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement No. 33-95562 on Form S-1).
3.3	Amended and Restated Bylaws Adopted October 17, 2007 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed October 22, 2007).
4.1.	Provisions in the Company’s Articles of Incorporation and Bylaws defining the rights of holders of the Company’s Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement No. 33-95562 on Form S-1).
4.2.	Form of Certificate of Common Stock (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement No. 33-95562 on Form S-1).
10.1	Employment Agreement of Walter E. Standish, III with the Company dated February 27, 2007 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed March 2, 2007).*
10.2	Description of the Director Deferred Compensation Plan (incorporated to Exhibit 10.1 to the Company’s Form 10-QSB filed with the SEC on November 14, 2002).*
10.3	Description of the Executive Deferred Compensation Plan (incorporated to Exhibit 10.2 to the Company’s Form 10-QSB filed with the SEC on November 14, 2002).*
10.4	Description of the Split Dollar Life Insurance Plan (incorporated to Exhibit 10.3 to the Company’s Form 10-QSB filed with the SEC on November 14, 2002).*
10.5	Beach First National Bancshares, Inc. 1997 Stock Option Plan and Form of Option Agreement (incorporated by reference to Exhibit 10.7 of the Company’s Form 10-KSB for the fiscal year ended December 31, 1996).*
10.6	Form of First Amendment to the Beach First National Bank Amended and Restated Salary Continuation Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed January 25, 2008).*
10.7	Form of First Amendment to the Beach First National Bank Amended and Restated Director Retirement Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed January 25, 2008).*
10.8	Form of First Amendment to the Beach First National Bank Split Dollar Policy Endorsement of the Split Dollar Agreement (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed January 25, 2008).*
10.9	Beach First National Bank Salary Continuation Agreement dated March 1, 2008 with Gary S. Austin (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed March 5, 2008).*
13	Annual Report to Shareholders for the year ended December 31, 2007.
21.1.	Subsidiaries of the Company
23.1	Consent of Independent Registered Public Accounting Firm.
24	Power of Attorney (contained on the signature page hereof).

27

31.1	Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer.
32	Section 1350 Certifications.

* Indicates Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K.

28

EX-13

Exhibit 13

(photo)

Beach First National Bank (logo)

2007 Annual Report

Beach First National Bancshares, Inc.

Beach First National Bank Board of Directors

(photo)

Front row from left to right are:  Gary Austin, Katie Huntley, Ray Cleary, Walt Standish, Leigh Meese, and Julien Springs.  Back row from left to right are:  Joe Jarrett, Jimmy Yahnis, Tom Fulmer, Bart Buie, Sammy Spann, Rick Seagroves, Dicke Lester, Mike Harrington, Don Smith, Bert Anderson, and Larkin Spivey.

Beach First National Bancshares logo

About Beach First

Beach First National Bancshares, Inc. is the parent company of Beach First National Bank, headquartered in Myrtle Beach, South Carolina. Beach First was organized in 1996 to meet the financial needs of consumers and small-to-mid-sized businesses, and today serves the Grand Strand and Hilton Head Island markets, with six banking offices. A seventh office will open in Myrtle Beach early in the second quarter 2008. The bank’s mortgage lending division is a nationwide lender with offices in the Carolinas and the mid-Atlantic states. The company’s stock trades on the NASDAQ Global Market® under the symbol BFNB and its website is beachfirst.com.

Inside the Report

To Our Shareholders and Friends	2
Banking on Relationships	4
How We Make Banking Easy...Every Day	6
Management’s Discussion and Analysis	8
Report on Management’s Assessment of Internal Control Over Financial Reporting	24
Report of Independent Registered Public Accounting Firm	24
Consolidated Balance Sheets	26
Consolidated Statements of Income	27
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income	28
Consolidated Statements of Cash Flows	29
Notes	30
Corporate Information	51
Officers	52
Directors	Inside Back Cover

Headquarters

3751 Grissom Parkway, Suite 100

Myrtle Beach, SC 29577

843.626.2265

843.916.7818 (Fax)

Selected Financial Highlights

	2007			2006		% Change
Earnings (in thousands)
Net Income	$	5,877		6,196		(5.1	)%
Net Income per share — basic	1.22			1.30		(6.1	)%
Net Income per share — diluted	1.18			1.27		(7.1	)%
Book Value per share	10.85			9.53		13.9	%
Earnings Breakdown (in thousands)
Total Interest Income	$	45,107		36,487		23.62	%
Total Interest Expense	22,482			16,029		40.26	%
Net Interest Income	22,625			20,458		10.59	%
Total Noninterest Income	7,578			3,990		89.92	%
Total Noninterest Expense	18,933			12,576		50.55	%
Year End Balances (in thousands)
Total Assets	$	605,988		520,201		16.49	%
Loans, net of unearned income	503,433			411,215		22.43	%
Deposits	464,198			416,357		11.49	%
Shareholders’ Equity	52,578			45,460		15.66	%
Selected Ratios
Allowance for loan loss to total loans	1.36		%	1.43	%	(4.90	)%
Return on average assets	1.04		%	1.33	%	(21.80	)%
Return on average equity	12.01		%	14.53	%	(17.34	)%
Average equity to average assets	8.67		%	9.18	%	(5.55	)%

Graphs

Total Assets ($ millions)

Net Income ($ millions)

Total Loans ($ millions)

Total Deposits ($ millions)

To Our Shareholders and Friends

Beach First has held its own in a challenging financial environment. During the year, we continued to build brand awareness for our bank in the markets we serve, we absorbed much of the cost of the relocation to our new Grissom Parkway headquarters, and we managed through the issues created by a slowing economy. I am pleased to share our results for 2007 and our plans for the future.

Earnings Update

Net income decreased 5.15% in 2007, totaling $5.88 million.  This decrease was due in part to slower growth in net interest income and an increase in noninterest expense.  Return on average equity was 12.01% for the year and return on average assets was 1.04%.

Total assets grew to $606.0 million, an increase of 16.5%, and total deposits grew 11.5% to $464.2 million. Total loans grew to $509.9 million, an increase of 24.0%.  The net interest margin declined to 4.20%, due in part to three rate cuts in the last four months of 2007 that totaled a 1% reduction in the Prime lending rate. These rate cuts immediately impacted loan pricing, but deposit rates have not declined as much or as quickly, which has put pressure on the net interest margin. Two additional rate cuts in January 2008, totaling another 1.25% reduction in the Prime lending rate, will keep pressure on the net interest margin throughout 2008.

As loan demand has remained robust along the Grand Strand and in Hilton Head Island, finding cost effective and efficient ways to fund deposit growth is imperative to maintain balance sheet health. We intend to achieve this goal by using technology to expand the variety of services available.  This expansion will be a priority for our bank in 2008.

Stock Update

Our management is disappointed in the performance of our common stock during 2007.  In December 2007, our board of directors authorized the holding company to repurchase up to $2 million of our common stock from the open market, representing approximately 2.5% of the shares outstanding.  This repurchase program is intended to reduce the number of shares available on the market, which will increase the percentage of ownership of the remaining outstanding shares.  Our board considered other investment opportunities and determined that repurchasing our shares represents the best long-term option for our shareholders.  At its recent market levels, we believe our stock is an excellent investment.

For further updates and to enroll in email notification of news and events, I invite you to visit the Investor Relations page of our website at beachfirst.com.

Strength in Location and Presence

Beach First is fortunate to have its primary locations in a rapidly growing part of the country. Projections for the next 25 to 30 years indicate that South Carolina’s population will grow 30%, with Horry, Georgetown, and Beaufort counties having double digit growth. We are located in desirable areas where people want to live and where businesses want to work, and we stand ready to meet their financial needs.

In December, Beach First marked its first year in its new headquarters at 3751 Grissom Parkway in Myrtle Beach.  The new building greatly expanded our presence in the Myrtle Beach community and gave us a prominent location in a dynamic part of the city.  We are easily accessible from points north, south, east, and west, and extend a warm welcome to all we serve.

Early in the second quarter of 2008, we will open our seventh office at 73^rd Avenue North in Myrtle Beach.  This new office will be in the heart of prime residential and professional areas.   Renovations to the building are on schedule and we are on track for an April grand opening. We also completed a 1,400 square foot expansion of our successful North Myrtle Beach office in November 2007 to better serve the needs of our growing customer base in this market. We are pleased to have locations in areas poised for additional growth and are exploring other attractive locations along coastal South Carolina.

Our mortgage lending offices are concentrated primarily in the Carolinas and mid-Atlantic states in areas that are seeing dynamic growth. Despite the current difficulties in the mortgage markets, our mortgage lending division remains strong.

Problems have formed nationally within the subprime lending market where loans were made to borrowers who did not qualify for the best rates. Beach First is not in the business of making subprime loans. The ensuing credit crunch which occurred when subprime borrowers could not make their payments, along with the decline both in home sales and property values, has been felt by mortgage lenders throughout the country. Our mortgage lending division shares Beach First’s commitment to credit quality and customer service.  We have a talented group of originators, all of whom have the customer’s best interest at heart. To bolster mortgage loan activity, we are focusing on products that customers will find useful in the current environment, including refinances

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and reverse mortgages. Another key to increasing originations will be to capture additional mortgage business through an employee referral program.

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We have been using Jack Henry and Associates’ (JHA) 20/20 core processing system since October 2002 when our asset size was a little over $100 million. Today, with assets greater than $600 million and growing, it is apparent that 20/20 is at its maximum capacity. To ensure that we are prepared for future growth and expansion, we are upgrading to JHA’s Silverlake software.  The conversion to the new software will take place in April and will greatly enhance customer service capabilities going forward.

Technology Expands Menu of Services

Advances in technology are continuing to change the banking landscape, closing distances and eliminating barriers like never before.

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Late in 2007, we introduced a new service that is redefining the way deposits are made.  Known as the EDGE, which is short for Easy Deposits Gathered Electronically, this new service essentially brings the bank right to the customer’s storefront or office. Using a table top scanner and software provided by the bank that is hooked to a Windows®-based personal computer, business customers can deposit paper checks of all types electronically. The need to rush a deposit to the bank to ensure posting by a certain time is eliminated.

The EDGE has allowed us to expand our geographic footprint without adding more bricks and mortar. Once the scanner and software are installed, it makes no difference if the customer is based across the street or across the county.  The EDGE makes it so that location no longer is an issue for business customers who want to work with Beach First.

We have also recently implemented a Remote Deposit Capture program in our branches, eliminating the 2 p.m. cutoff and giving both the business and personal customer greater flexibility.  With these programs, we are making it easier than ever for the customer to do business with Beach First.

Community Involvement

Community involvement has always been a standard in the history of Beach First. In 2007 we continued our support of many important endeavors. We produced our seventh annual Children’s Art Calendar to the delight of parents, students, and customers alike. More than 1,000 children from eight different elementary schools along the Grand Strand and Hilton Head Island participated in this project. In addition to our support of the arts, we partnered with the Waccamaw Community Foundation, setting up an endowment that will grow over the years to help fund our future charitable activities. In November 2007, we supported the work of Greenkeepers, a local organization whose mission is to protect, preserve, and beautify green space. The group arranged for the planting of trees along Grissom Parkway, where Beach First Center, an environmentally friendly building, is located. The bank was also honored by the City of Myrtle Beach Community Appearance Board on Arbor Day for its landscaping at this office. We are glad to be able to give back to the communities where we are proud to make our living.

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2008 and Beyond

While we expect market conditions to remain unsettled in 2008, Beach First will respond to the challenges ahead with courage, innovation, and strength. We are a strong bank, built to weather uncertainties, and we remain poised to take advantage of opportunities as economic conditions improve.

As always, we appreciate your investment in our company, and we hope to see you at our 2008 Annual Meeting of Shareholders on Monday, April 21 at 2 p.m. at the Myrtle Beach Convention Center.

/s/ Walter E. Standish, III

Walter E. Standish, III

President and Chief Executive Officer

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Banking on relationships that put our customers at ease.

In an age when nearly every part of our lives seems so much more hectic and demanding, Beach First believes that a bank can make things a lot less complicated for its customers.

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Print advertising for 2008 continues to reinforce our branding strategy built around making banking easy for Beach First customers.

In fact, it’s a philosophy we believe in so strongly that we made it part of a new branding strategy launched in 2007.  With a brand platform built around “Banking Should Always be this Easy,” our goal was to fittingly describe an attitude that pervades everything we do to serve our clients.

It’s a simple, assuring message that clearly differentiates us from our competition. And from all accounts, one that truly resonates with customers throughout the Grand Strand and Hilton Head markets. On numerous occasions, for example, customers have commented on how much they share our view that “a bank at the beach should feel like, well, a bank at the beach,” as our broadcast copy affirms. And that they really feel we follow through on “making life easier for our customers,” as stated in our print ads.

We’ve also taken steps to ensure that “easy banking” is much more than an external message — but one that it is in tune with our internal culture as well. With the implementation of our “Action Steps of Easy,” we identify thirteen core values that every member of our organization can put into practice every day to help us further enhance our corporate image.

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As our campaign rolls forward in 2008, our goal is to continue sharing the extraordinary features and benefits of Beach First — and building even stronger and more satisfying relationships with our customers.

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Our small business direct mail campaign features testimonials from actual Beach First customers who have experienced our “less complicated” style of doing business.

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With their engaging look, feel, tone, and message, our television spots continue to play a key role in differentiating Beach First from our competition.

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Our new and improved Web site is easy to navigate and provides quick access to our NetTeller internet banking service.

The Action Steps of Easy

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·Learn your job and never stop learning

·Build relationships by caring about people

·Do the job right the first time

·Respect the time of others

·Embrace technology

·Be friendly

·Smile often

·Be a good listener

·Act with courtesy

·Offer to help

·Work together

·Go the extra mile

·Recognize problems early and seek resolution

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How We Make Banking Easy…Every Day

Over the years, Beach First has built its reputation on providing superior customer service. From finding the best possible financial solutions to making the banking process simple and easy — Beach First’s commitment to customers runs deep. Below, four Beach First bankers share their thoughts on how they make banking easy for their customers.

Charles W. Fisher, III

Relationship Manager

Grand Strand

A career banker with more than 21 years of experience, Charles Fisher understands what it takes to make banking easy. “It’s all about listening, exploring, and finding solutions that work,” he says.

“One of my customers is a contractor who is away from his office most of the time, managing job sites for clients. The office manager runs the business day to day, and is often hard pressed to find the time for the trip to the bank,” Charles says. “The daily transaction includes depositing a large number of checks, transferring funds to cover payroll, and moving excess cash in the checking account. In addition, many of their employees work at job sites in nearby counties, requiring reimbursement for gasoline and other purchases. Processing their expense reports is another frequent and time consuming task.”

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“After talking with the office manager, I knew we could streamline their banking and make the entire back room more efficient,” Charles recalls. Working with members of Beach First’s team, Charles introduced the customer to Cash Management Services. A package combining an operating account, a zero balance account, an investment sweep account, and line curtailment, ensured that funds would be moved automatically to cover payroll, excess funds were invested yet available when needed, and excess interest did not accrue on their loans.

Even the daily deposit became easy when Charles called in Debbie Myers, Beach First’s business services manager, who set the customer up on the bank’s remote deposit capture product, known as the EDGE (Easy Deposits Made Electronically). “By using the EDGE, the office manager made deposits right from the office, eliminating the time-consuming trip to the bank.  We also enrolled them in our corporate credit card program. Employees use the cards to pay for gasoline and incidentals while traveling on business, and expense reports are down to once a month, which really helps their bookkeeping area,” Charles says.

“When the banker understands the challenges and accomplishments of the customer, everyone wins,” Charles says. “By having a dialogue with the customer to review all the potential avenues to meet his goals, we make the banking experience easy.”

Barbara Abrams

Branch Manager

Myrtle Beach

In her 38 years in banking, Barbara Abrams has had the opportunity to work with generations of customers in Myrtle Beach, with one goal in mind — finding the best solutions for their financial needs. “If you can do that, you will make banking easy for the customer,” she says.

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“I have a customer who was managing a restaurant when we first met, and I helped him with his personal banking. He confided that one of his dreams was to open his own car lot. He had worked in the business, liked it, and knew he could make a go of it. At the time, however, he couldn’t afford a fleet of cars,” Barbara recalls. “We suggested that he start with one car and work from there. Beach First made the loan that gave him his start in the business, and one vehicle at a time, we helped him get where he wanted to be. Today he is the successful owner of several automotive businesses.”

“I serve as a sounding board for my customers, listening to their needs, asking questions, and then providing them with options. I’ve found that an informed customer is better prepared to make wise financial decisions. We take the guess work out of the process and explain regulations and requirements in a way that is clear and sensible to the customer. It’s not about fitting the customer to the product we have, but working with customers to build the package of services that’s right for them,” Barbara says.

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“When you call any of us at Beach First, you won’t get a voice mail system that leads you in a circle,” she says. “You will hear a live person on the other end of the phone, ready to help. It’s easy to talk to us. When you work with people’s finances, you are touching their lives. It has to be personal.”

Collier Schettig

Relationship Manager

South Strand

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As the son of small business owners, Collier Schettig learned first hand just how important attentive service is to the customer.  If you can provide a high level of dependable service, you will make the customer’s life a lot easier.

Recently, Collier worked on a large, government-guaranteed loan for a local restaurant. “A lot of banks won’t do this type of loan because of the amount of work and time involved. This was a diverse, complex credit that took about four months to complete.  Our job was to see the big picture and then figure out how to get all the individual pieces in the right order,” he says.

“I kept the customer informed every step of the way, providing updates, helping with paperwork, and taking documents to the customer and to the attorneys and accountants involved. We wanted to be sure we did everything right the first time, so strong communication was very important to ensuring the process went smoothly,” Collier says.

“Most customers have a vision for their project, and turn to their loan officer to see if that vision is viable.  I need to make sure that they’ve thought the project through and will have what they need to succeed.  When you do your job well, you become a trusted member of the customer’s team and they rely on your expertise to see them through the process,” Collier says.

“You may be able to get the same types of products at different banks, but service is the one way you can stand out from the competition,” Collier says. “If you make banking easy for your customers every time, you will have customers for life.”

Michelle Wilson

Mortgage Banker

Hilton Head Island

Michelle Wilson knows that buying a home and applying for a mortgage loan are some of the biggest financial decisions a customer will ever make. There’s a daunting amount of paperwork to complete and many procedures to follow. But Michelle has found ways to make it easy.

“The best thing we can do is to be available for the customer throughout the entire process,” Michelle says. “Just the other day, I had a customer call with questions regarding their escrow account. I contacted the insurance agent on their behalf, and then called the investor with the updated information on the insurance coverage.  It only took me a few minutes, and it put my customer’s mind at ease.”

“Making things easy for the customer is vitally important because most of my business comes from customers I’ve helped in the past or referrals from those customers.  Because I’ve made it easy, they remember me and will call when they need another loan,” she says.

“Libby [mortgage loan assistant Libby Johnson] and I work with mortgages every day and know the process inside and out. But the customer doesn’t, so if we can guide them through it, they appreciate it. We can be trusted to do what’s best for the customer, provide competitive rates, and keep it simple,” Michelle says.

“Nothing is more satisfying than helping a customer finance their home, whether it’s a primary residence, a second home, or an investment property. The transaction is important to the customer, and helping them achieve their goals is very satisfying to me,” she says.

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Libby Johnson and Michelle Wilson are committed to handling all their customers’ mortgage needs before, during and after the closing.

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Management’s Discussion and Analysis

This section discusses the financial position, results of operation, and certain risk factors of the Company and its primary subsidiary, Beach First National Bank, during the periods included in the accompanying financial statements and should be read in conjunction with the financial statements, the related notes, and the other statistical information included in this report.

This report, including without limitation the letter to shareholders and other information above, contains “forward-looking statements” relating to 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. The actual results may differ materially from the results discussed in the forward-looking statements, and operating performance each quarter is subject to various risks and uncertainties that are discussed in detail in the 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 losses;

·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;

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

·natural disasters, such as a hurricane or flooding in our footprint.

Overview

Beach First National Bancshares, Inc. (the “Company”) is the parent company of Beach First National Bank, (the “Bank”), a wholly owned subsidiary, and Beach First National Trust (the “Trust”) and Beach First National Trust II (the “Trust II”), both of which are non-consolidated subsidiaries. The Company also owns 66% of BFNM Building, LLC, which is a limited liability corporation formed solely for the construction of a corporate office building that houses the main office for the Bank. The trusts were established exclusively for the issuance of junior subordinated debt which was used to capitalize the Bank.  The Company’s primary business activities are conducted by the Bank. The Company commenced operations on September 23, 1996 and completed its eleventh full year of operations on December 31, 2007. From the outset, the Company focused on serving the banking needs of small businesses and individuals, and emphasized local management and ownership.

The Bank’s primary market areas are located along the coastal regions of South Carolina and predominately center on the Metro regions of Myrtle Beach and Hilton Head Island, South Carolina. The Bank currently operates from six banking locations with a seventh scheduled to open in early 2008. In addition to the main office in Myrtle Beach, there are five branches. The Bank opened the Surfside branch in June 2001, the North Myrtle Beach branch in November 2002, the Hilton Head Island branch in February 2003, the Litchfield/Pawleys Island area of the Grand Strand branch in 2004, and the branch on the south end of Hilton Head Island in January 2005. All branches are full service.

In June 2006, the Bank added a mortgage division that originates and sells mortgages to investors. At December 31, 2007, the division had six loan production offices in South Carolina, North Carolina, and Virginia.  The South Carolina office in Little River includes the mortgage operations staff. The North Carolina offices are in Raleigh and Gastonia, and the three offices in Virginia are located in Burke, Fredericksburg, and Sterling.

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On June 14, 2005, the Company closed the sale of 1,150,000 shares of common stock at $18.75 per share.  The net proceeds from the offering were approximately $20 million after deducting underwriting discounts and expenses. The net proceeds were used for general corporate purposes, which included, among other things, providing additional capital to the Bank to support its asset growth.

The following table sets forth selected measures of our financial performance for the periods indicated:

	For the Years Ended December 31,
	2007		2006		2005		2004		2003
Net Income	$	5,876,630	$	6,195,728	$	3,359,643	$	1,435,922	$	1,008,931
Total Assets	$	605,988,418	$	520,201,339	$	397,389,234	$	242,091,345	$	165,093,036
Total Loans (1)	$	509,908,135	$	411,214,856	$	311,788,722	$	191,481,765	$	135,612,193
Total Deposits	$	464,198,345	$	416,357,129	$	310,894,210	$	203,168,958	$	138,099,566
Total Capital	$	52,578,050	$	45,459,579	$	39,125,413	$	14,732,893	$	13,555,619

(1)Includes mortgage loans held for sale and deferred fees.

The following discussion describes the Company’s results of operations for 2007 as compared to 2006 and 2006 compared to 2005 and also analyzes our financial condition as of December 31, 2007 as compared to December 31, 2006.  Like most community banks, the Bank derives most of its income from interest on loans and investments.  The primary sources of funding are deposits and advances from the Federal Home Loan Bank (FHLB), on which interest is paid.  Consequently, one of the key measures of success is the amount of net interest income, or the difference between the income on interest-earning assets, such as loans and investments, and the expense on interest-bearing liabilities, such as deposits and advances from FHLB.  Another key measure is the spread between the yield earned on interest-earning assets and the yield on interest-bearing liabilities.

Tables are included to explain the Company’s performance. The “Average Balances, Income and Expenses, and Rates” table shows the average balance during 2007, 2006, and 2005 of each category of assets and liabilities, as well as the yield earned or the rate paid with respect to each category.  The Company’s loans typically provide higher interest yields than do other types of interest earning assets, which is why loans are a substantial percentage of its earning assets.  Similarly, the “Analysis of Changes in Net Interest Income” table demonstrates the impact of changing interest rates and changing volume of assets and liabilities during the years shown.  The sensitivity of the various categories of assets and liabilities to changes in interest rates are included in an “Interest Sensitivity Analysis Table”.  Other tables provide details about investment securities, loans, deposits, and other borrowings.

There are risks inherent in all loans so an allowance for loan losses is established to absorb probable losses on existing loans that may become uncollectible.  The Company established and maintains this allowance by charging a provision for loan losses against operating earnings.  In the “Loans and Allowance for Loan Losses” sections there is a detailed discussion of the process, as well as several tables describing the allowance for loan losses and the allocation of the allowance among various loan categories.

In addition to earning interest on loans and investments, income is earned through fees and other expenses charged to customers.  The various components of noninterest income, as well as noninterest expense, are detailed in the “Noninterest Income and Expense” section.

The Company has identified significant factors that may affect its financial position and operating results during the periods included in the accompanying financial statements.  Management encourages everyone to read this discussion and analysis in conjunction with the financial statements, the related notes, and the other statistical information included in this report.

Critical Accounting Policies

The Company has adopted various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of its financial statements.  Significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements.

Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the carrying value of certain assets and liabilities.  Management considers such accounting policies to be critical.  The judgments and assumptions used are based on historical experience and other factors, which are believed to be reasonable under the circumstances.  Because of the nature of the judgments and assumptions, actual results could differ from these judgments and estimates.  These differences could have a material impact on the carrying values of assets and liabilities and the Company’s results of operations.

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The allowance for loan losses is a critical accounting policy that requires the most significant judgment and estimates used in preparation of the consolidated financial statements.  Some of the more critical judgments supporting the amount of 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 may be different from management’s estimates provided in the consolidated financial statements.  Refer to the portion of this discussion that addresses the allowance for loan losses for a more complete discussion of the Company’s processes and methodology for determining its allowance for loan losses.

Analysis of the Fiscal Years Ended December 31, 2007 and 2006 and 2005

Earnings Review

Overview.  For the year ended December 31, 2007, the Company’s net income was $5.9 million, or $1.18 per diluted common share, as compared to $6.2 million, or $1.27 per diluted common share, for the year ended December 31, 2006, and $3.4 million, or $0.83 per diluted common share, for the year ended December 31, 2005.  All per share data for all periods has been adjusted to reflect the 3-for-2 stock split in 2006.  The slower net interest income growth and the increase in noninterest expense contributed to the decline in the current year’s earnings. Return on average assets and return on average shareholders’ equity are key measures of earnings performance.  Return on average assets for 2007 was 1.04% compared to 1.33% in 2006 and 1.08% in 2005.  Return on average shareholders’ equity for 2007 was 12.01% verses 14.53% in 2006 and 11.37% in 2005.  The equity to assets ratio was 8.68% in 2007, 8.74% in 2006 and 9.48% in 2005.

The Company had total assets of $606.0 million at December 31, 2007, an increase of 16.5% from $520.2 million at December 31, 2006.  Total deposits increased to $464.2 million at December 31, 2007, up 11.5% from $416.4 million at December 31, 2006.

Over the past eighteen months, real estate values have stagnated or been falling nationwide, and the default rates on mortgage loans have risen.  There has been a resulting disruption in secondary markets for mortgages, especially in non-conforming loan products.  The Federal Reserve Bank has reduced short-term rates to stimulate the economy.  The Company has been affected by these events in such areas as  mortgage banking; land acquisition, development and construction lending, and consumer lending.  The Company has seen a moderate rise in delinquencies and non-performing loans during 2007, and it continues to monitor its portfolio of real estate loans closely.  In the current economic, credit and market environment, there can be no assurance that the Company’s portfolio will continue to perform at current levels.

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Net Interest Income

General.  The Company’s primary source of revenue is net interest income, which represents the difference between the income on interest-earning assets and expense on interest-bearing liabilities.  The Company’s net interest income increased $2.1 million, or 10.6%, to $22.6 million in 2007 from $20.5 million in 2006.  Net interest income increased $6.8 million in 2006 from $13.7 million in 2005.  The level of net interest income is determined by the level of earning assets and the management of the net interest margin.  The continued growth of our loan portfolio is the primary driver of the increase in net interest income.  Average total loans increased from $372.8 million in 2006 to $458.7 million in 2007.  In addition, average securities increased to $73.4 million in 2007 compared to $60.2 million in 2006.

Net interest spread, the difference between the rate earned on interest-earning assets and the rate paid on interest-bearing liabilities, was 3.63% for the year ended December 31, 2007, compared to 4.06% for the year ended December 31, 2006, and 4.13% for the year ended December 31, 2005.  The net interest margin, which is net interest income divided by average interest-earning assets, was 4.20% for the year ended December 31, 2007, 4.62% for the year ended December 31, 2006, and 4.60% for the year ended December 31, 2005.

Average Balances, Income and Expenses and Rates.  The following tables set forth, for the periods indicated, information related to our average balance sheet and average yields on assets and average rates paid on liabilities.  The yield or rates were derived by dividing income or expense by the average balance of the corresponding assets or liabilities.  The average balances are calculated from the daily balances from the periods indicated.

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	Average Balances, Income and Expenses, and Rates
	For the years ended December 31,
	2007						2006						2005
	Average		Income/Expense		Yield/		Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate		Balance		Expense		Rate
Federal funds sold, short term investments and trust preferred securities	$	6,290,203	$	319,985	5.09	%	$	10,246,774	$	485,515	4.74	%	$	4,568,208	$	140,922	3.08	%
Investment securities	73,409,038		3,722,477		5.07	%	60,213,573		2,909,457		4.83	%	42,624,049		1,841,034		4.31	%
Loans (1)	458,703,105		41,064,557		8.95	%	372,791,961		33,091,838		8.88	%	251,305,542		18,938,675		7.54	%
Total earning assets	$	538,402,346	$	45,107,019	8.38	%	$	443,252,308	$	36,486,810	8.23	%	$	298,497,799	$	20,920,631	7.01	%
Cash & Due from Banks	6,320,502						5,947,556						5,367,687
Other Assets	19,474,074						15,399,446						8,022,006
Total Assets	$	564,196,922					$	464,599,310					$	311,887,492
Interest-bearing deposits
IBCA	19,486,521		117,264		0.60	%	21,514,975		233,353		1.08	%	17,236,509		95,647		0.55	%
MMA	106,912,339		4,320,864		4.04	%	85,981,147		2,980,274		3.47	%	75,683,962		1,838,868		2.43	%
Savings	2,829,492		38,711		1.37	%	3,265,767		45,840		1.40	%	3,586,695		39,133		1.09	%
CDs < $100,000	153,730,655		7,982,414		5.19	%	122,929,041		5,796,688		4.72	%	58,899,483		1,947,919		3.31	%
CDs > $100,000	111,858,527		5,886,342		5.26	%	92,326,041		4,324,574		4.68	%	56,464,039		1,825,888		3.23	%
IRA	9,256,635		456,461		4.93	%	7,614,029		330,483		4.34	%	4,978,161		165,436		3.32	%
Total interest-
bearing deposits	$	404,074,169	$	18,802,056	4.65	%	$	333,631,000	$	13,711,212	4.11	%	$	216,848,849	$	5,912,891	2.73	%
Other borrowings	69,671,556		3,679,917		5.28	%	50,490,882		2,318,026		4.59	%	33,244,233		1,276,021		3.84	%
Total interest- bearing liabilities	$	473,745,725	$	22,481,973	4.75	%	$	384,121,882	$	16,029,238	4.17	%	$	250,093,082	$	7,188,912	2.87	%
Demand Deposits	36,102,497						33,421,935						31,113,839
Other Liabilities	5,416,265						4,402,565						1,127,407
Total Liabilities	$	515,264,487					$	421,946,382					$	282,334,328
Equity Capital	48,932,435						42,652,928						29,553,164
Total Liabilities and Equity	$	564,196,922					$	464,599,310					$	311,887,492
Net interest spread					3.63	%					4.06	%					4.14	%
Net interest income/margin			$	22,625,046	4.20	%			$	20,457,572	4.62	%			$	13,731,719	4.60	%

(1) The effect of loans in nonaccrual status and fees collected is not significant to the computations.  All loans and deposits are domestic. Includes mortgage loans held for sale.

Analysis of Changes in Net Interest Income.  The following tables set forth the impact of the varying levels of earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented. The change in net interest income from 2006 to 2007 is primarily due to the increases in volume of both loans and deposits and changes in average interest rates.

	Analysis of Changes in Net Interest Income
	For the years ended December 31,
	2007 versus 2006									2006 versus 2005
	Volume (1)			Rate (1)			Net Change			Volume (1)		Rate (1)		Net change
Federal funds sold and short term investments and trust preferred securities	$	(201,272	)	$	28,509		$	(172,763	)	$	273,071	$	76,034	$	349,105
Investment securities	669,125			155,633			824,758			846,479		212,927		1,059,406
Loans	7,691,038			277,176			7,968,214			10,785,523		3,372,145		14,157,668
Total earning assets	8,158,891			461,318			8,620,209			11,905,073		3,661,106		15,566,179
Interest-bearing deposits	3,277,805			1,813,039			5,090,844			4,799,389		2,998,932		7,798,321
Other borrowings	1,013,086			348,805			1,361,891			791,790		250,215		1,042,005
Total interest-bearing liabilities	4,290,891			2,161,844			6,452,735			5,591,179		3,249,147		8,840,326
Net interest income	$	3,868,000		$	(1,700,526	)	$	2,167,474		$	6,313,894	$	411,959	$	6,725,853

(1) Volume-rate changes have been allocated to each category proportionately based on the percentage of the total change.

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Interest Rate Sensitivity.  A significant portion of the Company’s assets and liabilities are monetary in nature, and consequently are very sensitive to changes in interest rates.  This interest rate risk is the Company’s primary market risk exposure, and it can have a significant effect on the net interest income and cash flows.  The exposure to market risk is monitored on a regular basis and is managed by the pricing and maturity of assets and liabilities to diminish the potential adverse impact that changes in interest rates could have on the net interest income.

Net interest income is also affected by other significant factors, including changes in the volume and mix of interest-earning assets and interest-bearing liabilities.  The Company performs asset/liability modeling to assess the impact of varying interest rates and the impact that balance sheet mix assumptions will have on net interest income.  Interest rate sensitivity is managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability.  Managing the amount of assets and liabilities that reprice in the same time interval helps to hedge risks and minimize the impact on net interest income in rising or falling interest rates.  The Company evaluates interest sensitivity risk and then formulates guidelines regarding asset generation and repricing, funding sources and pricing, and off-balance sheet commitments in order to decrease interest rate sensitivity risk.

The following table summarizes the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2007 that are expected to mature, prepay, or reprice in each of the future time periods shown.  Except as stated in the following tables, the Company determines the amount of assets or liabilities that mature or reprice during a particular period in accordance with the contractual terms of the asset or liability.  The Company includes adjustable rate loans in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due, and includes fixed rate loans in the periods in which the Company anticipates they will be repaid based on scheduled maturities.  Savings accounts and interest-bearing demand accounts (interest bearing checking and money market deposit accounts), which are generally subject to immediate withdrawal, are in the “Three Months or Less” category, although historical experience has proven these deposits to be more stable over the course of a year.

	Interest Sensitivity Analysis
	December 31, 2007
	Within three Months			After three but within twelve months			After one but within five years			After five years			Total
Assets
Earning assets:
Federal funds sold and short term investments	$	566,044		—			—			—			$	566,044
Investments, including FHLB,FRB, & Trust	999,800			376,870			20,917,957			48,072,666			70,367,293
Gross loans (1)	293,600,287			82,389,406			111,940,729			22,403,468			510,333,890
Total earning assets	$	295,166,131		$	82,766,276		$	132,858,686		$	70,476,134		$	581,267,227
Liabilities
Interest-bearing liabilities
Money market and interest checking	124,198,908			—			—			—			124,198,908
Regular savings deposits	2,988,881			—			—			—			2,988,881
Time deposits	91,596,216			173,445,216			38,727,575			102,613			303,871,620
FHLB advances	—			—			32,500,000			22,500,000			55,000,000
Other borrowings	11,461,859			246,643			1,842,037			4,737,609			18,288,148
Junior subordinated debentures	—			—			—			10,310,000			10,310,000
Total interest-bearing liabilities	$	230,245,864		$	173,691,859		$	73,069,612		$	37,650,222		$	514,657,557
Period gap	$	64,920,267		$	(90,925,583	)	$	59,789,074		$	32,825,912		$	66,609,670
Cumulative gap	$	64,920,267		$	(26,005,316	)	$	33,783,758		$	66,609,670
Ratio of cumulative gap to total earning assets	11.16		%	(4.47		)%	5.81		%	11.46		%	11.46		%

(1)  Unearned fees and unamortized loan origination costs totaling $425,755 are excluded from the above analysis.  Mortgage loans held for sale are included.

Allowance for Loan Losses

The allowance for loan losses was established through a provision for loan losses charged to expense on the statement of income.  The allowance for loan losses represents an amount which management believes will be adequate to absorb probable losses on existing loans that may become uncollectible.  Management’s judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove to be accurate.  The evaluation of the allowance is segregated into general

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allocations and specific allocations.  For general allocations, the portfolio is segregated into risk-similar segments for which historical loss ratios are calculated and adjusted for identified trends or changes in current portfolio characteristics.  Historical loss ratios are calculated by product type for consumer loans (installment and revolving), mortgage loans, and commercial loans and may be adjusted for other risk factors.  To allow for modeling error, a range of probable loss ratios is then derived for each segment.  The resulting percentages are then applied to the dollar amounts of the loans in each segment to arrive at each segment’s range of probable loss levels.  Certain nonperforming loans are individually assessed for impairment under SFAS No. 114 and assigned specific allocations.  Other identified high-risk loans or credit relationships based on internal risk ratings are also individually assessed and assigned specific allocations.

The general allocation also includes a component for probable losses inherent in the portfolio, based on management’s analysis that is not fully captured elsewhere in the allowance.  This component serves to address the inherent estimation and imprecision risk in the methodology as well as address management’s evaluation of various factors or conditions not otherwise directly measured in the evaluation of the general and specific allocations.  Such factors include the current general economic and business conditions; geographic, collateral, or other concentrations of credit; system, procedural, policy, or underwriting changes; experience of the lending staff; entry into new markets or new product offerings; and results from internal and external portfolio examinations.

The amount of the allowance is based on the existing circumstances each time it is evaluated.  The Company charges recognized losses and adds subsequent recoveries back to the allowance for loan losses.  There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period.

The allocation of the allowance to the respective loan segments is an approximation and not necessarily indicative of future losses or future allocations.  The entire allowance is available to absorb losses occurring in the overall loan portfolio.  In addition, the allowance is subject to examination and adequacy testing by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions, and other adequacy tests.  Such regulatory agencies could require the Company to adjust the allowance based on information available to them at the time of their examination.

At December 31, 2007, the allowance for loan losses was $6.9 million, or 1.36% of outstanding total loans, compared to an allowance for loan losses of $5.9 million, or 1.43% of outstanding total loans, at December 31, 2006.  This increase is due to growth in the loan portfolio and needs based on ongoing evaluations of credits.

Provision for Loan Losses

An allowance for loan losses is established through a provision for loan losses on the statement of income.  Management reviews the loan portfolio periodically to evaluate outstanding loans, measure the performance of the portfolio, and the adequacy of the allowance for loan losses.  The provision for loan losses was $2.0 million for 2007, $2.2 million for 2006, and $2.2 million for 2005. The provision was the result of management’s assessment of the adequacy of the reserve for possible loan losses given the size, mix, and quality of the current loan portfolio.  Please see the discussion under “Allowance for Loan Losses” for a description of the factors considered in determining the amount of the provision expensed each period.

(graph)

Nonperforming Assets

The Company discontinues accrual of interest on a loan when collection of interest from the borrower is doubtful.  Management takes into account factors such as the borrower’s financial condition, economic and business conditions, and the results of its previous collection efforts.  Generally, a delinquent loan is placed in nonaccrual status when the loan becomes 90 days or more past due.  When a loan is placed on nonaccrual status, all interest which has been accrued but not paid is reversed and it is deducted from earnings.  No additional interest is accrued on the loan balance until management concludes the collection of both principal and interest is reasonably certain.  At December 31, 2007, there were no loans accruing interest which were 90 days or more past due, and there were no restructured loans.

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	Nonperforming Assets
	(Dollars in Thousands)
	For the years ended December 31,
Nonaccrual loans	2007			2006				2005				2004				2003
Commercial	$	110		$	—			$	85			$	—			$	198
Real estate — construction	1,460			938				193				—				—
Real estate — mortgage	1,321			661				795				70				168
Consumer	12			26				38				7				—
Total	$2,903			$1,625				$1,111				$77				$366
Accruing loans which are contractually past due 90 days or more
Commercial	—			—				—				—				—
Real estate — construction	—			—				—				—				—
Real estate — mortgage	—			—				—				—				—
Consumer	—			—				—				1				—
Total	$	—		$	—			$	—			$	1			$	—
Total nonperforming loans	$	2,903		$		1,625		$		1,111		$		78		$		366
Other real estate owned	15			15				63				—				—
Total nonperforming assets	$	2,918		$	1,640			$	1,174			$	78			$	366
Total nonperforming loans to total loans	0.57		%	0.40			%	0.36			%	0.04			%	0.27			%
Total nonperforming loans to total assets	0.48		%	0.31			%	0.28			%	0.03			%	0.22			%
Total nonperforming assets to total assets	0.48		%	0.32			%	0.30			%	0.03			%	0.22			%

There were thirteen nonaccrual loans totaling $2.9 million at December 31, 2007.  Two of the nonaccrual loans totaled $1.9 million.  The larger of the two nonaccrual loans, at $1.5 million, was a commercial construction loan secured by a first real estate mortgage. The other large nonaccrual loan was a consumer real estate loan secured by a first real estate mortgage. Interest income that would have been received for the years ended December 31, 2007 and 2006 had nonaccrual loans been current in accordance with their original terms amounted to $259,958 and $145,626 respectively.  Real estate acquired through foreclosure totaled $15,000 at December 31, 2007, $15,000 at December 31, 2006, and $62,967 at December 31, 2005.  The Company did not have any real estate acquired through foreclosure during the periods ended December 31, 2004 and 2003.

Loans that are current as to principal and interest are not included in our nonperforming assets categories.  However, management will classify a current loan as a potential problem loan if there is serious doubt about the borrower’s future performance under the terms of the loan contract.  Management considers the level of potential problem loans in determining the adequacy of the allowance for loan losses. At December 31, 2007, classified loans totaled $10.3 million (substandard $5.2 million and special mention $5.1 million).  Substandard assets consist primarily of thirty-seven loans with the largest amount to any one borrower being $1.2 million.  The special mention loans consist of seventeen loans with the largest amount to any one borrower being $2.4 million.   At December 31, 2006, classified loans totaled $3.0 million (substandard $3.0 million and special mention $11,410).  Substandard assets consist primarily of thirty-four loans with the largest amount to any one borrower being $655,310.  The special mention loans consist of one loan to one borrower in the amount of $11,410.  At December 31, 2005, classified loans totaled $3.3 million, with $3.3 million classified substandard and $423,600 classified special mention.  The following table sets forth certain information with respect to the allowance for loan losses and the composition of charge-offs and recoveries for the years ended December 31, 2007 to December 31, 2003.

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	Allowance for Loan Losses
	(Dollars in Thousands)
	For the years ended December 31,
	2007			2006			2005			2004			2003
Average total loans outstanding	$	458,703		$	372,792		$	251,306		$	159,321		$	116,469
Total loans outstanding at period end	$	509,908		$	411,215		$	311,789		$	191,482		$	135,612
Total nonperforming loans	$	2,903		$	1,625		$	1,111		$	77		$	366
Above includes mortgage loans held for sale
Beginning balance of allowance	$	5,888		$	4,364		$	2,422		$	1,760		$	1,276
Loans charged-off:
Real Estate	294			307			16			126			62
Commercial	577			384			200			530			184
Consumer	114			101			64			27			2
Total loans charged-off	985			792			280			683			248
Recoveries:
Real Estate	9			128			—			—			18
Commercial	7			5			28			—			—
Consumer	21			9			10			—			1
Total recoveries	37			142			38			5			19
Net loans charged-off	948			650			242			678			229
Transfer to mortgage recourse reserve	50			—			—			—			—
Provision for loan losses	2,046			2,174			2,184			1,340			713
Balance at period end	$	6,936		$	5,888		$	4,364		$	2,422		$	1,760
Net charge-offs to average loans	0.21		%	0.17		%	0.10		%	0.43		%	0.20		%
Allowance as a percent of total loans	1.36		%	1.43		%	1.40		%	1.26		%	1.30		%
Nonperforming loans as a percentage of allowance	41.85		%	27.59		%	25.46		%	3.18		%	20.80		%

The following table sets forth the breakdown of the allowance for loan losses by loan category and the percentage of loans in each category to total loans for the periods indicated.  The allowance can be allocated by category only on an approximate basis.  The allocation of the allowance to each category is not necessarily indicative of further losses and does not restrict the use of the allowance to absorb losses in any category.

	Allocation of the Allowance for Loan Losses
	For the years ended December 31,
	2007				2006				2005				2004				2003
	Amount		% of Loans		Amount		% of Loans		Amount		% of Loans		Amount		% of Loans		Amount		% of Loans
Commercial	$	1,228	11.8	%	$	947	10.7	%	$	596	13.5	%	$	437	17.3	%	$	413	22.8	%
Real Estate Construction	1,175		12.5	%	761		10.7	%	194		8.3	%	200		8.5	%	61		6.0	%
Real Estate Mortgage	4,335		74.0	%	3,832		76.7	%	2,023		75.8	%	1,041		70.5	%	706		66.2	%
Consumer	167		1.7	%	146		1.9	%	102		2.4	%	128		3.7	%	97		5.0	%
Unallocated	31		—		202		—		1,449		—		616		—		483		—
Total allowance for loan losses	$	6,936	100.00	%	$	5,888	100.00	%	$	4,364	100.0	%	$	2,422	100.0	%	$	1,760	100.0	%

Noninterest Income and Expense

Noninterest Income.  Noninterest income increased to $7.6 million for the year ended December 31, 2007, up 92.5% from $3.9 million for the year ended December 31, 2006.  Noninterest income increased 252.5% from $1.1 million in 2005 to $3.9 million in 2006.  The increase in noninterest income is related primarily to the income from our mortgage lending division that we added in June 2006.  Prior to 2006, income from mortgage lending represented referral fees on mortgage loans where the Bank was acting as an agent for a third party originator.  With the formation of the Company’s mortgage lending division during the second quarter of 2006, revenues from mortgage operations

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increased dramatically. This accounts for the sequential, year over year increases in mortgage production income for each of 2007 and 2006.

Other income increased 130.2% to $1,265,194 in 2007 from $549,366 in 2006, and increased 157.1% from $213,775 in 2005.  The increase in 2007 relates to lease income on the Company’s new headquarters building in 2007.  Gain on sale of fixed assets was $6,324, $583,011, and $142 for 2007, 2006, and 2005, respectively.  The increase in 2006 is due to a one-time gain of $581,711 on the sale of the bank’s former main office in June 2006.  Merchant income increased from $17,806 in 2005 to $164,229 in 2006, and to $665,811 in 2007. The increase in 2006 and 2007 related to the launch of merchant credit card processing and the issuance of credit cards in the bank’s name.  Prior to this issuance, the bank offered credit cards through a third party.

(graph)

Noninterest Expense.  Noninterest expense totaled $18.9 million for the year ended December 31, 2007, up from $12.5 million for 2006 and $7.5 million for the year ended December 31, 2005.  As a percentage of total assets, our total noninterest expenses increased from 1.90% in 2005 to 2.41% in 2006 and to 3.12% in 2007.  The increase in total noninterest expenses and noninterest expenses as a percentage of total assets relates to 1) the formation of the company’s mortgage division during the second quarter of 2006, 2) the launching of merchant credit card processing, and 3) the continued growth of assets as the result of expansion of the company’s branch network. 2007 noninterest expenses reflect a full year of operation of the mortgage division, while 2006 results reflect less than a full year of operation. As a result of organic growth through branch expansion, total assets grew by 16.49% during 2007 and 30.9% during 2006.

(graph)

Salaries and wages and employee benefits, the largest component of noninterest expense, increased by $2.2 million to $9.4 million during 2007, and by $3.1 million to $7.2 million during 2006.  The principal reason for the increase in 2007 and 2006 is the start-up of the Company’s mortgage division during the second quarter of 2006, coupled with headcount increases related to the growth of the bank, normal compensation adjustments, and higher costs associated with group benefits.

The Company had 152, 119, and 66 full-time equivalent employees at the end of 2007, 2006, and 2005, respectively.  The increase during the three year period relates to the start-up of the mortgage lending division during the second quarter of 2006, and, to a lesser extent, the growth in branch and administrative staffing due to the volume increase in core banking functions.

Advertising and public relations expenses were $615,552, $387,056, and $295,509 for 2007, 2006, and 2005, respectively.  The increase in advertising and public relations expense during the three year period relates to the start-up of the mortgage lending division, special promotions to attract deposits in all of the Company’s markets, and the use of a professional advertising agency commencing in 2006 to develop and promote the Company’s brand.

Professional fees were $725,122, $311,627 and $327,130 for 2007, 2006, and 2005, respectively.  Professional fees continue to grow due to the growth in size and complexity of the Company, the regulatory fees associated with such growth, and the escalating cost of accounting, auditing, and legal services related to being a public company, including expenses directly related to Sarbanes-Oxley (SOX) compliance.  2007 was the first year management reports on the Company’s internal control over financial reporting under SOX and it required additional work to be performed by the external auditors.

Occupancy costs for the year ended December 31, 2007 were $1.7 million, compared to $1.1 million in 2006 and $0.7 million in 2005. The increase during the three year period relates to the addition of facilities associated with the mortgage operations, increases on leases, and the expense associated with the new corporate headquarters.  As the Company continues to expand, occupancy costs will continue to increase.

Data processing fees increased in 2007 to $748,446 from $547,747 in 2006 and $455,646 in 2005.  Data processing costs are primarily related to the volume of loan and deposit accounts and associated transaction activity. The Company enhanced the security features on internet banking products in addition to upgrading security measures for internal and external systems.  In 2007, the Company signed an agreement with its existing data processing outsourcer to change operating systems in 2008 to expand features and functionality in order to attract and retain customers.

The increase in mortgage production related expenses during the three year period relates primarily to credit and collection charges and other operating expenses in the mortgage operation which was established during the second quarter of 2006. The increase in merchant processing expenses relate to the launch of merchant credit card processing commencing in 2006.

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Total other operating expenses increased 45% to $2.7 million in 2007 from $1.8 million in 2006.  Total other operating expenses increased 75% to $1.8 million in 2006 from $1.1 million in 2005.  The increase during the three year period relates to the continued growth of assets as the result of expansion of the company’s balance sheet.  The following table presents a comparison of other operating expenses by expense category:

	For the years ended December 31,
	2007		2006		2005
Telephone	$	144,924	$	84,081	$	57,138
Postage	99,733		73,884		59,651
Armored car	91,508		86,482		78,143
Credit and collection-bank	146,073		187,741		66,973
Dues and subscriptions	136,788		117,976		83,733
Travel	259,456		189,603		114,310
Entertainment	362,261		106,137		50,940
FDIC insurance	166,240		41,037		30,565
Other insurance	70,542		44,898		34,916
Debit/ATM	96,721		77,871		66,249
Credit card processing fees	49,794		63,043		—
Federal Reserve charges	43,870		38,209		33,240
Software maintenance	127,579		61,610		32,607
Director Supplemental Retirement Plan	118,972		137,289		78,013
NASDAQ	65,940		24,500		14,292
Furniture and equipment	297,781		427,015		163,951
Other operating expenses	402,761		86,602		88,292
Total	$	2,680,943	$	1,847,978	$	1,053,013

Income Taxes.  Total income tax expense included in the Consolidated Statements of Income was $3.5 million in 2007, $1.8 million in 2006, and $0.8 million in 2005.  The Company’s effective tax rates were 36% for 2007, 36% for 2006, and 34% for 2005.

Financial Condition

General.  Total assets were $606.0 million at December 31, 2007, an increase of 16.5% from $520.2 million at December 31, 2006.  Total assets consisted primarily of $503.0 million in net loans, including loans HFS, and $65.6 million in investments.  Liabilities at December 31, 2007, totaled $553.4 million, consisting primarily of $464.2 million in deposits and $55.0 million in Federal Home Loan Bank (FHLB) advances.  Total deposits increased to $464.2 million at December 31, 2007, up 11.5% from $416.4 million at December 31, 2006.  Shareholders’ equity increased $7.1 million to $52.6 million at December 31, 2007, as compared to $45.5 million at December 31, 2006.

Investment Securities.  Investment securities averaged $69.3 million and $60.2 million for the years ended December 31, 2007 and 2006, respectively, representing 12.9% of average earning assets in 2007 and 13.6% in 2006.  At December 31, 2007, the total portfolio had a book value of $66.1 million, and a market value of $65.7 million, for an unrealized net loss of $442 thousand.  This compares to a market value of $68.5 million at December 31, 2006, and $44.0 million at December 31, 2005.

	Investment Securities
	For the years ended December 31,
	2007		2006		2005
Government Sponsored Enterprises	$	64,055,391	$	67,578,399	$	43,873,698
Federal Agencies	65,022		80,132		102,178
Other	1,557,580		816,000		—
Total investment securities	65,677,993		68,474,531		43,975,876
Other	4,379,300		3,459,600		2,545,400
Total investments	$	70,057,293	$	71,934,131	$	46,521,276

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At December 31, 2007, Federal Funds sold and short term investments totaled $566,044 compared with $14.0 million at December 31, 2006.  The funds are generally invested in maturities of six months or less in federal funds or other financial institutions.

Contractual maturities and yields on the investment securities (all available for sale) at December 31, 2007 are set forth on the following tables based on market values.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.  Investment securities are generally invested in government sponsored enterprises and mortgage backed securities with an average life of six years or less.

	Investment Securities Maturity Distribution and Yields
	December 31, 2007
	Less than one year				After one year through five years				After five years through ten years				After ten years
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
Government Sponsored Enterprises	$	1,376,670	4.55	%	$	20,917,957	4.56	%	$	15,152,189	5.26	%	$	26,608,575	4.95	%
Federal Agencies	—		—		—		—		—		—		65,022		4.92	%
Other	—		—		—		—		—		—		5,936,880		6.09	%
Total	$	1,376,670	4.55	%	$	20,917,957	4.56	%	$	15,152,189	5.26	%	$	32,610,477	5.16	%

Loans.  Loans are the largest component of earning assets and typically provide higher yields than other types of earning assets.  During 2007, loans represented 85.2% of average earning assets, representing a small increase from the 84.1% that they represented during 2006.  At December 31, 2007, net loans, which are gross loans less the allowance for loan losses and deferred loan fees plus mortgage loans held for sale (HFS), totaled $503.0 million, an increase of $97.6 million, or 24.1%, from December 31, 2006.  Average gross loans, including HFS loans, increased 23.0% from $372.8 million with a yield of 8.88% in 2006 to $458.7 million with a yield of 8.95% in 2007.  Average gross loans increased from $251.3 million with a yield of 7.54% in 2005.  The increase in yield on loans was due to the increasing interest rate environment in 2005 and 2006.  Variable rate loans make up approximately 53% of our loan portfolio compared to 47% in fixed rates.  The interest rates charged on loans vary with the degree of risk and the maturity and amount of the loan.  Competitive pressures, money market rates, availability of funds, and government regulations also influence interest rates.

Mortgage loans constitute the principal component of our loan portfolio.  Mortgage loans represented 74.0%, 76.7%, and 75.8% of the portfolio at year end 2007, 2006, and 2005, respectively.  In the context of this discussion, a “real estate mortgage loan” is defined as any loan, other than loans for construction purposes, secured by real estate, regardless of the purpose of the loan.  We follow the common practice of financial institutions of obtaining a security interest in real estate whenever possible, in addition to any other available collateral.  The collateral is taken to enhance the likelihood of the ultimate repayment of the loan and tends to increase the size of our real estate loan portfolio component.  Generally, the Company limits the loan-to-value ratio to 80%.  The Company attempts to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentrations of collateral.

The following table shows the composition of the loan portfolio, including loans HFS, by category at December 31, for the years indicated.

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	Composition of Loan Portfolio (Dollars in Thousands)
	For the years ended December 31,
	2007					2006					2005					2004					2003
	Amount			% of Total		Amount			% of Total		Amount			% of Total		Amount			% of Total		Amount			% of Total
Commercial	$	60,376		11.8	%	$	43,975		10.7	%	$	42,183		13.5	%	$	33,031		17.2	%	$	30,941		22.8	%
Real estate — construction	63,988			12.5	%	44,033			10.7	%	25,846			8.3	%	16,255			8.5	%	8,157			6.0	%
Real estate — mortgage (1)	377,465			74.0	%	315,689			76.7	%	236,539			75.8	%	134,978			70.4	%	89,723			66.0	%
Consumer	8,505			1.7	%	7,784			1.9	%	7,488			2.4	%	7,554			3.9	%	7,066			5.2	%
Loans, gross	$	510,334		100.0	%	$	411,481		100.0	%	$	312,056		100.0	%	$	191,818		100.0	%	$	135,887		100.0	%
Deferred loan fees	(425		)			(266		)			(268		)			(336		)			(275		)
Allowance for loan losses	(6,936		)			(5,888		)			(4,364		)			(2,422		)			(1,760		)
Loans, net	$	502,973				$	405,327				$	307,424				$	189,060				$	133,852

(1) Includes mortgage loans held for sale.

The following tables set forth the maturity distribution, classified according to sensitivity to changes in interest rates, for selected components of the loan portfolio as of December 31, 2006.  The information in this table is based on the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity.  Renewal of these loans is subject to review and credit approval, as well as modification of terms upon their maturity.  Actual repayments of loans may differ from maturities reflected above because borrowers may have the right to prepay obligations with or without prepayment penalties.

	Loan Maturity Schedule and Sensitivity to Changes in Interest Rates (Includes mortgage loans held for sale)
	December 31, 2007
	One year or less		After one but within five years		After five years		Total
Commercial	$	24,238,209	$	21,511,922	$	14,625,974	$	60,376,105
Real estate mortgage	166,717,355		166,330,404		41,786,409		374,834,168
Real estate construction	34,224,738		29,763,435		—		63,988,173
Consumer	3,977,385		4,328,451		177,949		8,483,785
Total from maturity schedules	229,157,687		221,934,212		56,590,332		507,682,231
Loans in process	2,651,659		—		—		2,651,659
Total	$	231,809,346	$	221,934,212	$	56,590,332	$	510,333,890

Loans maturing after one year with fixed interest rates totaled $132,670,919, and variable interest rates totaled $1,673,278 as of December 31, 2007.

Funding Sources

Deposits and Other Interest-Bearing Liabilities.  Average total deposits were $440.2 million in 2007, up 20.0% from $367.0 million in 2006.  Average interest-bearing deposits were $404.1 million in 2007, up 53.9% from $333.6 million in 2006.  These increases were primarily a result of the continued expansion of the Company.  Deposit growth was attributable to internal growth and the generation of new deposit accounts due primarily to special promotions and increased advertising.  Interest bearing checking accounts increased primarily due to a change mandated in 2005 by the South Carolina Bar Association requiring that all lawyer trust accounts be interest bearing.  This created a shift from demand deposit accounts to interest bearing checking accounts.

Core deposits, which exclude certificates of deposit of $100,000 or more and brokered deposits, provide a relatively stable funding source for the loan portfolio and other earning assets.  Core deposits were $275.2 million at December 31, 2007, a slight decrease of 3.2% compared to $284.4 million at December 31, 2006.  A stable base of deposits continues to be the Company’s primary source of funding to meet both short-term and long-term liquidity needs.  Core deposits as a percentage of total deposits were approximately 59.2% at December 31, 2007 and 68.3% at December 31,

19

2006.  The loan-to-deposit ratio was 108.4% at December 31, 2007 versus 97.4% at December 31, 2006.  The average loan-to-deposit ratio was 104.2% during 2007 and 101.6% during 2006.

The following table sets forth deposits by category as of December 31, of each respective year.

	Deposits by Category For the years ended December 31,
	2007				2006				2005				2004				2003
	Amount		% of Deposits		Amount		% of Deposits		Amount		% of Deposits		Amount		% of Deposits		Amount		% of Deposits
Noninterest bearing demand	$	33,138,936	7.1	%	$	37,194,469	8.9	%	$	31,152,603	10.0	%	$	32,540,139	16.0	%	$	23,454,124	17.0	%
Interest bearing demand	20,377,754		4.4	%	21,336,836		5.1	%	22,235,452		7.2	%	7,770,363		3.8	%	5,024,410		3.6	%
Money market accounts	103,821,154		22.4	%	103,056,865		24.8	%	70,090,021		22.5	%	65,912,428		32.4	%	22,074,665		16.0	%
Savings accounts	2,988,881		0.6	%	3,303,763		0.8	%	3,639,178		1.2	%	3,003,904		1.5	%	2,777,278		2.0	%
Time deposits < $100,000	161,038,254		34.7	%	154,191,755		37.0	%	100,390,284		32.3	%	46,751,575		23.1	%	48,988,982		35.5	%
Time deposits > $100,000	142,833,366		30.8	%	97,273,441		23.4	%	83,386,672		26.8	%	47,190,549		23.2	%	35,780,108		25.9	%
Total deposits	$	464,198,345	100.0	%	$	416,357,129	100.0	%	$	310,894,210	100.0	%	$	203,168,958	100.0	%	$	138,099,567	100.0	%

The following table sets forth deposits by category with the average balance and the average rate paid for each category.  All deposits are domestic.

	Average Balances and Rates
	(Dollars in thousands)
	For the years ended December 31,
	2007				2006				2005				2004				2003
	Amount		Rate		Amount		Rate		Amount		Rate		Amount		Rate		Amount		Rate
Noninterest bearing demand	$	36,102	—	%	$	33,422	—	%	$	31,114	—	%	$	27,060	—	%	$	19,261	—	%
Interest bearing demand	19,487		0.60	%	21,515		1.08	%	17,236		0.55	%	6,182		0.35	%	4,869		0.45	%
Money market accounts	106,912		4.04	%	85,981		3.47	%	75,684		2.43	%	38,956		1.76	%	22,440		1.40	%
Savings accounts	2,829		1.37	%	3,266		1.40	%	3,587		1.09	%	3,169		0.80	%	3,074		0.82	%
Time deposits		274,847	5.21	%		222,869	4.69	%		120,342	3.27	%		91,396	2.36	%		72,088	2.62	%
Total	$	440,177			$	367,053			$	247,963			$	166,763			$	121,732

20

As of December 31, 2007, time deposits greater than $100,000 that matured within three months were $56.5 million, those over 3 months through 12 months were $76.6 million and time deposits greater than $100,000 that had a maturity greater than 12 months were $9.7 million.

Due to the seasonal nature of our market areas, deposit growth is strong during the summer months and loan demand usually reaches its peak during the winter months.  Thus, the Company historically has a more favorable liquidity position during the summer months.  To meet loan demand and liquidity needs during the winter months, the Company typically offers rate specials on deposits.  Deposit growth during the summer months is invested in temporary investments and short-term securities.  Additionally, the Company has access to other funding sources including federal funds purchased from correspondent banks, a line of credit with the Federal Home Loan Bank (FHLB), and a seasonal line of credit with the Federal Reserve Discount Window.

Borrowings.  Total borrowings outstanding at December 31, 2007 were $83.5 million, at December 31, 2006 were $55.0 million, and at December 31, 2005 were $45.8 million.  Short-term borrowings were $11.3 million at December 31, 2007 and $0.0 at each of December 31, 2006 and 2005.  During 2007, average short-term borrowings were $3.6 million compared to $5.5 million in 2006 and $0.0 million in 2005.  The maximum outstanding short-term borrowings during any month-end period for 2007, 2006, and 2005 were $13.5 million, $8.9 million and $3.7 million, respectively.  Long-term borrowings aggregated $72.2 million, $55.0 million, and $45.8 million at December 31, 2007, 2006, and 2005, respectively.  Average long-term borrowings were $66.0 million, $49.4 million, and $33.2 million for 2007, 2006, and 2005, respectively.  At December 31, 2007, the borrowings included $55.0 million of advances from the FHLB, $10.3 million of junior subordinated debentures, and $7.0 million of indebtedness on the main office building.  At December 31, 2006, there was $37.5 million of FHLB advances, $10.3 million of junior subordinated debentures, and $7.2 million of indebtedness on our main office building.  At December 31, 2005, there was $34.0 million of FHLB advances, $10.3 million of junior subordinated debentures, and $1.5 million of indebtedness on our main office building.  Funds were obtained from the FHLB to fund loan growth.  For more information on borrowings, refer to Notes 8 and 9 of the Notes to the Consolidated Financial Statements.

Junior Subordinated Debt

The average and period end balances of the junior subordinated debt totaled $10.3 million in both 2007 and 2006.  The maximum amount outstanding during any month-end period at December 31, 2007 was $10.3 million with an average rate of 7.78%. At December 31, 2006, the maximum outstanding during any month-end period was $10.3 million with an average rate of 7.49%.

The trust preferred securities accrue and pay distributions annually at a rate per annum equal to the three month LIBOR plus 270 and 190 basis points, respectively, which was 7.85% and 7.59% at December 31, 2007.  The distribution rate payable on these securities is cumulative and payable quarterly in arrears.  The Company has the right, subject to events of default, to defer payments of interest on the trust preferred securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity dates of May 27, 2034 and March 30, 2035, respectively.  The Company has no current intention to exercise its right to defer payments of interest on the trust preferred securities.  The Company has the right to redeem the trust preferred securities, in whole or in part, on or after May 27, 2009 and March 30, 2010, respectively.  The trust preferred securities can be redeemed prior to such dates upon occurrence of specified conditions and the payment of a redemption premium.

Debt issuance costs, net of accumulated amortization, from the junior subordinated debentures totaled $33,943 at December 31, 2007, $41,067 at December 31, 2006, and $45,740 at December 31, 2005.  These costs are included in other assets on the Consolidated Balance Sheets.  Amortization of debt issuance costs from trust preferred debt totaled $5,005 during 2007, $4,588 during 2006, and $3,962 during 2005, and is reported in noninterest expenses on the Consolidated Statements of Income.

Capital Standards and Regulatory Matters

The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%.  Under the capital adequacy guidelines, regulatory capital is classified into two tiers.  These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets.  Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets.  In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type of asset.  Tier 2 capital consists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations.  The Company is also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.  The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  To be considered “well-capitalized,” total risk-based capital must be at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.

21

On June 14, 2005, the Company closed the sale of 1,150,000 shares of our common stock at $18.75 per share in underwritten offering managed by Sandler O’Neill & Partners, L.P.  The Company received net proceeds from the offering of approximately $20 million after deducting underwriting discounts and expenses.  The net proceeds were used for general corporate purposes, which included, among other things, providing additional capital to the Bank to support its growth.

(graph)

At December 31, 2007, total shareholders’ equity was $52.6 million ($53.0 million at the Bank level).  At December 31, 2007, the Company’s Tier 1 capital ratio was 12.7% (10.9% at the Bank), the total risk-based capital ratio was 14.0% (12.2% at the Bank), and the Tier 1 leverage ratio was 11.2% (9.2% at the Bank).  The Bank was considered “well-capitalized” and the Company met or exceeded its applicable regulatory capital requirements.

Liquidity Management

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 sources and uses of funds in order to meet 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 the 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.

The Company’s primary sources of liquidity are deposits, scheduled repayments on its loans, unused borrowing lines, and interest on and maturities of our investments.  The Company meets future cash needs through the liquidation of temporary investments and the generation of deposits.  All securities have been classified as available for sale.  Occasionally, the Company may sell investment securities in connection with the management of its interest sensitivity gap or to manage its liquidity.  The Company has the ability, on a short-term basis, to purchase federal funds from other financial institutions.  Arrangements are in place for $18.8 million in short-term unsecured advances, $13.0 million secured advances, and a line of credit with the FHLB to borrow up to 80% of our 1 to 4 family loans, resulting in an availability of funds of $7.7 million at December 31, 2007.  The FHLB has approved borrowings up to 15% of the Bank’s total assets less advances outstanding.  The borrowings are available by pledging additional collateral and purchasing FHLB stock.  At December 31, 2007, FHLB borrowings totaled $55.0 million.  The Company believes the liquidity needs for the next twelve months can be met by the existing stable base of core deposits, the bond portfolio, loan maturities, borrowings from the FHLB, and short-term credit lines.

Interest Rate Sensitivity

A significant portion of the Company’s assets and liabilities are monetary in nature, and consequently are very sensitive to changes in interest rates.  This interest rate risk is the Company’s primary market risk exposure, and it can have a significant effect on the net interest income and cash flows.  The Company reviews exposure to market risk on a regular basis, and manages the pricing and maturity of assets and liabilities to diminish the potential adverse impact that changes in interest rates could have on net interest income.

The Company actively monitors and manages interest rate risk exposure principally by measuring the interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time.  A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities, and it is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets.  An asset sensitive position, or a positive, interest rate gap, would generally benefit from increasing market interest rates.  A liability-sensitive, or a negative, interest rate gap would generally benefit from decreasing market interest rates.  When measured on a “gap” basis, the Company is asset-sensitive in the one-three month and liability-sensitive over the cumulative one-year time frame as of December 31, 2007.  However, the gap analysis is not a precise indicator of the Company’s interest sensitivity position.  The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally.  For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but we believe those rates are significantly less interest-sensitive than market-based rates such as those paid on non-core deposits.

Net interest income is also affected by other factors, including how quickly interest rates change and changes in the volume and mix of interest-earning assets and interest-bearing liabilities.  The Company performs asset/liability modeling to assess the impact of varying interest rates and the impact that balance sheet mix assumptions will have on net interest income.  The Company attempts to manage interest rate sensitivity by matching maturities of assets and liabilities, repricing assets or liabilities, selling securities available-for-sale, or adjusting the interest rate paid or received during the life of an asset or liability.  Actively managing the amount of assets and liabilities that reprice in the same time interval helps to minimize the impact on net interest income in a rising or falling interest rates environment. 

22

The Company evaluates its interest sensitivity risk and formulates guidelines regarding asset generation, liquidity, funding sources, and off-balance sheet commitments in order to decrease interest rate sensitivity risk.

Off-Balance Sheet Risk

The Bank makes contractual commitments to extend credit in the ordinary course of its business activities.  These commitments are legally binding agreements to lend money to customers at predetermined interest rates for a specified period of time.  Each customer’s credit worthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on the credit evaluation of the borrower.  Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate.  The Bank manages the credit risk on commitments by subjecting them to normal underwriting and risk management processes.

At December 31, 2007, the Bank had issued commitments to extend credit of $48.3 million through various types of lending arrangements.  The commitments expire over the next 18 months.  Past experience indicates that many of these commitments to extend credit will expire unused.  The Company believes adequate sources of liquidity are available to fund commitments that are drawn upon by the borrowers.

In addition to commitments to extend credit, the Bank also issue standby letters of credit which are assurances to a third party that they will not suffer a loss if the customer fails to meet its contractual obligation to the third party.  Standby letters of credit totaled $13.2 million at December 31, 2007.  Past experience indicates that many of these standby letters of credit will expire unused.  The Company believes adequate sources of liquidity are available to fund these obligations, if necessary.

Except as disclosed in this report, The Company is not involved in off-balance sheet contractual relationships, unconsolidated related entities with off-balance sheet arrangements, or transactions that could result in liquidity needs or other commitments or significantly impact earnings.

Impact of Inflation

The effect of relative purchasing power over time due to inflation has not been taken into account in the consolidated financial statements.  Rather, the financial statements have been prepared on an historical cost basis in accordance with generally accepted accounting principles.

The Company’s and the Bank’s assets and liabilities, unlike most companies, are primarily monetary in nature.  Therefore, interest rates have a more significant impact on its performance than do the effects of changes in the general rate of inflation and changes in prices.  In addition, interest rates do not necessarily move with the same magnitude as the prices of goods and services.  As discussed previously, the Company seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation.

23

Report on Management’s Assessment of Internal Control Over Financial Reporting

Beach First National Bancshares, Inc. is responsible for the preparation, integrity, and fair presentation of the financial statements included in this annual report. The financial statements and notes have been prepared in conformity with United States generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgments.

As management of Beach First National Bancshares, Inc., we are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

Management assessed the system of internal control over financial reporting as of December 31, 2007, in relation to criteria for effective internal control over financial reporting as described in “Internal Control—Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concludes that, as of December 31, 2007, its system of internal control over financial reporting is effective and meets the criteria of the “Internal Control—Integrated Framework.”  Elliott Davis LLC, independent registered public accounting firm, has issued an attestation report on the effectiveness of internal control over financial reporting.

/s/ Walt Standish	/s/ Gary S. Austin
Walter E. Standish, III	Gary S. Austin
President and	Executive Vice President and
Chief Executive Officer	Chief Financial Officer
Myrtle Beach, South Carolina
March 11, 2008

Report of Independent Registered Public Accounting Firm

Board of Directors

Beach First National Bancshares, Inc.

Myrtle Beach, South Carolina

We have audited Beach First National Bancshares, Inc. (the Company) and Subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria established in “Internal Control—Integrated Framework”, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report on Management’s Assessment of Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audit also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

24

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Beach First National Bancshares, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in “Internal Control—Integrated Framework”, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Beach First National Bancshares, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in shareholders’ equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 2007 and our report dated March 11, 2008 expressed an unqualified opinion.

/s/ Elliott Davis, LLC

Elliott Davis, LLC

Columbia, South Carolina

March 11, 2008

Report of Independent Registered Public Accounting Firm

Board of Directors

Beach First National Bancshares, Inc.

Myrtle Beach, South Carolina

We have audited the consolidated balance sheets of Beach First National Bancshares, Inc. (the Company) and Subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in shareholders’ equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 2007.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Beach First National Bancshares, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Beach First National Bancshares, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria established in “Internal Control—Integrated Framework”, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 11, 2008 expressed an unqualified opinion on the effectiveness of Beach First National Bancshares, Inc. and Subsidiaries’ internal control over financial reporting.

/s/ Elliott Davis, LLC

Elliott Davis, LLC

Columbia, South Carolina

March 11, 2008

25

Beach First National Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

	December 31,
	2007			2006
Assets
Cash and due from banks	$	4,992,634		$	5,198,945
Federal funds sold and short term investments	566,044			14,010,667
Investment securities	65,677,993			68,474,531
Loans, net	496,496,900			392,848,582
Mortgage loans held for sale	6,475,619			12,478,222
Federal Reserve Bank stock	984,000			984,000
Federal Home Loan Bank stock	3,395,300			2,475,600
Property and equipment, net	15,746,143			14,344,330
Cash value of life insurance	3,554,807			3,424,586
Investment in BFNB Trusts	310,000			310,000
Other assets	7,788,978			5,651,876
Total assets	$	605,988,418		$	520,201,339
Liabilities and shareholders’ equity
Liabilities
Deposits
Noninterest bearing	$	33,138,936		$	37,194,469
Interest bearing	431,059,409			379,162,660
Total deposits	464,198,345			416,357,129
Advances from Federal Home Loan Bank	55,000,000			37,500,000
Federal funds purchased and other borrowings	18,288,148			7,209,820
Junior subordinated debentures	10,310,000			10,310,000
Other liabilities	5,613,875			3,364,811
Total liabilities	553,410,368			474,741,760
Commitments and contingencies
Shareholders’ equity
Common stock, $1 par value, 10,000,000 shares authorized, 4,845,018 shares issued and outstanding at December 31, 2007 and 4,768,413 at December 31, 2006	4,845,018			4,768,413
Paid-in capital	29,494,912			28,657,576
Retained earnings	18,583,425			12,706,795
Accumulated other comprehensive loss	(345,305		)	(673,205		)
Total shareholders’ equity	52,578,050			45,459,579
Total liabilities and shareholders’ equity	$	605,988,418		$	520,201,339

The accompanying notes are an integral part of these consolidated financial statements.

26

Beach First National Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

	For the years ended December 31,
	2007		2006			2005
Interest income
Loans and fees on loans	$	41,064,557	$	33,091,838		$	18,938,675
Investment securities	3,698,507		2,886,528			1,825,174
Federal funds sold and short term investments	319,985		485,515			140,922
Other	23,970		22,929			15,860
Total interest income	45,107,019		36,486,810			20,920,631
Interest expense
Deposits	18,802,056		13,711,212			5,912,891
Advances from FHLB, federal funds purchased and other borrowings	2,877,462		1,546,286			747,209
Junior subordinated debentures	802,455		771,740			528,812
Total interest expense	22,481,973		16,029,238			7,188,912
Net interest income	22,625,046		20,457,572			13,731,719
Provision for loan losses	2,045,600		2,174,400			2,184,000
Net interest income after provision for loan losses	20,579,446		18,283,172			11,547,719
Noninterest income
Service fees on deposit accounts	568,760		514,285			549,689
Mortgage production related income	4,911,705		2,039,829			249,757
Merchant income	665,811		164,229			17,806
Gain on sale of investment securities	7,904		(57,276		)	(3,935		)
Income from cash value life insurance	152,086		143,717			89,809
Gain on sale of fixed assets	6,324		583,011			142
Other income	1,265,194		549,566			213,755
Total noninterest income	7,577,784		3,937,361			1,117,023
Noninterest expenses
Salaries and wages	7,760,272		6,018,633			3,371,922
Employee benefits	1,646,093		1,138,653			675,496
Supplies and printing	199,977		126,705			101,889
Advertising and public relations	615,552		387,056			295,509
Professional fees	725,122		311,627			327,130
Depreciation and amortization	1,060,255		518,551			539,406
Occupancy	1,719,491		1,065,091			724,313
Data processing fees	748,446		547,747			455,646
Mortgage production related expense	1,153,246		392,762			—
Merchant processing	623,947		167,866			—
Other operating expenses	2,680,943		1,847,978			1,053,013
Total noninterest expenses.	18,933,344		12,522,669			7,544,324
Income before income taxes.	9,223,886		9,697,864			5,120,418
Income tax expense	3,347,256		3,502,136			1,760,775
Net income	$	5,876,630	$	6,195,728		$	3,359,643
Basic net income per common share	$	1.22	$	1.30		$	0.85
Diluted net income per common share	$	1.18	$	1.27		$	0.83
Weighted average common shares outstanding:
Basic	4,817,911		4,764,072			3,975,864
Diluted	4,977,067		4,874,562			4,059,865

The accompanying notes are an integral part of these consolidated financial statements.

27

Beach First National Bancshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss)

										Accumulated
										Other			Total
	Common Stock			Paid-in			Retained			Comprehensive			Shareholders’
	Shares	Amount		Capital			Earnings			Income (Loss)			Equity
Balance, December 31, 2004	2,013,508	$	2,013,508	$	11,335,982		$	3,153,939		$	(170,467)		$	16,332,962
Net income	—	—		—			3,359,643			—			3,359,643
Other comprehensive, income, net of taxes:
Unrealized loss on investment securities	—	—		—			—			(548,100		)	(548,100		)
Plus reclassification adjustments for losses included in net income	—	—		—			—			2,597			2,597
Comprehensive income	—	—		—			—			—			2,814,140
Exercise of stock options	6,450	6,450		37,863			—			—			44,313
Issuance of common stock	1,150,000	1,150,000		18,783,998			—			—			19,933,998
Balance, December 31, 2005	3,169,958	3,169,958		30,157,843			6,513,582			(715,970		)	39,125,413
Net income	—	—		—			6,195,728			—			6,195,728
Other comprehensive, income, net of taxes:
Unrealized gain on investment securities	—	—		—			—			6,108			6,108
Plus reclassification adjustments for losses included in net income	—	—		—			—			36,657			36,657
Comprehensive income	—	—		—			—			—			6,238,493
Exercise of stock options	13,575	13,575		84,613			—						98,188
Issuance of common stock 3-for-2 stock split	1,584,880	1,584,880		(1,584,880		)	(2,515		)	—			(2,515		)
Balance, December 31, 2006	4,768,413	4,768,413		28,657,576			12,706,795			(673,205		)	45,459,579
Net income	—	—		—			5,876,630			—			5,876,630
Other comprehensive, income, net of taxes:
Unrealized gain on investment securities	—	—		—			—			386,592			386,592
Plus reclassification adjustments for gains included in net income	—	—		—			—			(5,375		)	(5,375		)
Unrealized loss on interest rate swap	—	—		—			—			(53,317		)	(53,317		)
Comprehensive income													6,204,530
Stock-based compensation expense	—	—		7,643			—			—			7,643
Exercise of stock options	76,605	76,605		829,693			—			—			906,298
Balance, December 31, 2007	4,845,018	$	4,845,018	$	29,494,912		$	18,583,425		$	(345,305	)	$	52,578,050

The accompanying notes are an integral part of these consolidated financial statements.

28

Beach First National Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

	For the years ended December 31,
	2007			2006			2005
Operating activities
Net income	$	5,876,630		$	6,195,728		$	3,359,643
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	1,060,255			518,551			539,406
Proceeds from sale of mortgages held for sale	231,970,200			93,107,365			—
Disbursements for mortgages held for sale	(225,967,597		)	(105,251,847		)	—
Discount accretion and premium amortization	(153,431		)	(79,569		)	(45,404		)
Deferred income taxes	(673,024		)	(634,250		)	23,781
Provision for loan loss	2,045,600			2,124,400			2,184,000
Recourse reserve provision	205,000			50,000			—
Gain on sale of property and equipment	(6,324		)	(583,011		)	—
Loss (gain) on sale of investment securities	(7,904		)	57,276			3,935
Investment in Beach First National Trusts	—			—			(310,000		)
Stock based compensation expense	7,643			—			—
Increase in other assets	(1,713,779		)	(1,672,997		)	(917,049		)
Increase in other liabilities	1,994,064			1,809,209			621,177
(Gain) loss on sale of other real estate owned	(99,267		)	6,031			—
Net cash provided by (used in) operating activities	14,538,066			(4,353,114		)	5,459,489
Investing Activities
Proceeds from paydowns of investment securities	4,988,852			4,180,510			—
Proceeds from sale of investment securities	8,623,625			4,473,361			6,148,824
Purchase of investment securities	(10,077,003		)	(33,065,437		)	(14,707,381		)
Purchase of FHLB stock	(919,700		)	(464,200		)	(941,200		)
Purchase of Federal Reserve stock	—			(450,000		)	(225,000		)
Decrease (increase) in Federal funds sold and short-term investments	13,444,623			11,510,404			(25,058,002		)
Increase in loans, net	(107,223,880		)	(88,352,287		)	(120,548,509		)
Purchase of life insurance contracts	(130,221		)	(123,169		)	—
Purchase of property and equipment	(2,462,068		)	(9,107,363		)	(2,540,328		)
Proceeds from sale of property and equipment	6,324			1,500,000			10,227
Proceeds from sale of other real estate owned	1,679,229			400,969			—
Net cash used by investing activities	(92,070,219		)	(109,497,212		)	(157,861,369		)
Financing activities
Repayment of advances from Federal Home Loan Bank	(5,000,000		)	(6,500,000		)	(15,000,000		)
Advances from Federal Home Loan Bank	22,500,000			10,000,000			32,500,000
Increase (decrease) in Federal funds purchased	11,382,100			—			—
Net increase in deposits	47,841,216			105,462,919			107,725,252
Advances from junior subordinated debentures	—			—			5,155,000
Proceeds from exercise of stock options	520,733			98,188			44,313
Cash paid in lieu of fractional shares	—			(2,515		)	—
Proceeds from stock issuance, net	—			—			19,933,998
Tax benefit of stock options	385,565			—			—
Proceeds from other borrowings	—			5,730,991			1,504,009
Repayments of other borrowings	(303,772		)	(25,180		)	—
Net cash provided by financing activities	77,325,842			114,764,403			151,862,572
Net (decrease) increase in cash	(206,311		)	914,077			(539,308		)
Cash and cash equivalents at beginning of year	5,198,945			4,284,868			4,824,176
Cash and cash equivalents at end of year	$	4,992,634		$	5,198,945		$	4,284,868
Cash paid for
Interest	$	22,042,809		$	15,639,904		$	6,709,409
Income taxes	$	3,851,653		$	4,388,302		$	1,281,882

The accompanying notes are an integral part of these consolidated financial statements.

29

Notes

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES

Beach First National Bancshares, Inc. (the “Company”) is organized under the laws of the State of South Carolina for the purpose of operating as a bank holding company for Beach First National Bank (the “Bank”), Beach First National Trust (the “Trust”), Beach First National Trust II (the “Trust II”), and BFNM, LLC (the “LLC”).  The Bank provides full commercial banking services to customers and is subject to regulation by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation.  The Company is subject to regulation by the Federal Reserve Board.  The Trust and Trust II are special purpose subsidiaries organized for the sole purpose of issuing trust preferred securities.

In 2005, the Company formed a limited liability company with Nelson Mullins Riley & Scarborough, LLP (NMRS) known as BFNM, LLC.  The purpose of the LLC was to construct and own an office building in Myrtle Beach, South Carolina.  The building was completed in 2006.  The Company owns two-thirds of the LLC and NMRS owns one-third.

Basis of presentation — The consolidated financial statements include the accounts of the Company, the Bank, and the LLC.  All significant intercompany accounts and transactions have been eliminated in consolidation.  The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices in the banking industry.  In accordance with current accounting guidance, the Trust and Trust II have not been consolidated in these financial statements.  The Company uses the accrual basis of accounting.

Estimates — The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of income and expenses during the reporting periods.  Actual results could differ from those estimates.

Concentrations of credit risk — Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans, investment securities, federal funds sold and amounts due from banks.

The Company originates consumer, commercial business, commercial real estate, residential mortgage loans and land acquisition and land development loans for personal and business purposes. These loans are primarily originated in the markets we serve.  These markets are centered in the Myrtle Beach area and Hilton Head, South Carolina but include the geographical area from Little River, South Carolina to Pawleys Island, South Carolina and Hilton Head and Bluffton in Beaufort County, South Carolina.  The mortgage division originates mortgages in several states and these loans are sold to investors.

The Company’s loan portfolio is not centered in loans to any single borrower or a relatively small number of borrowers, but it does have a geographic concentration in real estate.  Additionally, management is not aware of any concentrations of loans to groups of borrowers or industries that would be similarly affected by economic conditions except for loans for the acquisition of land and loans for the development of land and for commercial real estate loans.  The acquisition of land and loans for the development of land concentration totaled $169.4 million at December 31, 2007, representing 322.2% of total capital and 33.7% of net loans.  At December 31, 2006, the concentration totaled $120.1 million representing 264.2% of total capital and 29.6% of net loans.  This concentration increased as a percentage of capital and loans in 2007, as compared to 2006.  Investment in second homes, relocation of retirees to our markets and the steady growth of population to support the service industries (i.e., heating and cooling, plumbing, janitorial services, pest control, medical, etc.) have contributed to this concentration.

The commercial real estate loan concentration totaled $149.5 million at December 31, 2007, representing 284.4% of total capital and 29.7% of net loans.  At December 31, 2006, the concentration totaled $116.7 million, representing 256.7% of total capital and 28.8% of net loans.  This concentration increased as a percentage of capital and loans in 2007, as compared to 2006.  There is a diversified portfolio mix of these loans. The loans are primarily centered in small business owner occupied buildings, retail shops, office buildings, medical offices, warehouses, service businesses, churches, restaurants, convenience stores and tourist related businesses.

These loans could be negatively impacted by changes in economic conditions, declining market values, slower absorption of the projects and interest rate increases.  The Company has not experienced any significant losses in these areas.  Management continues to implement procedures to monitor these concentrations and has considered these concentration’s in its allowance for loan loss analysis.

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices.  These loans include those that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc), and loans with high loan-to-value ratios.  Management tries to use its best judgment when evaluating risk and the effect and impact these factors may have on the banks loan portfolio.  These factors may include national and local economic conditions, concentrations of credit types of loans that carry a higher degree of risk, terms of loans both long-term and interest-only repayment schedules, supervisory loan-to-value

30

limits, unsecured loan concentrations, nature and mix of the loan portfolio, vacancy rates, collateral types, insurance volatility, real estate markets, entry into new products and other factors that may be assigned from time to time.

Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life.  For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans).  These loans are underwritten and monitored to manage the associated risks.  Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.

The Company’s investment portfolio consists principally of obligations of the United States and its agencies or its corporations.  In the opinion of management, there is no concentration of credit risk in its investment portfolio.  The Company places its deposits and correspondent accounts with and sells its federal funds to financial institutions.  Management believes credit risk associated with correspondent accounts is not significant.

Cash and cash equivalents — For purposes of the statement of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption “Cash and due from banks”.  Cash and cash equivalents have an original maturity of three months or less.

Investment securities — The Company accounts for investment securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”  Gains or losses on the disposition of securities are based on the difference between the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method.  Interest income is recognized when earned.  SFAS 115 requires investments in equity and debt securities to be classified into three categories:

1.  Available for sale: These are securities which are not classified as either held to maturity or as trading securities. These securities are reported at fair market value. Unrealized gains and losses are reported, net of income taxes, as separate components of shareholders’ equity (accumulated other comprehensive income).

2. Held to maturity: These are investment securities which the Company has the ability and intent to hold until maturity.  These securities are stated at cost, adjusted for amortization of premiums and the accretion of discounts. The Company currently has no held to maturity securities.

3. Trading:  These are securities which are bought and held principally for the purpose of selling in the near future. Trading securities are reported at fair market value, and related unrealized gains and losses are recognized in the statement of income.  The Company has no trading securities.

Other investments — The Bank, as a member institution, is required to own certain stock investments in the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank.  The stock is generally pledged against any borrowings from these institutions.  No ready market exists for the stocks and they have no quoted market value.  However, redemption of these stocks has historically been at par value.  Dividends are recognized when earned. These non-marketable equity securities have not been evaluated for impairment.

Loans, interest and fee income on loans — Loans are stated at the principal balance outstanding.  Unamortized loan fees and the allowance for loan losses are deducted from total loans in the balance sheet.  Interest income is recognized over the term of the loan based on the principal amount outstanding.

Fees on real estate loans are taken into income to the extent they represent the direct cost of initiating a loan.  The amount in excess of direct costs is deferred and amortized over the expected life of the loan using a method approximating a level yield.

Loans are generally placed on non-accrual status when principal or interest becomes contractually ninety days past due, or when payment in full is not anticipated.  When a loan is placed on non-accrual status, interest accrued but not received is generally reversed against interest income.  If collectibility is in doubt, cash receipts on non-accrual loans are not recorded as interest income, but are used to reduce principal.

Allowance for loan losses — The provision for loan losses charged to operating expenses reflects the amount deemed appropriate by management to establish an adequate allowance to meet the present and foreseeable risk characteristics of the current loan portfolio.  Management’s judgment is based on periodic and regular evaluation of individual loans, the overall risk characteristics of the various portfolio segments, past experience with losses and prevailing and anticipated economic conditions.  Loans which are determined to be uncollectible are charged against the allowance. Provisions for loan losses and recoveries on loans previously charged off are added to the allowance.  Management considers the year-end allowance appropriate and adequate to cover probable losses in the loan portfolio; however, management’s judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid.  Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required.

The Company accounts for impaired loans in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”.  This standard requires that all lenders value loans at the loan’s fair value if it is probable that the lender will be unable to collect all amounts due according to the terms of the loan agreement.  Fair value may be determined based upon the present value of expected cash flows, market price of the loan, if available, or value of the underlying collateral.  Expected cash flows are required to be discounted at the loan’s effective interest rate.  SFAS No. 

31

114 was amended by SFAS No. 118 to allow a lender to use existing methods for recognizing interest income on an impaired loan and by requiring additional disclosures about how a creditor recognizes interest income on an impaired loan.

Under SFAS No. 114, as amended by SFAS No. 118, when the ultimate collectibility of an impaired loan’s principal is in doubt, wholly or partially, cash receipts are applied to principal.  Once the reported principal balance has been reduced to the loan’s estimated net realized value, future cash receipts are applied to interest income, to the extent that any interest has been foregone.  Further cash receipts are recorded as recoveries of any amounts previously charged off.  When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first to interest income then to principal.

A loan is also considered impaired if its terms are modified in a troubled debt restructuring.  For these accruing impaired loans, cash receipts are typically applied to principal and interest receivable in accordance with the terms of the restructured loan agreement.  Interest income is recognized on these loans using the accrual method of accounting.

Residential mortgage loans held for sale (HFS) — The Company’s residential mortgage lending activities for sale in the secondary market are comprised of accepting residential mortgage loan applications and qualifying borrowers to standards established by investors under pre-existing commitments. Funded residential mortgages held temporarily for sale to investors are recorded at the lower of cost or market value determined on an individual basis using quoted market prices.  Application and origination fees collected by the Company are recognized as income upon sale to the investor.

The Company issues rate lock commitments to borrowers based on prices quoted by secondary market investors.  When rates are locked with borrowers, a sales commitment is immediately entered (on a best efforts basis) at a specified price with a secondary market investor.  Accordingly, any potential liabilities associated with rate lock commitments are offset by sales commitments to investors.

Real estate acquired in settlement of loans — Real estate acquired through foreclosure is initially recorded at the lower of cost or estimated fair value.  Subsequent to the date of acquisition, it is carried at the lower of cost or fair value, adjusted for net selling costs.  Fair values of real estate owned are reviewed regularly and writedowns are recorded when it is determined that the carrying value of real estate exceeds the fair value less estimated costs to sell.  Costs relating to the development and improvement of such property are capitalized, whereas those costs relating to holding the property are charged to expense.

Property and equipment — Buildings and furniture and equipment are stated at cost, net of accumulated depreciation.  Depreciation is computed using the straight-line method over the estimated useful lives of the related assets.  Maintenance and repairs are charged to operations, while major improvements are capitalized.  Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts, and gain or loss is included in net income.

Income taxes — The consolidated financial statements have been prepared on the accrual basis.  When income and expenses are recognized in different periods for financial reporting purposes and for purposes of computing income taxes currently payable, deferred taxes are provided on such temporary differences.  The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”.  Under SFAS No. 109, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the consolidated financial statements or tax return.  Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled.

The Company adopted FIN 48, “Accounting for Uncertain Income Taxes”, which is an interpretation of SFAS 109.  FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose uncertain tax positions.  Such positions shall be recognized in the financial statements when it is more likely than not the position will be sustained upon examination of the taxing authorities.  Upon adoption of FIN 48 no changes were required to the Company’s income tax reserves.

Advertising and public relations expense — Advertising, promotional and other business development costs are generally expensed as incurred.  External costs incurred in producing media advertising are expensed the first time the advertising takes place.  External costs relating to direct mailing costs are expensed in the period in which the direct mailings are sent.

Earnings per share — Basic is computed by dividing net income by the weighted average number of common shares outstanding. Earnings per share — diluted is computed by dividing net income by the weighted average number of common shares outstanding and dilutive common share equivalents using the treasury stock method.  All share amounts have been adjusted for the 3-for-2 stock split recorded in 2006.  Dilutive common share equivalents include common shares issuable upon exercise of outstanding stock options.

32

	For the years ended December 31,
	2007		2006		2005
Basic earnings per share:
Net income available to common shareholders	$	5,876,630	$	6,195,728	$	3,359,643
Average common shares outstanding — basic	4,817,911		4,764,072		3,975,864
Basic earnings per share	$	1.22	$	1.30	$	0.85
Diluted earnings per share:
Net income available to common shareholders	$	5,876,630	$	6,195,728	$	3,359,643
Average common shares outstanding — basic	4,817,911		4,764,072		3,975,864
Incremental shares from assumed conversion of stock options	159,156		110,490		84,001
Average common shares outstanding — diluted	4,977,067		4,874,562		4,059,865
Diluted earnings per share	$	1.18	$	1.27	$	0.83

Stock Based Compensation — The Company has a stock-based employee compensation plan which is further described in Note 17.  For the year ended December 31, 2005, the Company utilized the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (as amended) (“APB 25”). Under the intrinsic value method prescribed by APB 25, no compensation costs were recognized for the Company’s stock options because the option exercise price in its plans equals the market price on the date of the grant.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R), which requires that the fair value of share-based payments to employees, including stock options, be recognized as compensation expense in the statement of income.

In December 2005, the Company elected to fully vest all outstanding options effective immediately.  The accelerated vesting was effective as of December 14, 2005.  All of the other terms and conditions applicable to the outstanding stock options remained unchanged.   As a result, there is no compensation cost attributable to periods after 2005 for options granted in 2005 or earlier, because there is no requisite service period over which the options must be earned.

The following table illustrates the effect on net income and net income per common share as if the Company had applied fair value recognition provisions to stock-based compensation in 2007, 2006, and 2005.

	For the years ended December 31,
	2007			2006		2005
Net income, as reported	$	5,876,630		$	6,195,728	$	3,359,643
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(7,643		)	—		(1,256,526		)
Amount of stock-based compensation included in net income as reported	7,643			—		—
Pro forma net income	$	5,876,630		$	6,195,728	$	2,103,117
Net income per common share
Basic — as reported	$	1.22		$	1.30	$	0.85
Basic — pro forma	$	1.22		$	1.30	$	0.53
Diluted — as reported	$	1.18		$	1.27	$	0.83
Diluted — pro forma	$	1.18		$	1.27	$	0.52

The decision to accelerate vesting did not incur recognition of pre-tax compensation expense by the Company upon the adoption of SFAS 123(R) in 2006. The Company believes that the acceleration of vesting stock options meets the criteria for variable accounting under FIN No. 44.  Based upon past experience, the Company believes the grantees of these stock options will remain as a director or employee of the Company.

In 2007, the Company granted 9,200 stock options.  The cost recognized under SFAS 123 (R) was $7,643.

33

Reclassifications — Certain previously reported amounts have been reclassified to conform to the current year presentation. Such changes had no effect on previously reported net income or shareholders’ equity.

Recently Issued Accounting Pronouncements — The following is a summary of recent authoritative pronouncements:

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This standard eliminates inconsistencies found in various prior pronouncements but does not require any new fair value measurements. SFAS 157 is effective for the Company on January 1, 2008 and will not impact the Company’s accounting measurements but it is expected to result in additional disclosures.

In September 2006, The FASB ratified the consensuses reached by the FASB’s Emerging Issues Task Force (“EITF”) relating to EITF 06-4, “Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”).  Entities purchase life insurance for various reasons including protection against loss of key employees and to fund postretirement benefits. The two most common types of life insurance arrangements are endorsement split dollar life and collateral assignment split dollar life. EITF 06-4 covers the former and EITF 06-10 (discussed below) covers the latter. EITF 06-4 states that entities with endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to post retirement periods should recognize a liability for future benefits in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement earnings or to other components Benefits Other Than Pensions,” (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board (“APB”) Opinion No. 12, “Omnibus Opinion —1967” (if the arrangement is, in substance, an individual deferred compensation contract).  Entities should recognize the effects of applying this Issue through either (a) a change in accounting principle through a cumulative-effect adjustment to equity or net assets in the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. EITF 06-4 is effective for the Company on January 1, 2008. The Company does not believe the adoption of EITF 06-4 will have a material impact on its financial position, results of operations or cash flows.

In September 2006, the FASB ratified the consensus reached on EITF 06-5, “Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance” (“EITF 06-5”).  EITF 06-5 states that a policyholder should consider any additional amounts included in the contractual terms of the insurance policy other than the cash surrender value in determining the amount that could be realized under the insurance contract.  EITF 06-5 also states that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). EITF 06-5 is effective for the Company on January 1, 2008.  The Company does not believe the adoption of EITF 06-5 will have a material impact on its financial position, results of operations, or cash flows.

In March 2007, the FASB ratified the consensus reached on EITF 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements” (“EITF 06-10”). The postretirement aspect of this EITF is substantially similar to EITF 06-4 discussed above and requires that an employer recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance with either FASB Statement No. 106 or APB Opinion No. 12, as appropriate, if the employer has agreed to maintain a life insurance policy during the employee’s retirement or provide the employee with a death benefit based on the substantive agreement with the employee.  In addition, a consensus was reached that an employer should recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement. EITF 06-10 is effective for the Company on January 1, 2008. The Company does not believe the adoption of EITF 06-10 will have a material impact on its financial position, results of operations, or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”). This statement permits, but does not require, entities to measure many financial instruments at fair value. The objective is to provide entities with an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Entities electing this option will apply it when the entity first recognizes an eligible instrument and will report unrealized gains and losses on such instruments in current earnings.  This statement:  1) applies to all entities, 2) specifies certain election dates, 3) can be applied on an instrument-by-instrument basis with some exceptions, 4) is irrevocable, and 5) applies only to entire instruments. One exception is demand deposit liabilities which are explicitly excluded as qualifying for fair value. With respect to SFAS 115, available-for-sale and held-to-maturity securities at the effective date are eligible for the fair value option at that date. If the fair value option is elected for those securities at the effective date, cumulative unrealized gains and losses at that date shall be included in the cumulative-effect adjustment and thereafter, such securities will be accounted for as trading securities. SFAS 159 is effective for the Company on January 1, 2008. The Company is currently analyzing the fair value option that is permitted, but not required, under SFAS 159.

In June 2007, the FASB ratified the consensus reached by the EITF with respect to EITF 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). Under EITF 06-11, a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to

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employees for equity-classified nonvested equity shares, nonvested equity share units and outstanding equity share options should be recognized as an increase in additional paid-in capital.  This EITF is to be applied prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared beginning in 2008, and interim periods within those fiscal years.  Early application is permitted. The Company does not believe the adoption of EITF 06-11 will have a material impact on its financial position, results of operations, or cash flows.

In November 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings” (“SAB 109”). SAB 109 expresses the current view of the SEC staff that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings.   SEC registrants are expected to apply this guidance on a prospective basis to derivative loan commitments issued or modified in the first quarter of 2008 and thereafter. The Company is currently analyzing the impact of this guidance, which relates to the Company’s mortgage loans held for sale.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS 141(R)”) which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141(R) is effective for acquisitions by the Company taking place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a calendar year-end company is required to record and disclose business combinations following existing accounting guidance until January 1, 2009. The Company will assess the impact of SFAS 141(R) if and when a future acquisition occurs.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Before this statement, limited guidance existed for reporting noncontrolling interests (minority interest). As a result, diversity in practice exists. In some cases minority interest is reported as a liability and in others it is reported in the mezzanine section between liabilities and equity. Specifically, SFAS 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financials statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests. SFAS 160 is effective for the Company on January 1, 2009. Earlier adoption is prohibited.  The Company is currently evaluating the impact, if any, the adoption of SFAS 160 will have on its consolidated financial statements.

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

NOTE 2 — RESTRICTIONS ON CASH AND DUE FROM BANKS

The Bank is required to maintain average reserve balances, computed by applying prescribed percentages to its various types of deposits, either at the bank or on deposit with the Federal Reserve Bank.  At December 31, 2007 and 2006, these required reserves were approximately $1.9 million and $ 2.0 million, respectively.  These balances do not bear interest.

NOTE 3 — INVESTMENT SECURITIES

The amortized costs and fair values of available for sale investment securities are as follows:

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	December 31, 2007
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
Government Sponsored Enterprises	$	64,484,602	$	259,996	$	689,207	$	64,055,391
Federal Agencies	65,023		480		481		65,022
Tax exempt securities	760,046		—		12,786		747,260
Corporate	810,728		—		408		810,320
Total securities	$	66,120,399	$	260,476	$	702,882	$	65,677,993

	December 31, 2006
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
Government Sponsored Enterprises	$	67,608,363	$	130,700	$	1,144,546	$	66,594,517
Federal Agencies	1,071,863		212		8,061		1,064,014
Corporate	814,312		1,688		—		816,000
Total securities	$	69,494,538	$	132,600	$	1,152,607	$	68,474,531

The amortized costs and fair values of investment securities at December 31, 2007, by contractual maturity, are shown in the following chart.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Government Sponsored Enterprise securities, which consist of mortgage-backed securities, are presented as a separate line since pay downs are expected before contractual maturity dates.

	Amortized cost		Fair value
Due within one year	$	999,800	$	999,300
Due after one year through five years	17,912,758		18,015,099
Due after five through ten years	9,593,703		9,725,986
Due after ten years	1,570,775		1,557,580
Sub-total	30,077,036		30,297,965
Government Sponsored Enterprises	36,043,363		35,380,028
Total securities	$	66,120,399	$	65,677,993

The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2007 and December 31, 2006.

	December 31, 2007
	Less than 12 months				12 months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Government Sponsored Enterprises	$	11,849,251	$	42,735	$	22,287,826	$	646,472	$	34,137,077	$	689,207
Federal Agencies	39,751		299		12,232		181		51,983		480
Tax exempt securities	747,260		12,786		—		—		747,260		12,786
Corporate	810,320		409		—		—		810,320		409
Total	$	13,446,582	$	56,229	$	22,300,058	$	646,653	$	35,746,640	$	702,882

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	December 31, 2006
	Less than 12 months				12 months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Government Sponsored Enterprises	$	13,716,282	$	66,633	$	36,594,828	$	1,077,912	$	50,311,110	$	1,144,545
Federal Agencies	983,881		7,540		64,578		521		1,048,459		8,061
Tax exempt securities	—		—		—		—		—		—
Corporate	—		—		—		—		—		—
Total	$	14,700,163	$	74,173	$	36,659,406	$	1,078,433	$	51,359,569	$	1,152,606

Securities classified as available-for-sale are recorded at fair market value.  Approximately 92.0% of the unrealized losses, or twenty-seven individual securities, were in a continuous loss position for twelve months or more.  The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature.  The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and, therefore, these losses are not considered other-than-temporary.

The amortized cost and fair value of securities pledged as collateral for public funds and other purposes as of December 31, 2007 and 2006 were $64,549,625 and $40,097,490, and $64,120,413 and $37,740,753, respectively.

For the years ended December 31, 2007, 2006, and 2005, proceeds from sales of securities available for sale amounted to $8,623,625, $4,473,361, and $6,148,824, respectively.  Gross realized gains amounted to $7,904, $1,007, and $10,195, respectively.  Gross realized losses amounted to $0, $58,283, and $14,130, respectively.

NOTE 4 — LOANS

The composition of net loans by major loan category is presented below:

	December 31,
	2007		2006
Commercial	$	60,376,105	$	43,974,792
Real estate — construction	63,988,173		44,032,693
Real estate — mortgage	370,989,308		303,211,082
Consumer	8,504,685		7,784,157
	503,858,271		399,002,724
Less:
Allowance for loan losses	6,935,616		5,888,052
Deferred loan fees	425,755		266,090
	7,361,371		6,154,142
Loans, net	$	496,496,900	$	392,848,582

Impaired loans totaled $5,526,724 and $2,633,702 at December 31, 2007 and 2006, respectively, which had the effect of reducing net income $259,958 in 2007, $145,626 in 2006, and $148,196 in 2005.  Included in the allowance for loan losses related to impaired loans at December 31, 2007 and 2006, was $1,378,306 and $877,331, respectively.  The average recorded investment in impaired loans for the years ended December 31, 2007 and 2006, was $2,852,830 and $2,528,335, respectively.  Interest income recognized on impaired loans in fiscal 2007 and 2006 was $324,556 and $78,368 respectively.

NOTE 5 — ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is available to absorb future loan charge-offs.  The allowance is increased by provisions charged to operating expenses and by recoveries of loans which were previously written-off.  The allowance is decreased by the aggregate loan balances, if any, which were deemed uncollectible during the year.

Activity within the allowance for loan losses account follows:

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	For the years ended December 31,
	2007			2006			2005
Balance, beginning of year	$	5,888,052		$	4,364,287		$	2,421,839
Mortgage recourse reserve	(50,000		)	—			—
Recoveries of loans previously charged against the allowance	36,394			141,553			38,304
Provision for loan losses	2,045,600			2,174,400			2,184,000
Loans charged against the allowance	(984,430		)	(792,188		)	(279,856		)
Balance, end of year	$	6,935,616		$	5,888,052		$	4,364,287

In 2006, a retail mortgage recourse reserve of $50,000 was established within the allowance. The reserve was established to provide for situations where the Company could be required by an investor, in accordance with the sales agreement, to repurchase retail mortgage loans that were previously sold.  For 2007, $50,000 was transferred into a separate liability.  The Company expensed in 2007 an additional $205,000 and paid losses of $47,445.  At December 31, 2007, the reserve was $207,555.  Subsequent to year end, the Company settled all known claims with its largest investor group for $180,000.   In addition the Company eliminated future conforming loan default claims with our largest investor through the payment of an additional fee per loan sold.  With the disruption occurring in the retail mortgage market, the Company is periodically reviewing loans sold to ensure the reserve is sufficient.

NOTE 6 — PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation.  Components of property and equipment included in the consolidated balance sheets are as follows:

	December 31,
	2007			2006
Land	$	1,838,564		$	1,838,564
Buildings and improvements	12,895,464			11,402,529
Furniture and equipment	3,429,624			2,766,333
Software	792,167			674,462
Construction in progress	55,708			12,434
	19,011,527			16,694,322
Accumulated depreciation	(3,265,384		)	(2,349,992		)
Total property and equipment	$	15,746,143		$	14,344,330

Depreciation expense for the years ended December 31, 2007, 2006, and 2005 amounted to $1,060,255, $518,551 and $539,406, respectively.  Depreciation is charged to operations over the estimated useful lives of the assets.  The estimated useful lives and methods of depreciation for the principal items follow:

Type of Asset	Life in Years	Depreciation Method
Software	3 to 5	Straight-line
Furniture and equipment	5 to 7	Straight-line
Buildings and improvements	5 to 40	Straight-line

The Bank has entered into non-cancelable operating leases related to land and buildings.  At December 31, 2007, future minimum payments under non-cancelable operating leases with initial or remaining terms of one year or more are as follows:

2008	$	1,261,159
2009	1,201,687
2010	1,157,974
2011	1,074,394
2012	989,938
Thereafter	3,441,306
	$	9,126,458

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The Bank has entered into eight separate lease agreements for its banking locations and seven lease agreements for its mortgage production locations.  These lease agreements have various initial lease terms and expire on various dates through 2023.  The lease agreements generally provide that the Bank is responsible for ongoing repairs and maintenance, insurance and real estate taxes.  The leases also provide for renewal options and certain scheduled increases in monthly lease payments.  The future minimum rental commitments above include commitments to the Company’s partially-owned subsidiary, BFNM, LLC aggregating $478,473 for each of 2008 through 2012.  Total rental expense amounted to $1,245,172, $775,232, and $508,250 for the years ended December 31, 2007, 2006, and 2005, respectively.

Other income for the year ended December 31, 2006 includes a gain on the sale of a branch location of $583,011.

NOTE 7 — DEPOSITS

The following is a detail of the deposit accounts:

	December 31,
	2007		2006
Noninterest bearing	$	33,138,936	$	37,194,469
Interest bearing:
Interest bearing checking accounts	20,377,754		21,336,836
Money market accounts	103,821,154		103,056,865
Savings	2,988,881		3,303,763
Time, less than $100,000	161,038,254		154,191,756
Time, $100,000 and over	142,833,366		97,273,440
Total deposits	$	464,198,345	$	416,357,129

At December 31, 2007 and 2006, $46,135,000 and $34,644,000, respectively, of time deposits less than $100,000 consisted of brokered deposits.  Interest expense on time deposits greater than $100,000 was $6,071,474 in 2007, $4,446,592 in 2006, and $1,880,101 in 2005.

 At December 31, 2007, the scheduled maturities of time deposits are as follows at right:

2008	$	265,041,431
2009	31,728,483
2010	5,565,772
2011	1,284,144
2012	149,177
Thereafter	102,613
	$	303,871,620

NOTE 8 — ADVANCES FROM FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan Bank (“FHLB”) at December 31 are summarized below:

FHLB Description	Current Rate		Maturity Date	Call Date	2007		2006
Fixed Rate	5.358	%	06/04/2010		$	10,000,000	$	—
Convertible	4.510	%	11/23/2010	11/24/2008	7,500,000		7,500,000
Convertible	3.440	%	03/10/2015		—		5,000,000
Convertible	3.680	%	07/13/2015	07/14/2008	5,000,000		5,000,000
Convertible	4.060	%	09/29/2015	09/29/2009	5,000,000		5,000,000
Fixed Rate Hybrid	4.760	%	10/21/2010		5,000,000		5,000,000
Convertible	4.160	%	03/13/2017	03/13/2009	5,000,000		—
Convertible	4.385	%	04/13/2017	04/13/2009	7,500,000		—
Prime Based Advance	3.160	%	09/19/2011		10,000,000		10,000,000
					$	55,000,000	$	37,500,000

The advances were collateralized by one to four family residential mortgage loans, government sponsored enterprises securities, and FHLB stock.  Additional borrowings are available by pledging additional collateral and purchasing additional stock in the FHLB.

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NOTE 9 — OTHER BORROWINGS

In June 2005, the LLC obtained a loan from a bank for the construction of a building that serves as the Company’s corporate office.  The loan proceeds of $7,235,000 were advanced during construction.  The loan is priced at LIBOR plus 1.40%, and the amount of the 107 monthly payments of principal and interest are based upon a fifteen year amortization.  All remaining principal and interest is due on June 15, 2015.  The LLC entered into an interest rate swap agreement as a risk management tool to hedge the interest rate risk of the variable interest rate building loan.  Under the swap agreement, the LLC pays a fixed rate of 4.62% and receives interest rate payments equal to LIBOR.  The fixed rate of 4.62% paid under the swap agreement, when added to the loan’s margin above LIBOR of 1.40%, converts the building loan’s interest from a variable rate to a fixed rate of 6.02%.  The outstanding balance on the loan at December 31, 2007 was $6,906,048.  The principal due on the loan is $364,402 in 2008, $345,638 in 2009, $367,355 in 2010, $ 390,394 in 2011, and $412,248 in 2012.

NOTE 10 — JUNIOR SUBORDINATED DEBENTURES

On May 27, 2004, and March 30, 2005, Beach First National Trusts (the “Trust”) and (“Trust II”), non-consolidated subsidiaries of the Company, issued and sold floating rate capital securities of the trusts, which are reported on the Consolidated Balance Sheets as junior subordinated debentures.  The junior subordinated debentures are unsecured obligations of the Company and are subordinate and junior in right of payment to all present and future senior indebtedness of the Company.  The Company has entered into guarantees, which together with its obligations under the junior subordinated debentures and the declaration of trusts governing the Trusts, provides full and unconditional guarantees of the trust preferred securities.  Each issuance generated proceeds of $5.0 million. The Trusts loaned these proceeds to the Company to use for general corporate purposes, primarily to provide capital to the Bank.  The debentures qualify as Tier 1 capital under Federal Reserve Board guidelines.

During 2007 and 2006, the average junior subordinated debt was $10.3 million.  Total junior subordinated debt outstanding at December 31, 2007 and 2006, was $10.3 million and $10.3 million, respectively. The maximum amount outstanding during any month-end period in 2007 was $10.3 million with an average rate of 7.78%.  The maximum amount outstanding during any month-end period in 2006 was $10.3 million with an average rate of 7.49%.

The trust preferred securities under Trust and Trust II accrue and pay distributions annually at a rate per annum equal to the three month LIBOR plus 270 and 190 basis points, respectively, which was 7.85% and 7.59% at December 31, 2007.  The distribution rate payable on these securities is cumulative and payable quarterly in arrears.  The Company has the right, subject to events of default, to defer payments of interest on the trust preferred securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity dates of May 27, 2034 and March 30, 2035, respectively.  The Company has no current intention to exercise this right to defer payments of interest on the trust preferred securities.  The Company has the right to redeem the trust preferred securities, in whole or in part, on or after May 27, 2009 and March 30, 2010, respectively.  The Company may also redeem the trust preferred securities prior to such dates upon occurrence of specified conditions and the payment of a redemption premium.

Debt issuance costs, net of accumulated amortization, from the junior subordinated debentures totaled $33,943 and $38,948 at December 31, 2007 and 2006, respectively, and are included in other assets on the Consolidated Balance Sheets.  Amortization of debt issuance costs from trust preferred debt totaled $5,005, $4,588, and $3,962 for the years ended December 31, 2007, 2006, and 2005, respectively.

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NOTE 11 — UNUSED LINES OF CREDIT

At December 31, 2007, the Bank had $31.8 million of lines of credit to purchase federal funds from unrelated banks.  These lines of credit are available on a one to fourteen day basis for general corporate purposes of the Bank.  All of the lenders have reserved the right to withdraw these lines at their option.

At December 31, 2007, the Bank had the ability to borrow an additional $7.7 million from the FHLB secured by a blanket lien on one to four family first mortgage loans.  In addition, U.S. government agency securities with a book value of $6.5 million and a market value of $6.3 million, respectively, are pledged to secure the borrowing. FHLB has approved borrowings up to 15% of the bank’s total assets less advances outstanding.  The borrowings are available by pledging collateral and purchasing additional stock in the FHLB.

NOTE 12 — COMMITMENTS AND CONTINGENCIES

The Company is party to litigation and claims arising in the normal course of business.  As of December 31, 2007, there is no litigation pending.

Refer to Note 15 concerning financial instruments with off balance sheet risk.

The Company currently has two capital projects in process as of December 31, 2007.  The first is to implement a new bank software system, and the second project is the build-out of leasehold improvements and furniture and equipment for a new branch location.  The estimated cost of these projects is $211,000 and $730,000, respectively.  The Company in 2007 has spent $55,700 on the branch and $103,700 on the new bank software system.

NOTE 13 — INCOME TAXES

The following summary of the provision for income taxes includes tax deferrals which arise from temporary differences in the recognition of certain items of revenue and expense for tax and financial reporting purposes for the years ended December 31:

	2007			2006			2005
Income taxes currently payable
Federal	$	3,721,922		$	3,834,918		$	2,251,274
State	298,358			301,468			168,861
	4,020,280			4,136,386			2,420,135
Deferred taxes
Allowance for loan losses	(373,172		)	(537,502		)	(617,922		)
Depreciation	60,520			51,238			(62,418		)
Loan origination fees	(63,973		)	43,164			(18,752		)
Deferred compensation	(139,302		)	(76,916		)	(46,213		)
Other	(157,097		)	(114,234		)	85,945
	(673,024		)	(634,250		)	(659,360		)
Income tax expense	$	3,347,256		$	3,502,136		$	1,760,775

The income tax effect of cumulative temporary differences at December 31, are as follows:

	Deferred tax asset (liability)
	2007			2006
Allowance for loan losses	$	2,222,365		$	1,827,410
Unrealized loss on investment securities	178,742			380,769
Depreciation	(210,205		)	(149,685		)
Loan origination fees	154,018			90,046
Deferred compensation	331,222			191,920
Oth	176,595			41,279
Net deferred tax asset	$	2,852,737		$	2,381,739

The net deferred tax asset is reported in other assets in the Consolidated Balance Sheets at December 31, 2007 and 2006.  The recognition of a net deferred tax asset is dependent upon a “more likely than not” expectation of the realization of the deferred tax asset, based upon the analysis of the available evidence.  A valuation allowance is required to sufficiently reduce the deferred tax asset to the amount that is expected to be realized through future

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realization of profits on a “more likely than not” basis.  The analysis of available evidence is performed on an ongoing basis utilizing the “more likely than not” criteria to determine the amount, if any, of the deferred tax asset to be realized.  Adjustments to the valuation allowance are made accordingly.  There can be no assurance that the Company will recognize additional portions of the deferred tax asset in future periods or that additional valuation allowances may not be recorded in the future periods. As of December 31, 2007 and December 31, 2006, there are no valuation allowances established.

The provision for income taxes is reconciled to the amount of income tax computed at the federal statutory rate on income before income taxes for the years ended December 31, as follows:

	2007				2006				2005
	Amount		%		Amount		%		Amount			%
Tax expense at statutory rate	$	3,136,121	34	%	$	3,297,274	34	%	$	1,740,942		34	%
Increase (decrease) in taxes
Resulting from:
State bank tax (net of federal benefit)	196,916		2		198,969		2		111,448			2
Other	14,219		—		5,893		—		(91,615		)	(2	)
Tax provision	$	3,347,256	36	%	$	3,502,136	36	%	$	1,760,775		34	%

NOTE 14 — RELATED PARTY TRANSACTIONS

Certain directors, executive officers and companies with which they are affiliated, are customers of and have banking transactions with the Bank in the ordinary course of business. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable arms-length transactions.

A summary of loan transactions with directors, including their affiliates, and executive officers follows:

	For the years ended December 31,
	2007		2006
Balance, beginning of year	$	18,976,915	$	15,002,485
New loans	18,128,080		17,417,068
Less loan payments.	8,838,454		13,442,638
Balance, end of year	$	28,266,541	$	18,976,915

Deposits by directors, including their affiliates and executive officers, at December 31, 2007 and 2006, totaled $12,494,266 and $19,712,400, respectively.

NOTE 15 — FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK

In the ordinary course of business, and to meet the financing needs of its customers, the Company is a party to various financial instruments with off balance sheet risk.  These financial instruments, which include commitments to extend credit and standby letters of credit, involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheets.  The contract amount of those instruments reflects the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments.

The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any material condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee.  At December 31, 2007, unfunded commitments to extend credit were $48,275,254 of which $5,922,997 were at fixed rates and $42,352,257 were at variable rates.  The Company evaluates each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.  Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate.

At December 31, 2007, there were commitments totaling $13,531,310 for standby letters of credit.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  Collateral varies but may include accounts receivable, inventory, equipment, marketable securities and property.  Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.

42

NOTE 16 — EMPLOYEE BENEFIT PLAN

The Company sponsors the Beach First National Bank Profit Sharing and 401(k) Plan for the benefit of all eligible employees.  The Company contributes to the Plan annually upon approval by the Board of Directors.  Contributions made to the Plan in 2007 and 2006 amounted to $447,564 and $117,497, respectively.

Supplemental benefits have been approved by the Board of Directors for the directors and certain executive officers of Beach First National Bank.  These benefits are not qualified under the Internal Revenue Code and they are not funded.  However, certain funding is provided informally and indirectly by life insurance policies.  The cash surrender value of the life insurance policies are recorded as a separate line item in the accompanying balances sheets at $3,554,807 and $3,424,586 at December 31, 2007 and 2006, respectively.  Income earned on these policies is reflected as a separate line item in the Consolidated Statements of Income.  The Company recorded expense related to these benefits in 2007, 2006, and 2005 of $310,923, $227,515, and $120,832, respectively.

NOTE 17 — STOCK OPTION PLANS

The Company sponsors a qualified stock option plan for the benefit of the directors, officers, and employees (“Plan”).  Under the Plan, options vest on a straight line basis over a five year period and terminate ten years after grant.  The shareholders in 2007 approved an 111,224 share increase in options available under the Plan.  The Plan has 718,724 shares available for grant at an option price per share not less than the fair market value on the date of grant.  As discussed in Note 1, the Company fully vested all options on December 14, 2005 that had been granted, including an additional 117,000 options issued to directors on the same date.  The new grant of options in 2007 is subject to FAS 123(R) accounting recognition of pre-tax compensation expense by the Company, which aggregated $7,643 in 2007.

The fair value of the option grant is estimated on the date of grant using the Black-Scholes option pricing model.  For the year ended December 31, 2007, options were granted with an expected life of 6.5 years based on the simplified method, risk free rate of 4.97% based on market rates for comparable terms, volatility rate of 32.96% based on the Company’s stock historical volatility, and an assumed dividend rate of zero.  There were no options granted for the year ended December 31, 2006. For the year ended December 31, 2005, the risk free interest rate used ranged from 4.04% to 4.76%, the expected option life was 10 years, volatility ranged from 34.98% to 35.58% and the assumed dividend rate was zero.

As of December 31, 2007, there was $69,186 of total unrecognized compensation costs related to non-vested options granted under the Plan that is expected to be recognized over a weighted average period of 2.56 years.

A summary of the status of the plan as of December 31, 2007, 2006, and 2005 and changes during the years ended on those dates is presented below, adjusted for the 3-for-2 stock split in 2006:

	2007				2006				2005
	Shares		Weighted average exercise price		Shares		Weighted average exercise price		Shares		Weighted average exercise price
Outstanding at beginning of year	503,479		$	11.19	517,054		$	11.06	346,954		$	8.19
Granted	9,200		19.12		—		—		184,500		16.16
Exercised	(77,728	)	6.93		(13,575	)	7.25		(9,675	)	4.58
Forfeited or expired	—		—		—		—		(4,725	)	—
Outstanding at end of year	434,951		12.11		503,479		11.19		517,054		11.06
Options exercisable at year-end	425,751		11.96		503,479		11.19		517,054		11.06
Shares available for grant	125,458				23,434				23,434
Weighted average fair value of options granted			$	8.35			$	—			$	6.06

The total fair value of shares vested during the years ended December 31, 2007, 2006, and 2005 was $0, $0 and $2,030,054, respectively.

The total intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005 was $1,219,177, $256,118 and $158,245, respectively.

As of December 31, 2007, all options outstanding were exercisable, except the 9,200 options granted in 2007. The aggregate intrinsic value of all outstanding options was $1,715,016, and the weighted average remaining contractual term of the options was 6.62 years at December 31, 2007. Vested and non-vested options had remaining contractual lives of 6.55 and 9.57 years, respectively.

43

NOTE 18 — SHAREHOLDERS’ EQUITY

Stock Dividend — In October 2006, the Company announced a 3-for-2 stock split effected in the form of a 50% stock dividend to shareholders of record on December 1, 2006.  The dividend was issued on December 21, 2006.  All earnings per share amounts for all periods have been adjusted to reflect this 3-for-2 split.

Stock Offering — On June 14, 2005, the Company closed on a secondary stock offering whereby 1,150,000 shares of the Company’s stock were issued at $18.75 per share.  Net proceeds after deducting underwriter discounts and expenses were $19.9 million.  Proceeds from the offering were used to support the growth of the Company.

Cash Dividends — There are no current plans to initiate payment of cash dividends and future dividend policy will depend on the Company’s earnings, capital requirements, financial condition and other factors considered relevant by the Company’s Board of Directors.  The Bank is restricted in its ability to pay dividends under the national banking laws and regulations of the Office of the Comptroller of the Currency.  OCC prior approval is required if dividends declared in any calendar year exceed the Bank’s net profit for that year combined with its retained net profits for the preceding two years.

Stock Repurchase Plan — On December 19, 2007, the Company approved a plan to repurchase up to $2 million of its common stock, representing approximately 2.5% of the shares outstanding.  The timing, price, and quantity of purchases under the plan will be at the discretion of management for up to one year and the plan may be discontinued, suspended or restarted at any time.  No shares were repurchased during 2007.

NOTE 19 — REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets.  As of December 31, 2007, the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2007, the most recent notification of the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  There are no conditions or events since that notification that management believes have changed the institution’s well capitalized category.

The Company’s actual capital amounts and ratios are presented as follows:

					For capital						To be well capitalized under prompt corrective
					adequacy purposes						action provisions
	Actual				Minimum						Minimum
	Amount		Ratio		Amount			Ratio			Amount		Ratio
	(amounts in $000)
As of December 31, 2007
Total Capital (to risk weighted assets)	$	69,405	14.0	%	$	39,774	8.0		%	$		N/A	N/A
Tier 1 Capital (to risk weighted assets)	63,180		12.7		19,899		4.0			N/A			N/A
Tier 1 Capital (to average assets)	63,180		11.2		22,564		4.0			N/A			N/A
As of December 31, 2006
Total Capital (to risk weighted assets)	$	61,622	15.2	%	$	32,432	8.0		%	$		N/A	N/A
Tier 1 Capital (to risk weighted assets)	56,543		14.0		16,155		4.0			N/A			N/A
Tier 1 Capital (to average assets)	56,543		12.2		18,539		4.0			N/A			N/A

The Bank’s actual capital amounts and ratios and minimum regulatory amounts and ratios are presented as follows:

44

					For capital					To be well capitalized under prompt corrective
					adequacy purposes					action provisions
	Actual				Minimum					Minimum
	Amount		Ratio		Amount		Ratio			Amount		Ratio
	(amounts in $000)
As of December 31, 2007
Total Capital (to risk weighted assets)	$	59,269	12.2	%	$	38,799		8.0	%	$	48,499		10.0	%
Tier 1 Capital (to risk weighted assets)	53,179		10.9		19,478			4.0		29,217			6.0
Tier 1 Capital (to average assets)	53,179		9.2		23,289			4.0		29,111			5.0
As of December 31, 2006
Total Capital (to risk weighted assets)	$	51,497	13.0	%	$	31,690		8.0	%	$	39,613		10.0	%
Tier 1 Capital (to risk weighted assets)	46,531		11.7		15,908			4.0		23,862			6.0
Tier 1 Capital (to average assets)	46,531		19.3		20,013			4.0		25,016			5.0

NOTE 20 — FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” requires disclosure of fair value information, whether or not recognized in the balance sheets, when it is practical to estimate the fair value.  SFAS No. 107 defines a financial instrument as cash, evidence of an ownership interest in an entity, or contractual obligations which require the exchange of cash or other financial instruments. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment and other assets and liabilities.

Fair value approximates carrying value for the following financial instruments due to the short-term nature of the instrument: cash and due from banks, federal funds sold and short term investments, demand deposit accounts, and interest-bearing accounts with no fixed maturity date.  Securities are valued using quoted market prices.  Fair value for the Company’s off-balance sheet financial instruments is based on the discounted present value of the estimated future cash flows.  Fair value for fixed and variable rate loans maturing after one year is based on the discounted present value of the estimated future cash flows.  Discount rates used in these computations approximate the rates currently offered for similar loans of comparable terms and credit quality.

Fair value for certificate of deposit accounts are valued by discounting cash flows at rates currently available on similar account types.  Fair value for advances from the FHLB is based on discounted cash flows using the Company’s current incremental borrowing rate.  Fair value for junior subordinated debentures approximates their carrying value since the debentures were issued at a floating rate.  Fair value for other borrowings approximates their carrying value since the borrowings bear a floating rate.  Fair value of the LIBOR rate swap agreement is valued using a quoted market price.

The Company has used management’s best estimate of fair value based on the above assumptions.  Thus, the fair values presented may not be the amounts which could be realized in an immediate sale or settlement of the instrument.  In addition, any income taxes or other expenses which would be incurred in an actual sale or settlement are not taken into consideration in the fair value presented.

The estimated fair values of the Company’s financial instruments are as follows:

45

	December 31,
	2007				2006
	Carrying amount		Fair value		Carrying amount		Fair value
Financial Assets:
Cash and due from banks	$	4,992,634	$	4,992,634	$	5,198,945	$	5,198,945
Federal funds sold and short term investments	566,044		566,044		14,010,667		14,010,667
Investment securities	65,677,993		65,677,993		68,474,531		68,474,531
Loans, net	496,496,900		499,389,381		392,848,582		392,616,778
Mortgage loans held for sale	6,475,619		6,475,619		12,478,222		12,478,222
Federal Reserve Bank stock	984,000		984,000		984,000		984,000
Federal Home Bank Loan Bank stock	3,395,300		3,395,300		2,475,600		2,475,600
Trust preferred securities	310,000		310,000		310,000		310,000
Cash value of life insurance	3,554,807		3,554,807		3,424,586		3,424,586
Financial Liabilities:
Deposits	464,198,345		458,851,000		416,357,129		412,594,234
Advances from Federal Home Loan Bank	55,000,000		57,636,000		37,500,000		36,994,000
Federal funds purchased and other borrowings	18,288,148		8,288,148		7,209,820		7,209,820
Junior subordinated debt	10,310,000		10,310,000		10,310,000		10,310,000

NOTE 21 — PARENT COMPANY FINANCIAL INFORMATION

Following is condensed financial information of Beach First National Bancshares, Inc. (parent company only):

Condensed Balance Sheets

	December 31,
	2007			2006
Assets
Cash	$	6,443,711		$	9,043,890
Investment in Bank subsidiary	52,887,079			45,857,311
Investment in Beach First National Trusts	310,000			310,000
Investment in BFNM, LLC	3,175,873			2,861,446
Other assets	110,611			49,830
Total assets	$	62,927,274		$	58,122,477
Liabilities and Shareholders’ Equity
Accounts payable	$	(187,877	)	$	188,836
Due to Bank subsidiary	227,101			2,164,062
Junior subordinated debentures	10,310,000			10,310,000
Shareholders’ equity	52,578,050			45,459,579
Total liabilities and shareholders’ equity	$	62,927,274		$	58,122,477

46

Condensed Statements of Income

	For the years ended December 31,
	2007			2006			2005
Income	$	665,853		$	242,985		$	140,365
Expenses
Interest	802,455			771,740			528,812
Amortization	5,005			5,006			4,379
Other expenses	612,253			—			—
Total expenses	1,419,713			776,746			533,191
Income before equity in undistributed net income of subsidiaries	(753,860		)	(533,761		)	(392,826		)
Equity in undistributed net income of subsidiaries	6,630,490			6,729,489			3,752,469
Net income	$	5,876,630		$	6,195,728		$	3,359,643

Condensed Statements of Cash Flows

	For the years ended December 31,
	2007			2006			2005
Operating activities
Net income	$	5,876,630		$	6,195,728		$	3,359,643
Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed net income of subsidiaries	(6,630,490		)	(6,729,489		)	(3,752,469		)
Amortization	5,005			5,006			4,628
Increase (decrease) in due to Bank	(1,936,961		)	2,010,879			588,600
(Increase) decrease in other assets	14,009			(200		)	(25,401		)
Increase (decrease) in accounts payable	(376,713		)	(300,591		)	353,108
Stock based compensation expense	7,643			—			—
Net cash provided by (used for) operating activities	(3,040,877		)	1,181,333			528,109
Investing activities
Additional investment in bank	—			—			(19,000,000		)
Additional investment in BFNM, LLC	(385,806		)	(958,663		)	—
Investment in Beach First National Trusts	—			—			(155,000		)
Proceeds from sale of securities available for sale	—			—			18,246
Purchase of premises and equipment	(79,795		)	—			(607,618		)
Net cash used for investing activities	(465,601		)	(958,663		)	(19,744,372		)
Financing activities
Proceeds from issuance of junior subordinated debentures	—			—			5,155,000
Proceeds from exercise of stock options	520,734			98,188			44,313
Tax benefit of options in excess of compensation expense	385,565			—			—
Cash in lieu of stock dividend	—			(2,515		)	—
Proceeds from stock issuance, net	—			—			19,933,998
Net cash provided by financing activities	906,299			95,673			25,133,311
Net (decrease) increase in cash and cash equivalents	(2,600,179		)	318,343			5,917,048
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	9,043,890			8,725,547			2,808,499
CASH AND CASH EQUIVALENTS, END OF YEAR	$	6,443,711		$	9,043,890		$	8,725,547

47

NOTE 22 — QUARTERLY DATA (UNAUDITED)

	2007								2006
(Dollars in thousands except per share)	Fourth Quarter		Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter		Second Quarter		First Quarter
Interest income	$	11,382	$	11,669	$	11,360	$	10,696	$	10,668	$	9,696	$	8,566	$	7,556
Interest expense	5,829		5,842		5,596		5,214		4,890		4,234		3,689		3,216
Net interest income	5,553		5,827		5,764		5,482		5,778		5,462		4,877		4,340
Provision for loan losses	1,095		279		321		351		396		591		665		522
Net interest income after provision for loan losses	4,458		5,548		5,443		5,131		5,382		4,871		4,212		3,818
Noninterest income	1,286		1,804		2,153		2,334		1,481		1,237		961		312
Noninterest expenses	4,493		4,521		4,960		4,959		3,991		3,398		2,949		2,238
Income before taxes	1,251		2,831		2,636		2,506		2,872		2,710		2,224		1,892
Income tax expense	507		1,009		937		894		1,041		980		801		680
Net Income	$	744	$	1,822	$	1,699	$	1,612	$	1,831	$	1,730	$	1,423	$	1,212
Earnings per share:
Basic	$	0.15	$	0.38	$	0.35	$	0.34	$	0.41	$	0.36	$	0.30	$	0.26
Diluted	$	0.15	$	0.37	$	0.34	$	0.33	$	0.40	$	0.35	$	0.29	$	0.25

48

Rule 13a-14(a) Certification of the Chief Executive Officer (CEO)

I, Walter E. Standish, III, President and CEO, certify that:

1.  I have reviewed this Annual Report on Form 10-K of Beach First National Bancshares, Inc.;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

March 11, 2008

/s/ Walt Standish

Walter E. Standish, III

President and

Chief Executive Officer

49

Rule 13a-14(a) Certification of the Chief Financial Officer (CFO)

I, Gary S. Austin, Executive Vice President and CFO, certify that:

1.  I have reviewed this Annual Report on Form 10-K of Beach First National Bancshares, Inc.;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

March 11, 2008

/s/ Gary S. Austin

Gary S. Austin

Executive Vice President and

Chief Financial Officer

50

Corporate Information

Annual Meeting of Shareholders

The Annual Meeting of Shareholders of Beach First National Bancshares, Inc. will be held at the Myrtle Beach Convention Center, 2101 Oak Street, Myrtle Beach, South Carolina on Monday, April 21, beginning at 2 p.m.

Stock Information

The Company’s stock trades on the NASDAQ Global Market® under the symbol “BFNB”. As of February 29, 2008, the Company had approximately 3,068 stockholders and 4,845,018 shares of common stock outstanding.  This includes an estimate of the number of persons or entities who hold stock in nominee or “street name.”  Our common stock can be purchased from any broker licensed to sell or buy stock.  You can also learn about Beach First National Bancshares via the Internet.  You may visit NASDAQ.com, enter “BFNB,” and click on “Info Quotes.”  You may also visit the shareholder relations section of our website, beachfirst.com, for additional details and company news.

Stock Performance

The chart at right shows the performance of

Beach First National Bancshares, Inc. in comparison

to three indices over the time period from

December 2002 until December 2007.

(chart)

Registrar and Transfer Agent

First Citizens Bank

Shareholder Services-FCC61

P.O. Box 29522

Raleigh, NC 27626-0522

Toll-free:  1.877.685.0576

Form 10-K

Copies of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as filed with the Securities and Exchange Commission, will be furnished at no charge to shareholders upon written request to Gary S. Austin, Executive Vice President and Chief Financial Officer, 3751 Robert M. Grissom Parkway, Suite 100, Myrtle Beach, SC 29577, or via e-mail (gaustin@beachfirst.com).

Forward Looking Statement

Certain statements in this document contain “forward-looking statements,” such as statements relating to future plans and expectations.  Such forward-looking statements are subject to risks and uncertainties, such as a downturn in the economy, greater than expected non-interest expenses or excessive loan losses, which could cause actual results to differ materially from future plans and expectations expressed or implied by such forward-looking statements. For a more detailed description of factors that could cause such differences, please see our filings with the SEC.

Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate.  Therefore, we can give no assurance that the results contemplated in the forward-looking statements will be realized.  The inclusion of this forward-looking information should not be construed as a representation by our company or any person that future events, plans, or expectations contemplated by our company will be achieved.  We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

51

Executive Office

Walt Standish

M. Katharine Huntley (Katie)

Julien E. Springs

Gary S. Austin

Ann Nesmith

Pat Gregory

Sharon Burton

Departments

Accounting

Joey Housand

Jason Hucks

Danielle Settles

Allison Stout

Deposit Operations

Rita Maxson

Lorraine Best

Mary Kay Flynn

Beverley Harrison

Brad McNabb

Laura Scagliotti

Michelle Thomas

Business Services

Deborah J. Myers

Kristen Curtis

Sharyn Glass

Dreama S. Osborne

Human Resources

Lorie Y. Runion

Audra Barnett

Kimberly H. Gary

Information Technology and Facilities

William E. Hinson

Sarah Carter

Tina McInville

Harry Myers

M. Scott Williamson

Loan Operations

Linda S. Dickinson

John D. Brown, Jr.

Krystal Furlough

Sandy Gablehouse

Veronica Gilbert

Sheila King

52

Margie Livingston

Lisa Neff

Jennie Shaw

Dale Sullivan

Sharon Vane

Audit

Kimberly L. Talley

Compliance

Sherry Schoolfield

Kathleen Lutes

Security

C. Dale Long

Marketing

Barbara W. Marshall

Christi Wickliffe-Bessinger

Branches

Grand Strand

Myrtle Beach Main

Barbara H. Abrams

Theresa Bretz

Maria Drummond

Kim Fullwood

Will Gravely

Zella Henley

Leslie Hotzelt

Brigid McKee

Monica Shinn

Commercial Banking

Harry G. Bates, IV

Charles W. Fisher, III

J. Louis LaBruce

Joshua C. Wise

Zebeth Fowler

Sarah Johnson

Jolene McCune

73^rd Avenue North

Rosie Minton

Susie Barnhill

Jessica Brown

Susan Eccard

North Strand

Marcus G. McDowell

53

North Myrtle Beach Office

John L. Breeden, III

Mary Argondizzo

Lisa Bell

Kathy Crawford

Lisa Fineran

Sandra Gore

Stephanie Rhea

Peggy Roessler

South Strand

O. Kendall Buckner

Litchfield Office

Lynn Carmon

Cathy Boatman

Mark Hawkinson

Yolanda Rogers

Nellie Yohe

Surfside Beach Office

Orit Perez

Carrie Duran

Alexus Gore

Karen Hess

Christine Holmes

Chris Lindamood

Tami Miller

Collier J. Schettig

Hilton Head Island

Paul R. Walter

The Village at Wexford

Kimberly Krivda

Sherese Bailey

Stephanie Green

Libby Johnson

Roselyn Moultrie

Juanita Strnad

Michelle Wilson

Pineland Station

Jamie Bloch

Michael Brown

Nat Green

Mabel Herrera

54

Mortgage Offices

Little River

H. David Stacy

Paul Allman

Elizabeth Anthony

Carla Cunningham

Julie Gilbert

Brenda Gose

Donnella Hardee

Alan (Butch) Irby

Amy Jack

Tina Kosmos

David Neff

Nancy Rutkowski

Gastonia, NC

Chris Nichols

Lisa Nichols

Raleigh, NC

Paul Bengds

Mark Black

Ronnie Botros

Wade Brantley

David Brunetz

Jason Harris

Aaron Lindeen

Tonya Mason

Daniel Nelson

Monica Smith

Leon Tyler

Christopher Wheaton

Dennis Zullig

Fredericksburg, VA

Michelle Halpin

Carole Moyer

Wendy Richards

Scott Swahl

Eladio Tavara

Patricia Wells

Burke, VA

David Bryan

Keith Bryan

Mary De la Vega

Delphia Ferguson

John Forgrave

Greg Meads

Dan Slattery

Judith Wines

Sterling, VA

James Bell, Jr.

Susan Brazel

Chanda Breakiron

55

Kelli Foster

James Gbormittah

Mark Griffin

Jacki Haynes

John Haynes

Brian Matteson

Jennifer Perry-Griffin

Derron Tapp

Diane Walsh

Equal Employment Opportunity

Beach First is an equal opportunity employer. It is the bank’s policy to grant equal employment opportunity (EEO) to all qualified persons without regard to race, color, sex, religion, age, national origin, physical or mental disability, veteran’s status, or any other characteristic protected by applicable law (“Protected Characteristics”). The bank provides equal opportunities in employment, promotion, wages, benefits, and all other privileges, terms, and conditions of employment.  This policy has the support of the highest levels of management. Unfavorable speech or actions by employees regarding the Protected Characteristics of other employees, agents, contractors, vendors, customers, or others having an affiliation with the Bank will not be tolerated.  All employees and managers are expected to comply with our equal employment opportunity policy.

Beach First is a South Carolina Family Friendly Workplace.

(graphic)

(graphic Member FDIC logo)

(graphic Equal Housing Lender logo)

56

Board of Directors

Michael Bert Anderson

Managing Owner

Oceana Resorts

Thomas P. Anderson

Chief Executive Officer

Medical University of South Carolina Foundation

Bart Buie

Certified Public Accountant

Bartlett Buie, CPA, P.A.

Raymond E. Cleary, III, DDS

Chairman of the Board

Beach First National Bancshares, Inc.

Dentist

Glenn’s Bay Dentists at Surfside

E. Thomas Fulmer

Owner

Beachcomber Realty

Michael D. Harrington

General Contractor

Harrington Construction Company, Inc.

Joe N. Jarrett, Jr. MD

Orthopaedic Surgeon

Strand Orthopaedic Consultants, LLC

Richard E. Lester

Attorney

Lester & Lester, P.A.

Leigh Ammons Meese

President

Sea Mist Resort and Family Kingdom Amusement Park

Rick H. Seagroves

Owner

Southeast Restaurant Corporation

Don J. Smith

President

Coldwell Banker Chicora Real Estate

Samuel R. Spann, Jr.

President

Spann Roofing and Sheet Metal, Inc.

B. Larkin Spivey, Jr.

Owner

Spivey Company, LLC

Walt Standish

President and Chief Executive Officer

Beach First National Bank

James C. Yahnis

Beverage Wholesaler

The Yahnis Company

57

Business Development Boards

North Strand

J. Michael Campbell

Sales Representative, Blanchard Machinery

Bunkie Ford

Owner, Ford’s Fuel Service, Inc., Ford’s Propane, Inc., and Affordable Trailers

Roger P. Roy, Jr.

Attorney, Cook & Roy, LLC

Linda Hope Taylor

Owner, Hope Taylor & Co.

Mickey Thompson

Owner, Marine Service Center of Little River

Quinn Thompson

Owner, Thompson Roofing Company

Joey Todd

Owner, Atlantic Heating and Cooling

Tina Yates

Owner, Hoskins Restaurant

South Strand

Brian J. Brady, CPA, PFS, ChFC

Lawlor & Brady CPAs, LLC

Lawlor & Brady Financial Planning, LLC

Tim Conner

Owner, American Athletic Clubs

Allen B. Foxworth

President, Foxworth Development, Inc.

Laura Jackson Hoy

The Jackson Companies

Frederick C. Parsons, III

Attorney, Parsons, Ouverson, Stark, Guest, and Neill, PA

Helen Smith

Project Manager, SE Smith Construction Co., Inc.

Developer/Owner, The Park at Forestbrook and Maddington Place Condos

58

Hilton Head Island

Paul Cale

Owner/President, Hilton Head Vacation Rentals

David Howard

President, Allied Management Group

Mark June, CPA

Managing Director, June & Associates, CPA

Gloria LaCoe

Realtor, Dunes Marketing

Hale Mayer

Retired

Mary Navis

President, Billy Wood Appliance

Joe Ryan

Broker-in-Charge/Owner,

Weichert Realty-Coastal Properties

Dennis Sexton

President, Dennis Sexton Home Builders

Chuck Slusne

Owner, Coastal Home & Villa Rentals

Jeff Wilson

President, Pinnacle Southeastern, Inc.

Pawleys Island

Van Arrington

Pastor, My Father’s House

Jackie Epperson, M.D.

Inlet Medical Associates

Donald Godwin

Owner, Southern Asphalt

Heyward Gulledge

Investor/Real Estate Appraiser

Lee Hewitt

Co-Owner, Garden City Realty

Vida Miller

Owner, Gray Man Gallery, and

South Carolina State Representative

59

Full Service Banking Offices

Hilton Head Island-

Pineland Station

430 William Hilton Parkway,

Suite 501

Hilton Head Island, SC 29926

Hilton Head Island-

The Village at Wexford

1000 William Hilton Parkway,

Suite F-4

Hilton Head Island, SC 29928

843.842.3232

Myrtle Beach Main

3751 Grissom Parkway, Suite 100

Myrtle Beach, SC 29577

843.626.2265

North Myrtle Beach

710 Highway 17 North

North Myrtle Beach, SC 29582

843.663.2265

Pawleys Island

115 Willbrook Blvd., Suite A

Pawleys Island, SC 29585

843.979.5300

Opening April ‘08

73^rd Avenue

7202 North Kings Highway

Myrtle Beach, SC 29572

843.839.9750

Surfside Beach

3064 Dick Pond Road

Surfside Beach, SC 29588

843.294.6000

60

Mortgage Offices

Burke

9554-F Old Keene Road

Burke, VA 22015

703.564.8019

Fredericksburg

10500 Wakeman Drive, Suite 300

Fredericksburg, VA 22407

800.261.1833

Gastonia

1519 South Marietta Street

Gastonia, SC 28054

704.868.3460

Little River

1384 Highway 17

Little River, SC 29566

800.261.1834

Raleigh

1005 Bullard Court, Suite 107

Raleigh NC 27615

919.861.7686

Sterling

21351 Gentry Drive, Suite 150

Sterling, VA 20166

703.462.1454

61

(photo)

Beach First National Bancshares, Inc. logo

3751 Grissom Parkway, Myrtle Beach, South Carolina, 29577/843.626.2265/beachfirst.com

62

EX-21.1

Exhibit 21.1

Subsidiaries of the Company.

Beach First National Bank

Beach First National Trust

Beach First National Trust II

BFNM, LLC

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference of our Reports, dated March 11, 2008, included in Beach First National Bancshares’ Annual Report, into the Form 10-K for the year ended December 31, 2007.

/s/ Elliott Davis, LLC

Elliott Davis, LLC

March 13, 2008

Columbia, South Carolina

EX-31.1

Exhibit 31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Walter E. Standish, III, President and Chief Executive Officer, certify that:

1.I have reviewed this annual report on Form 10-K of Beach First National Bancshares, Inc.

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)  All significant deficiencies and material the weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  March 14, 2008

/s/ Walter E. Standish, III

Walter E. Standish, III, President and C.E.O.

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Gary S. Austin, Chief Financial Officer, certify that:

1.I have reviewed this annual report on Form 10-K of Beach First National Bancshares, Inc.

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)  All significant deficiencies and material the weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  March 14, 2008

/s/ Gary S. Austin

Gary S. Austin, Chief Financial Officer

(Principal Financial and Accounting Officer)

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, the Chief Executive Officer and the Chief Financial Officer of Beach First National Bancshares, Inc. (the “Company”), each certify that, to his knowledge on the date of this certification:

1.The annual report of the Company for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on this date (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Walter E. Standish, III

Walter E. Standish, III

Chief Executive Officer

March 14, 2008

/s/ Gary S. Austin

Gary S. Austin

Chief Financial Officer

March 14, 2008