**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **x**      | ** ** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                              |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                          |
| ** ** | ** ** | **For the  quarterly period ended: March 31, 2008**                                                                                                                                                                      |
|       |       |                                                                                                                                                                                                                          |
| **o**      | ** ** | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                             |
|       |       |                                                                                                                                                                                                                          |
| ** ** | ** ** | **For the  transition period from                                  to** |

 

**Commissionfile number: 000-22503**

 

**BEACH FIRSTNATIONAL BANCSHARES, INC.**

(Exact name of registrant asspecified in its charter)

 

| **South Carolina**       | ** ** | **57-1030117**                       |
|--------------------------|------------|--------------------------------------|
| (State of Incorporation) |       | (I.R.S. Employer Identification No.) |

 

**3751Grissom Parkway, Suite 100, Myrtle Beach, South Carolina 29577**

(Address of principal executiveoffices)

 

**(843) 626-2265**

(Issuer’s telephone number)

 

**NotApplicable**

(Former name, former address andformer fiscal year, if changed since last report)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.    Yes  x    No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-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 markwhether the registrant is shell company (as defined in Rule 12b-2 of theExchange Act).    Yes  o    No  x

 

State the number ofshares outstanding of each of the issuer’s classes of common equity, as of thelatest practicable date:  On May 9,2008, 4,845,018 shares of the issuer’s common stock, par value $1.00 per share,were issued and outstanding.

 

 

----

 

**PART I**

**FINANCIAL INFORMATION**

**Item 1.  Financial Statements****.**

** **

**Beach FirstNational Bancshares, Inc. and Subsidiaries**

**Consolidated Condensed BalanceSheets**

 
| ** **                                                                                                                                                                                    | ** ** | **March 31,** | ** **      | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-----------------|-----------------------|------------|
| ** **                                                                                                                                                                                    | ** ** | **2008**           | ** **      | **2007**              | ** ** | **2007** | ** ** |
| ** **                                                                                                                                                                                    | ** ** | **(unaudited)**    | ** **      | **(unaudited)**       | ** ** | **(audited)** | ** ** |
| **Assets**                                                                                                                                                                                    | ** ** | ** **         | ** **      | ** **            | ** ** | ** ** | ** ** |
| Cash and due from banks                                                                                                                                                   |       | $                  |  5,544,916 |                  | $          |  7,654,093 |   | $ |  4,992,634 |   |
| Federal funds  sold and short-term investments                                                                                                                                                |       | 2,091,864          |            | 4,655,718             |       | 566,044 |   |
| Investment  securities                                                                                                                                                                        |       | 66,305,216         |            | 69,191,574            |       | 65,677,993 |   |
|                                                                                                                                                                                          |       |               |            |                  |       |   |   |
| Portfolio loans,  net of unearned                                                                                                                                                             |       | 531,546,872        |            | 434,129,341           |       | 503,432,516 |   |
| Allowance for  loan losses (ALL)                                                                                                                                                              |       | (7,519,960         | )               | (6,172,091            | )          | (6,935,616 | ) |
| Portfolio loans,  net of ALL                                                                                                                                                                  |       | 524,026,912        |            | 427,957,250           |       | 496,496,900 |   |
|                                                                                                                                                                                          |       |               |            |                  |       |   |   |
| Mortgage loans  held for sale                                                                                                                                                                 |       | 7,356,399          |            | 13,865,389            |       | 6,475,619 |   |
| Federal Reserve  Bank stock                                                                                                                                                                   |       | 984,000            |            | 984,000               |       | 984,000 |   |
| Federal Home  Loan Bank stock                                                                                                                                                                 |       | 3,545,100          |            | 2,607,800             |       | 3,395,300 |   |
| Premises and  equipment, net                                                                                                                                                                  |       | 16,188,434         |            | 14,967,965            |       | 15,746,143 |   |
| Cash value of  life insurance                                                                                                                                                                 |       | 3,582,672          |            | 3,456,029             |       | 3,554,807 |   |
| Investment in  BFNB Trusts                                                                                                                                                                    |       | 310,000            |            | 310,000               |       | 310,000 |   |
| Other assets                                                                                                                                                                                  |       | 8,871,724          |            | 7,157,396             |       | 7,788,978 |   |
| Total assets                                                                                                                                                                                  |       | $                  | 638,807,237     |                  | $          | 552,807,214 |   | $ | 605,988,418 |   |
| ** **                                                                                                                                                                                    |       |               |            |                  |       |   |   |
| **Liabilities  and shareholders’ equity**                                                                                                                                                |       |               |            |                  |       |   |   |
| **Liabilities:**                                                                                                                                                                              |       |               |            |                  |       |   |   |
| Deposits                                                                                                                                                                                      |       |               |            |                  |       |   |   |
| Noninterest  bearing deposits                                                                                                                                                                 |       | $                  | 35,925,681      |                  | $          | 35,863,807 |   | $ | 33,138,936 |   |
| Interest bearing  deposits                                                                                                                                                                    |       | 458,007,313        |            | 409,193,216           |       | 431,059,409 |   |
| Total deposits                                                                                                                                                                                |       | 493,932,994        |            | 445,057,023           |       | 464,198,345 |   |
| Advances from  Federal Home Loan Bank                                                                                                                                                         |       | 55,000,000         |            | 37,500,000            |       | 55,000,000 |   |
| Federal funds  purchased and other borrowings                                                                                                                                                 |       | 21,153,488         |            | 7,133,561             |       | 18,288,148 |   |
| Junior  subordinated debentures                                                                                                                                                               |       | 10,310,000         |            | 10,310,000            |       | 10,310,000 |   |
| Other  liabilities                                                                                                                                                                            |       | 4,595,991          |            | 5,526,823             |       | 5,613,875 |   |
| Total  liabilities                                                                                                                                                                            |       | 584,992,473        |            | 505,527,407           |       | 553,410,368 |   |
| ** **                                                                                                                                                                                    |       |               |            |                  |       |   |   |
| **Shareholders’  equity:**                                                                                                                                                               |       |               |            |                  |       |   |   |
| Common stock, $1 par value; 10,000,000 sharesauthorized;  4,845,018 issued and outstanding at March 31, 2008, 4,779,241 at  March 31, 2007, and 4,845,018 at December 31, 2007 |       | 4,845,018          |            | 4,779,241             |       | 4,845,018 |   |
| Paid-in capital                                                                                                                                                                               |       | 29,499,042         |            | 28,695,185            |       | 29,494,912 |   |
| Retained  earnings                                                                                                                                                                            |       | 19,467,138         |            | 14,319,179            |       | 18,583,425 |   |
| Accumulated  other comprehensive income (loss)                                                                                                                                                |       | 3,566              |            | (513,798              | )          | (345,305 | ) |
| Total  shareholders’ equity                                                                                                                                                              |       | 53,814,764         |            | 47,279,807            |       | 52,578,050 |   |
| Total  liabilities and shareholders’ equity                                                                                                                                              |       | $                  | 638,807,237     |                  | $          | 552,807,214 |   | $ | 605,988,418 |   |

 

Theaccompanying notes are an integral part of these consolidated condensedfinancial statements.

 

2

----

 

**Beach FirstNational Bancshares, Inc, and Subsidiaries**

**Consolidated Condensed Statementsof Income**

 
| ** **                                                            | ** ** | **Three Months Ended  March 31,** | ** ** | **For the Year Ended  December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                                         | ** ** | **2007**                                                 | ** ** | **2007** | ** ** |
| ** **                                                            | ** ** | **(unaudited)**                                  | ** ** | **(unaudited)**                                          | ** ** | **(audited)** | ** ** |
| **Interest  income**                                                  |       |                                             |       |                                                     |       |   |   |
| Interest and  fees on loans                                           |       | $                                                | 10,159,454 |                                                     | $          | 9,700,238 |   | $ | 41,064,557 |   |
| Investment  securities                                                |       | 998,444                                          |       | 904,843                                                  |       | 3,698,507 |   |
| Federal funds  sold and short term investments                        |       | 71,602                                           |       | 72,477                                                   |       | 319,985 |   |
| Other                                                                 |       | 5,312                                            |       | 5,899                                                    |       | 23,970 |   |
| Total interest  income                                                |       | 11,234,812                                       |       | 10,683,457                                               |       | 45,107,019 |   |
| **Interest  expense**                                                 |       |                                             |       |                                                     |       |   |   |
| Deposits                                                              |       | 5,097,125                                        |       | 4,467,284                                                |       | 18,802,056 |   |
| Advances from  the FHLB, federal funds purchased and other borrowings |       | 742,935                                          |       | 536,958                                                  |       | 2,877,463 |   |
| Junior  subordinated debentures                                       |       | 174,378                                          |       | 197,468                                                  |       | 802,455 |   |
| Total interest  expense                                               |       | 6,014,438                                        |       | 5,201,710                                                |       | 22,481,973 |   |
| Net interest  income                                                  |       | 5,220,374                                        |       | 5,481,747                                                |       | 22,625,046 |   |
|                                                                  |       |                                             |       |                                                     |       |   |   |
| **Provision  for loan losses**                                        |       | 746,000                                          |       | 351,200                                                  |       | 2,045,600 |   |
| Net interest  income after provision for loan losses                  |       | 4,474,374                                        |       | 5,130,547                                                |       | 20,579,446 |   |
|                                                                  |       |                                             |       |                                                     |       |   |   |
| **Noninterest  income**                                               |       |                                             |       |                                                     |       |   |   |
| Service fees on  deposit accounts                                     |       | 154,044                                          |       | 135,488                                                  |       | 568,760 |   |
| Mortgage  production related income                                   |       | 740,001                                          |       | 1,772,672                                                |       | 4,911,705 |   |
| Merchant income                                                       |       | 153,687                                          |       | 96,565                                                   |       | 665,811 |   |
| Gain on sale of  investment securities                                |       | —                                           |       | —                                                   |       | 7,904 |   |
| Income from cash  value life insurance                                |       | 33,527                                           |       | 36,759                                                   |       | 152,086 |   |
| Gain on sale of  fixed assets                                         |       | 220                                              |       | 3,850                                                    |       | 6,324 |   |
| Other income                                                          |       | 298,544                                          |       | 241,289                                                  |       | 1,265,194 |   |
| Total  noninterest income                                             |       | 1,380,023                                        |       | 2,286,623                                                |       | 7,577,784 |   |
|                                                                  |       |                                             |       |                                                     |       |   |   |
| **Noninterest  expense**                                              |       |                                             |       |                                                     |       |   |   |
| Salaries and  wages                                                   |       | 1,697,881                                        |       | 2,332,432                                                |       | 7,760,272 |   |
| Employee benefits                                                     |       | 401,208                                          |       | 400,906                                                  |       | 1,646,093 |   |
| Supplies and  printing                                                |       | 52,267                                           |       | 51,182                                                   |       | 199,977 |   |
| Advertising and  public relations                                     |       | 182,400                                          |       | 143,606                                                  |       | 615,552 |   |
| Professional  fees                                                    |       | 142,436                                          |       | 127,989                                                  |       | 725,122 |   |
| Depreciation and  amortization                                        |       | 268,937                                          |       | 252,598                                                  |       | 1,060,255 |   |
| Occupancy                                                             |       | 410,615                                          |       | 464,283                                                  |       | 1,719,491 |   |
| Data processing  fees                                                 |       | 186,300                                          |       | 171,457                                                  |       | 748,446 |   |
| Mortgage  production related expense                                  |       | 169,667                                          |       | 380,697                                                  |       | 1,153,246 |   |
| Merchant  processing                                                  |       | 157,677                                          |       | 111,829                                                  |       | 623,947 |   |
| Other operating  expenses                                             |       | 809,364                                          |       | 474,198                                                  |       | 2,680,943 |   |
| Total  noninterest expenses                                           |       | 4,478,752                                        |       | 4,911,177                                                |       | 18,933,344 |   |
| Income before  income taxes                                           |       | 1,375,645                                        |       | 2,505,993                                                |       | 9,223,886 |   |
| **Income  tax expense**                                               |       | 491,932                                          |       | 893,609                                                  |       | 3,347,256 |   |
| Net income                                                            |       | $                                                | 883,713    |                                                     | $          | 1,612,384 |   | $ | 5,876,630 |   |
|                                                                  |       |                                             |       |                                                     |       |   |   |
| **Basic  net income per common share**                                |       | $                                                | 0.18       |                                                     | $          | 0.34 |   | $ | 1.22 |   |
| **Diluted  net income per common share**                              |       | $                                                | 0.18       |                                                     | $          | 0.33 |   | $ | 1.18 |   |
| Weighted average  common shares outstanding - basic                   |       | 4,845,018                                        |       | 4,769,102                                                |       | 4,817,911 |   |
| Weighted average  common shares outstanding – diluted            |       | 4,925,485                                        |       | 4,926,803                                                |       | 4,977,067 |   |

 

The accompanying notes are anintegral part of these consolidated condensed financial statements.

 

3

----

 

**Beach First National Bancshares, Inc. andSubsidiaries**

**Consolidated Condensed Statements of Changes inShareholders’ Equity and Comprehensive Income**

(Unaudited)

 
| ** **                                                          | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                                          | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | **Other**              | ** ** | **Total**  | ** ** |
| ** **                                                          | ** ** | **Common stock** | ** ** | **Paid-in** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Shareholders’** | ** ** |
| ** **                                                          | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**  | ** ** | **Earnings**      | ** ** | **Income (Loss)** | ** ** | **Equity** | ** ** |
|                                                                |       |                  |       |        |       |         |       |              |       |                   |       |       |       |
| Balance,  December 31, 2006                                    |       | 4,768,413             |       | $           | 4,768,413  |         | $          | 28,657,576        |       | $                      | 12,706,795 |       | $          | (673,205 | ) | $ | 45,459,579 |   |
| Net income                                                          |       | —                |       | —      |       | —       |       | 1,612,384         |       | —                 |       | 1,612,384  |       |
| Other comprehensive  income, net of taxes:                          |       |                  |       |        |       |         |       |              |       |                   |       |       |       |
| Unrealized gain  on investment securities                           |       | —                |       | —      |       | —       |       | —            |       | 95,085                 |       | 95,085     |       |
| Unrealized gain  on interest rate swap                              |       | —                |       | —      |       | —       |       | —            |       | 64,322                 |       | 64,322     |       |
| Plus  reclassification adjustments for gains included in net income |       | —                |       | —      |       | —       |       | —            |       | —                 |       | —     |       |
| Comprehensive  income                                               |       | —                |       | —      |       | —       |       | —            |       | —                 |       | 1,771,791  |       |
| Exercise of stock  options                                          |       | 10,828                |       | 10,828      |       | 37,609       |       | —            |       | —                 |       | 48,437     |       |
| Balance,  March 31, 2007                                       |       | 4,779,241             |       | $           | 4,779,241  |         | $          | 28,695,185        |       | $                      | 14,319,179 |       | $          | (513,798 | ) | $ | 47,279,807 |   |

 
| ** **                                 | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                 | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | **Other**              | ** ** | **Total**  | ** ** |
| ** **                                 | ** ** | **Common stock** | ** ** | **Paid-in** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Shareholders’** | ** ** |
| ** **                                 | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**  | ** ** | **Earnings**      | ** ** | **Income (Loss)** | ** ** | **Equity** | ** ** |
|                                       |       |                  |       |        |       |         |       |              |       |                   |       |       |       |
| Balance,  December 31, 2007           |       | 4,845,018             |       | $           | 4,845,018  |         | $          | 29,494,912        |       | $                      | 18,583,425 |       | $          | (345,305 | ) | $ | 52,578,050 |   |
| Net income                                 |       | —                |       | —      |       | —       |       | 883,713           |       | —                 |       | 883,713    |       |
| Other  comprehensive income, net of taxes: |       |                  |       |        |       |         |       |              |       |                   |       |       |       |
| Unrealized loss  on investment securities  |       | —                |       | —      |       | —       |       | —            |       | 475,924                |       | 475,924    |       |
| Unrealized gain  on interest rate swap     |       | —                |       | —      |       | —       |       | —            |       | (127,053               | )          | (127,053   | )          |
| Comprehensive  income                      |       | —                |       | —      |       | —       |       | —            |       | —                 |       | 1,232,584  |       |
| Stock based  compensation expense          |       | —                |       | —      |       | 4,130        |       | —            |       | —                 |       | 4,130      |       |
| Exercise of stock  options                 |       | —                |       | —      |       | —       |       | —            |       | —                 |       | —     |       |
|                                       |       |                  |       |        |       |         |       |              |       |                   |       |       |       |
| Balance, March 31, 2008               |       |                  | 4,845,018  |        | $          | 4,845,018    |       | $                 | 29,499,042 |                   | $          | 19,467,138 |       | $ | 3,566 |   | $ | 53,814,764 |   |
|                                            |            |                       |            |             |            |              |            |                   |            |                        |            |            |            |  |  |  |  |  |  |

 

The accompanying notes are anintegral part of these consolidated condensed financial statements.

 

4

----

 

**Beach FirstNational Bancshares, Inc. and Subsidiaries**

**MyrtleBeach, South Carolina**

**Consolidated  CondensedStatements of Cash Flows**

 
| ** **                                                                                   | ** ** | **Three Months Ended  March 31,** | ** **    | **For the Year Ended  December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|---------------|----------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2008**                                         | ** **    | **2007**                                                 | ** ** | **2007** | ** ** |
| ** **                                                                                   | ** ** | ** (unaudited)**                            | ** **    | **(unaudited)**                                          | ** ** | **(audited)** | ** ** |
| **Operating Activities**                                                                | ** ** | ** **                                       | ** **    | ** **                                               | ** ** | ** ** | ** ** |
| Net income                                                                              |       | $                                                |  883,713 |                                                     | $          |  1,612,384 |   | $ |  5,876,630 | ** ** |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                             |          |                                                     |       |   |   |
| Depreciation and  amortization                                                               |       | 268,937                                          |          | 315,739                                                  |       | 1,060,255 |   |
| Proceeds from  sale of mortgages held for sale                                               |       | 29,925,653                                       |          | 78,275,688                                               |       | 231,970,200 |   |
| Disbursements  for mortgages held for sale                                                   |       | (30,806,433                                      | )             | (80,036,130                                              | )          | (225,967,597 | ) |
| Discount  accretion and premium amortization                                                 |       | (134,540                                         | )             | 36,971                                                   |       | (153,431 | ) |
| Deferred income  taxes                                                                       |       | —                                           |          | 616,493                                                  |       | (673,024 | ) |
| Provisions for  loan losses                                                                  |       | 746,000                                          |          | 351,200                                                  |       | 2,045,600 |   |
| Recourse reserve  provision                                                                  |       | 10,000                                           |          |                                                     |       | 205,000 |   |
| Loss (gain) on  sale of property and equipment                                               |       | (220                                             | )             | 3,768                                                    |       | (6,324 | ) |
| (Gain) on sale  of investment securities                                                     |       | —                                           |          | —                                                   |       | (7,904 | ) |
| (Gain) on sale  of OREO                                                                      |       | 390                                              |          | —                                                   |       | — |   |
| Stock based  compensation expense                                                            |       | 4,130                                            |          | —                                                   |       | 7,643 |   |
| (Increase)  decrease in other assets                                                         |       | 75,675                                           |          | (1,587,690                                               | )          | (1,713,779 | ) |
| Increase  (decrease) in other liabilities                                                    |       | (1,027,884                                       | )             | 2,085,754                                                |       | 1,994,064 |   |
| Net cash  provided by (used in) operating activities                                         |       | (54,579                                          | )             | 1,674,177                                                |       | (14,538,066 | ) |
| **Investing  Activities**                                                                    |       |                                             |          |                                                     |       |   |   |
| Proceeds from  paydowns of investment securities                                             |       | 1,452,611                                        |          | —                                                   |       | 4,988,852 |   |
| Proceeds from  sale of investment securities                                                 |       | 14,970,000                                       |          | —                                                   |       | 8,623,625 |   |
| Purchase of  investment securities                                                           |       | (16,194,197                                      | )             | (717,043                                                 | )          | (10,077,003 | ) |
| Purchase of FHLB  stock                                                                      |       | (149,800                                         | )             | (132,200                                                 | )          | (919,700 | ) |
| Increase in  loans, net                                                                      |       | (29,821,659                                      | )             | (35,817,988                                              | )          | (107,223,880 | ) |
| Purchase of life  insurance contracts                                                        |       | (27,865                                          | )             | (31,443                                                  | )          | (130,221 | ) |
| Purchase of  property and equipment                                                          |       | (711,228                                         | )             | (623,635                                                 | )          | (2,462,068 | ) |
| Proceeds from  sale of property and equipment                                                |       | 220                                              |          | —                                                   |       | 6,324 |   |
| Proceeds from  sale of other real estate owned                                               |       | 14,610                                           |          | —                                                   |       | 1,679,229 |   |
| Net cash used in  investing activities                                                       |       | (30,467,308                                      | )             | (37,322,309                                              | )          | (105,514,842 | ) |
| **Financing  Activities**                                                                    |       |                                             |          |                                                     |       |   |   |
| Repayment of  advances from Federal Home Loan Bank                                           |       |                                             |          |                                                     |       | (5,000,000 | ) |
| Advances from  Federal Home Loan Bank                                                        |       | —                                           |          | —                                                   |       | 22,500,000 |   |
| Increase  (decrease) in Federal funds purchased                                              |       | 2,945,100                                        |          | —                                                   |       | 11,382,100 |   |
| Net increase in  deposits                                                                    |       | 29,734,649                                       |          | 28,699,894                                               |       | 47,841,216 |   |
| Proceeds from  exercise of stock options                                                     |       | —                                           |          | 48,437                                                   |       | 520,733 |   |
| Tax benefit of  stock options                                                                |       | —                                           |          | —                                                   |       | 385,565 |   |
| Proceeds from  other borrowings                                                              |       | —                                           |          | —                                                   |       | — |   |
| Repayments of  other borrowings                                                              |       | (79,760                                          | )             | —                                                   |       | (303,772 | ) |
| Net cash  provided by financing activities                                                   |       | 32,599,989                                       |          | 28,748,331                                               |       | 77,325,842 |   |
|                                                                                         |       |                                             |          |                                                     |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                        |       | 2,078,102                                        |          | (6,899,801                                               | )          | (13,650,934 | ) |
|                                                                                         |       |                                             |          |                                                     |       |   |   |
| **Cash  and due from banks, beginning of period**                                            |       | $                                                | 5,558,678     |                                                     | $          | 19,209,612 |   | $ | 19,209,612 |   |
| **Cash  and due from banks end of period**                                                   |       | $                                                | 7,636,780     |                                                     | $          | 12,309,811 |   | $ | 5,558,678 |   |
|                                                                                         | ** ** | ** **                                       | ** **    | ** **                                               | ** ** | ** ** | ** ** |
| Cash Paid for:                                                                               | ** ** | ** **                                       | ** **    | ** **                                               | ** ** | ** ** | ** ** |
| Income taxes                                                                                 |       | $                                                | 32,415        |                                                     | $          | 79,223 |   | $ | 3,851,653 |   |
| Interest                                                                                     |       | $                                                | 5,961,643     |                                                     | $          | 4,762,545 |   | $ | 22,042,809 |   |

 

  The accompanying notes are anintegral part of these consolidated financial statements.

 

5

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**Beach First National Bancshares, Inc.**

**Notes to Consolidated CondensedFinancial Statements (Unaudited)**

 

**1.****                   Basisof Presentation**

 

                The accompanyingconsolidated condensed financial statements for Beach First National Bancshares, Inc.(“Company”) were prepared in accordance with instructions for Form 10-Qand, therefore, do not include all disclosures necessary for a completepresentation of financial condition, results of operations, and cash flows inconformity with generally accepted accounting principles.  All adjustments, consisting only of normalrecurring accruals, which are, in the opinion of management, necessary for fairpresentation of the interim consolidated financial statements have beenincluded.  The results of operations forthe three month period ended March 31, 2008 are not necessarily indicativeof the results that may be expected for the entire year.  These consolidated financial statements donot include all disclosures required by generally accepted accounting principlesand should be read in conjunction with the Company’s audited consolidatedfinancial statements and related notes for the year ended December 31,2007.

 

Certain previously reported amounts have beenreclassified to conform to the current year’s presentations.  Such changes had no effect on previouslyreported net income or shareholders’ equity.

 

**2.****                   Principlesof Consolidation**

 

                Theaccompanying consolidated condensed financial statements include the accountsof the Company and its subsidiaries, Beach First National Bank and BFNMBuilding, LLC (“LLC”) (See No. 4  “Investmentin LLC” below).  The Company also ownstwo grantor trusts, Beach First National Trust I and Beach First National TrustII.  All significant inter-company itemsand transactions have been eliminated in consolidation.  In accordance with current accountingguidance, the financial statements of the trusts have not been included in theCompany’s financial statements.

 

**3.****              EarningsPer Share**

 

                The Company calculates earnings per share inaccordance with Statement of Financial Accounting Standard No. 128, “Earningsper Share” (“SFAS 128”).  SFAS 128specifies the computation, presentation, and disclosure requirements forearnings per share (EPS) for entities with publicly held common stock orpotential common stock such as options, warrants, convertible securities, orcontingent stock agreements if those securities trade in a public market.

 

                Thisstandard specifies computation and presentation requirements for both basic EPSand, for entities with complex capital structures, diluted EPS.  Basic earnings per share are computed bydividing net income by the weighted average common shares outstanding.  Diluted earnings per share is similar to thecomputation of basic earnings per share except that the denominator is increasedto include the number of additional common shares that would have beenoutstanding if the dilutive potential common shares had been issued.  The dilutive effect of options outstandingunder the Company’s stock option plan is reflected in diluted earnings pershare by application of the treasury stock method.

 

**RECONCILIATION OF THE NUMERATORSAND DENOMINATORS OF THE BASIC AND DILUTED EPS COMPUTATIONS:**

 
| ** **                                                   | ** ** | **For the Three Months Ended** | ** **  | **For the Year Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------|-------------|---------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                           | ** **  | **2007**                              | ** ** | **2007** | ** ** |
| **Basic  earnings per share:**                               |       |                                               |        |                                  |       |   |   |
| Net income  available to common shareholders                 | ** ** | **$**                                              | **883,713** | ** **                            | **$**      | **1,612,384** | ** ** | **$** | **5,876,630** | ** ** |
|                                                         | ** ** | ** **                                         | ** **  | ** **                            | ** ** | ** ** | ** ** |
| Average common  shares outstanding – basic              |       | 4,845,018                                          |        | 4,769,102                             |       | 4,817,911 |   |
|                                                         |       |                                               |        |                                  |       |   |   |
| Basic earnings  per share                                    | ** ** | **$**                                              | **0.18**    | ** **                            | **$**      | **0.34** | ** ** | **$** | **1.22** | ** ** |
|                                                         | ** ** | ** **                                         | ** **  | ** **                            | ** ** | ** ** | ** ** |
| **Diluted  earnings per share:**                             |       |                                               |        |                                  |       |   |   |
| Net income  available to common shareholders                 | ** ** | **$**                                              | **883,713** | ** **                            | **$**      | **1,612,384** | ** ** | **$** | **5,876,630** | ** ** |
|                                                         | ** ** | ** **                                         | ** **  | ** **                            | ** ** | ** ** | ** ** |
| Average common  shares outstanding – basic              |       | 4,845,018                                          |        | 4,769,102                             |       | 4,817,911 |   |
|                                                         |       |                                               |        |                                  |       |   |   |
| Incremental  shares from assumed conversion of stock options |       | 80,467                                             |        | 157,701                               |       | 159,156 |   |
|                                                         |       |                                               |        |                                  |       |   |   |
| Average common  shares outstanding – diluted            |       | 4,925,485                                          |        | 4,926,803                             |       | 4,977,067 |   |
|                                                         | ** ** | ** **                                         | ** **  | ** **                            | ** ** | ** ** | ** ** |
| Diluted earnings  per share                                  | ** ** | **$**                                              | **0.18**    | ** **                            | **$**      | **0.33** | ** ** | **$** | **1.18** | ** ** |

 

6

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**4.  Investment in LLC**

 

The LLC is in partnership with our legal counsel,Nelson Mullins Riley & Scarborough LLP (NMRS), for purposes of acquiring aparcel of land and constructing an office building on the property.  The Company owns two-thirds of the LLC andNMRS owns the remaining one-third.  Thebuilding is a three-story, 46,066 square foot office building located on 3.5acres at the southwest corner of Robert Grissom Parkway and 38th Avenue North inMyrtle Beach, South Carolina.  The Companymoved its main office to this location in December 2006. Nelson Mullins Riley& Scarborough LLP also relocated its Myrtle Beach legal office to thebuilding in December 2006.  The LLCpurchased the land for approximately $1.8 million and financed the constructionproject through a third-party lender with each of the owners being responsiblefor their respective interests in the project. The total land and construction project cost approximately $7.0 million,exclusive of tenant improvements.  TheCompany leases two-thirds of the building (approximately 30,000 square feet)from the LLC.  Because the Company onlyoccupies approximately 12,500 square feet of space, it intends to lease theother 17,500 square feet of its portion to outside tenants.  NMRS also leases one-third of the buildingfrom the LLC.  As of March 31, 2008,4,700 square feet is available for lease.

 

Upon completion of construction, the constructionfinancing note from the third-party lender was converted to a term loan payableby the LLC to the third-party bank and is secured by the building. The loanrequires 107 installments of principal and interest based on a fifteen yearamortization, with all remaining principal and interest due on June 15, 2015.The interest rate is variable based on one-month LIBOR plus 1.40%. Theoutstanding balance on the loan at March 31, 2008 is $6,826,288 and is shown asother borrowings in the accompanying balance sheet.

 

**5.**  **Derivative FinancialInstruments – Interest rate SWAP**

 

The Company has two typesof derivative instruments. One is an interest rate swap on the LLC buildingloan, which is discussed below, and the other is created as part of residentialmortgage lending activities when the Company enters into a rate-locked loancommitment with a prospective borrower and, at the same time, arranges to sellthe loan to an investor. The Company has determined that this latter derivativeactivity is not material.

 

In June 2005, theLLC obtained a $7,235,000 loan from a bank for the construction of the buildingthat serves as the Company’s corporate office. The interest on this loan floatsbased on LIBOR plus 1.40%. At the same time, the LLC entered into an interestrate swap agreement in the same notional amount as a risk management tool tolock the interest cash outflows on the floating-rate debt. Under the terms ofthe swap (which expires upon maturity of the building loan in June 15,2015), the Company pays monthly a fixed interest rate of 4.62% and receivesinterest payments equal to LIBOR. As there are no differences between thecritical terms of the interest rate swap and the hedged debt obligation, theCompany assumes no ineffectiveness in the hedging relationship.

 

The estimated fair valueof this agreement at March 31, 2008 was a liability of approximately$409,932, which is included in other liabilities in the Company’s balancesheet. Changes in the fair value are recorded as a separate component in othercomprehensive income.   The fixed rate of4.62% paid under the swap agreement, when added to the loan’s margin aboveLIBOR of 1.40%, converts the building loan’s interest (and cash flows) from avariable rate to a fixed rate of 6.02%, resulting in interest expense of$105,498 and $108,142 for the three months ended March 31, 2008 and 2007,respectively.

 

The Company formallydocuments all relationships between hedging instruments and hedged items, aswell as its risk-management objective and strategy for undertaking varioushedged transactions. This process includes linking all derivatives that aredesignated as fair value or cash flow hedges to specific assets and liabilitieson the balance sheet or to specific firm commitments or forecastedtransactions. The Company also formally assesses, both at the hedge’s inceptionand on an ongoing basis, whether the derivatives that are used in hedgingtransactions are highly effective in offsetting changes in fair values or cashflows of hedged items. When it is determined that a derivative is not highlyeffective as a hedge or that it has ceased to be a highly effective hedge, theCompany discontinues hedge accounting prospectively, as discussed below.

 

The Company discontinueshedge accounting prospectively when (1) it is determined that thederivative is no longer effective in offsetting changes in cash flows of ahedged item (including forecasted transactions); (2) the derivativeexpires or is sold, terminated, or exercised; (3) the derivative is nolonger designated as a hedge instrument because is it unlikely that aforecasted transaction will occur; or (4) management determines thatdesignation of the derivative as a hedge instrument is no longer appropriate.

 

When hedge accounting isdiscontinued because it is probable that a forecasted transaction will notoccur, the derivative will continue to be carried on the balance sheet at itsfair value, and gains and losses that were accumulated in other comprehensiveincome will be recognized immediately in earnings. In all other situations inwhich hedge accounting 

 

7

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is discontinued, thederivative will be carried at its fair value on the balance sheet, withsubsequent changes in its fair value recognized in current earnings.

 

6.  **Fair Value Measurements**

 

Effective January 1,2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS157”) which provides a framework for measuring and disclosing fair value undergenerally accepted accounting principles. SFAS 157 requires disclosures aboutthe fair value of assets and liabilities recognized in the balance sheet inperiods subsequent to initial recognition, whether the measurements are made ona recurring basis (for example, available-for-sale investment securities) or ona nonrecurring basis (for example, impaired loans).

 

SFAS 157 defines fairvalue as the exchange price that would be received for an asset or paid totransfer a liability (an exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date. SFAS 157 also establishes a fair valuehierarchy which requires an entity to maximize the use of observable inputs andminimize the use of unobservable inputs when measuring fair value. The standarddescribes three levels of inputs that may be used to measure fair value:

 

**Level 1:**Quotedprices in active markets for identical assets or liabilities. Level 1 assetsand liabilities include debt and equity securities and derivative contractsthat are traded in an active exchange market, as well as U.S. Treasury, otherU.S. Government and agency mortgage-backed debt securities that are highlyliquid and are actively traded in over-the-counter markets.

 

**Level 2:**Observableinputs other than Level 1 prices such as quoted prices for similar assets orliabilities; quoted prices in markets that are not active; or other inputs thatare observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities. Level 2 assets andliabilities include debt securities with quoted prices that are traded lessfrequently than exchange-traded instruments and derivative contracts whosevalue is determined using a pricing model with inputs that are observable inthe market or can be derived principally from or corroborated by observable marketdata. This category generally includes certain derivative contracts andimpaired loans.

 

**Level 3:**Unobservableinputs that are supported by little or no market activity and that aresignificant to the fair value of the assets or liabilities. Level 3 assets andliabilities include financial instruments whose value is determined usingpricing models, discounted cash flow methodologies, or similar techniques, aswell as instruments for which the determination of fair value requiressignificant management judgment or estimation. For example, this categorygenerally includes certain private equity investments, retained residualinterests in securitizations, residential mortgage servicing rights, andhighly-structured or long-term derivative contracts.

 

Assets and liabilitiesmeasured at fair value on a recurring basis are as follows as of March 31,2008:

 
| ** **                                | ** ** | **Quoted Market** | ** ** | ** **                 | ** ** | **Significant**    | ** ** |
|-------------------------------------------|------------|------------------------|------------|----------------------------|------------|--------------------|------------|
| ** **                                | ** ** | **Price in Active**    | ** ** | **Significant Other** | ** ** | **Unobservable**   | ** ** |
| ** **                                | ** ** | **Markets**            | ** ** | **Observable Inputs** | ** ** | **Inputs**         | ** ** |
| ** **                                | ** ** | **(Level 1)**     | ** ** | **(Level 2)**         | ** ** | **(Level 3)** | ** ** |
| Available-for-sale investment  securities |       | $                      | 66,305,216 |                       |       |               |       |   |
|                                      |       |                   |       |                       |       |               |       |
| Mortgage loans held for sale              |       |                   |       | $                          | 7,356,399  |               |       |   |
|                                      |       |                   |       |                       |       |               |       |
| Interest rate swap agreement              |       |                   |       | 409,932                    |       |               |       |
| Total                                     |       | $                      | 66,305,216 |                       | $          | 7,766,331          |       | $ | — |   |
|                                           |            |                        |            |                            |            |                    |            |  |  |  |

 

The Company ispredominantly an asset based lender with real estate serving as collateral on asubstantial majority of loans. Loans which are deemed to be impaired areprimarily valued at the fair values of the underlying real estate collateral.Such fair values are obtained using independent appraisals, which the Companyconsiders to be level 2 inputs. The aggregate carrying amount of impaired loansat March 31, 2008 was $5,119,312.

 

The Company has no assetsor liabilities whose fair values are measured using level 3 inputs.

 

8

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

 

Thefollowing is our discussion and analysis of certain significant factors thathave affected our financial position and operating results and those of oursubsidiary, Beach First National Bank, during the periods included in theaccompanying financial statements.  Thiscommentary should be read in conjunction with the financial statements and therelated notes and the other statistical information included in this report.

 

Thisreport contains “forward-looking statements” relating to, without limitation,future economic performance, plans and objectives of management for futureoperations, and projections of revenues and other financial items that arebased on the beliefs of management, as well as assumptions made by andinformation currently available to management. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,”“expect,” “estimate,” “continue,” and “intend,” as well as other similar wordsand expressions of the future, are intended to identify forward-lookingstatements.  Our actual results maydiffer materially from the results discussed in the forward-looking statements,and our operating performance each quarter is subject to various risks anduncertainties that are discussed in detail in our filings with the Securitiesand Exchange Commission (the “SEC”), including, without limitation:

 

·                  significantincreases in competitive pressure in the banking and financial servicesindustries;

·                  changes in the interest rateenvironment which could reduce anticipated or actual margins;

·                  changesin political conditions or the legislative or regulatory environment;

·                  generaleconomic conditions, either nationally or regionally and especially in ourprimary service area, becoming less favorable than expected resulting in, amongother things, a deterioration in credit quality;

·                  changesoccurring in business conditions and inflation;

·                  changesin management;

·                  changesin technology;

·                  changesin deposit flows;

·                  thelevel of allowance for loan loss;

·                  therate of delinquencies and amounts of charge-offs;

·                  therates of loan growth;

·                  adversechanges in asset quality and resulting credit risk-related losses and expenses;

·                  changesin monetary and tax policies;

·                  lossof consumer confidence and economic disruptions resulting from terroristactivities;

·                  changesin the securities markets;

·                  otherrisks and uncertainties detailed from time to time in our filings with the SEC;and

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

 

**Critical Accounting Policies**

 

We have adopted various accounting policies thatgovern the application of accounting principles generally accepted in theUnited States and with general practices within the banking industry in thepreparation of our consolidated financial statements.  Our significant accounting policies are describedin the footnotes to our audited consolidated financial statements as of December 31,2007 as filed on our Form 10-K.

 

Certain accountingpolicies involve significant judgments and assumptions by management which hasa material impact on the carrying value of certain assets and liabilities.  We consider such accounting policies to becritical accounting policies.  Thejudgments and assumptions we use are based on historical experience and otherfactors, which are believed to be reasonable under the circumstances.  Because of the nature of the judgments andassumptions we make, actual results could differ from these judgments andestimates.  These differences could havea material impact on our carrying values of assets and liabilities and ourresults of operations.

 

We believe the allowancefor loan losses is the critical accounting policy that requires the mostsignificant judgment and estimates used in preparation of our consolidatedfinancial statements.  Some of the morecritical judgments supporting the amount of our allowance for loan lossesinclude judgments about the credit worthiness of borrowers, the estimated valueof the underlying collateral, the assumptions about cash flow, determination ofloss factors for estimating credit losses, the impact of current events, andconditions, and other factors impacting the level of probable inherentlosses.  Under different conditions orusing different assumptions, the actual amount of credit losses incurred by usmay be different from management’s estimates provided in our consolidatedfinancial statements.  Refer to thesubsection entitled

 

9

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“Allowance for Loan Losses” below for a more complete discussion of ourprocesses and methodology for determining our allowance for loan losses.

 

**Overview**

 

The following discussiondescribes our results of operations for the quarter ended March 31, 2008as compared to the quarter ended March 31, 2007, and also analyzes ourfinancial condition as of March 31, 2008 as compared to December 31,2007.  Like most community banks, wederive most of our income from interest we receive on our portfolio loans andinvestments.  Our primary source of fundsfor making these loans and investments is our deposits, on which we pay interest.  Consequently, one of the key measures of oursuccess is our amount of net interest income, or the difference between theincome on our interest-earning assets, such as loans and investments, and theexpense on our interest-bearing liabilities, such as deposits.  Another key measure is the spread between theyield we earn on these interest-earning assets and the rate we pay on ourinterest-bearing liabilities.

 

Of course, there arerisks inherent in all loans, so we maintain an allowance for loan losses toabsorb probable losses on existing loans that may become uncollectible.  We establish and maintain this allowance bycharging a provision for loan losses against our operating earnings.  In the following section, we have included adetailed discussion of this process.

 

In addition to earninginterest on our loans and investments, we earn income through fees and otherexpenses we charge to our customers.  Wedescribe the various components of this noninterest income, as well as ournoninterest expense, in the following discussion.

 

#### **Thefollowing discussion and analysis also identifies significant factors that haveaffected our financial position and operating results during the periodsincluded in the accompanying financial statements.  We encourage you to read this discussion andanalysis in conjunction with the financial statements and the related notes andthe other statistical information also included in this report.**

#### ** **

#### **Results of Operations**

#### ** **

***EarningsReview***

 

Our net income was $883,713 or $0.18 diluted netincome per common share, for the three months ended March 31, 2008 ascompared to $1,612,384, or $0.33 diluted net income per common share, for thesame period in 2007, and was $5,876,630, or $1.18 diluted net income per commonshare, for the year ended December 31, 2007.  The decrease in net income is attributed tothe challenging financial environment facing all banks.  The net interest margin declined to 3.45% at March 31,2008, due in part to rate reductions, since September 2007, of 3% in theprime lending rate. We expect continued pressure on the net interest marginthroughout 2008.  The return on averageassets for the three month period ended March 31, 2008 was 0.56% ascompared to 1.21% for the same period in 2007, and was 1.04% for the year endedDecember 31, 2007.  The return on averageequity was 6.64% for the three month period ended March 31, 2008 versus14.04% for the same period in 2007, and was 12.01% for the year ended December 31,2007.

 

Over the past twenty fourmonths, real estate values have fallen, and the default rates on mortgage loanshave risen.  There has been a resultingdisruption in secondary markets for mortgages, especially in non-conformingloan products.  The Federal Reserve Bankhas reduced short-term rates to stimulate the economy.  As a result of inflationary pressures comingfrom oil, food and certain other sectors, the long end of the yield curve hasnot dropped as fast as the short end, resulting in a steepening of the yieldcurve.  The Company has been affected bythese events in areas such as mortgage banking; land acquisition, developmentand construction lending; and consumer lending. The Company has seen a moderate rise in delinquencies and non-performingloans during 2007 and the first quarter of 2008, and it continues to monitorits portfolio of real estate loans closely. The reduction in short-term rates has adversely impacted the Company’snet interest margin.  In the currenteconomic, market and credit environment, there can be no assurance that theCompany’s portfolio will continue to perform at current levels.

 

*Net Interest Income*

 

Our primary source of revenue is net interest income,which represents the difference between the income on interest-earning assetsand expense on interest-bearing liabilities. During the first three months of 2008, net interest income decreased4.8% to $5,220,374 from $5,481,747 for the same period of 2007 and compared to$22.6 million for the year 

 

10

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ended December 31,2007.  The decline in net interest incomefor the first three months of 2008 resulted from an increase of $551,355 ininterest income offset by an increase in interest expense of $812,728.  Our level of net interest income isdetermined by the level of our earning assets and our net interest margin.  The impact on net interest income from thecontinued growth of our loan portfolio was offset by the decrease in the primelending rate which reduced our net interest margin.  Average total loans increased from $428.5million in the first three months of 2007 to $526.5 million in the same periodin 2008.  Average total loans increased$67.8 million from $458.7 million for the year ended December 31, 2007 ascompared to $526.5 million for the three months ended March 31, 2008.  In addition, average securities increased to$73.3 million in the first three months of 2008 compared to $72.1 million forthe first three months of 2007, and decreased $0.1 million from $73.4 millionfor the year ended December 31, 2007. Net interest spread, the difference between the rate we earn oninterest-earning assets and the rate we pay on interest-bearing liabilities,was 3.84% in the first three months of 2007 compared to 2.96% during the sameperiod of 2008, and 3.63% for the year ended December 31, 2007.  The net interest margin was 3.45% for thethree month period ended March 31, 2008 compared to 4.39% for the sameperiod of 2007, and 4.20% for the year ended December 31, 2007.  The decline in the net interest spread andthe net interest margin can be attributed to the challenging financialenvironment facing banks including the reduction in the prime lendingrate.  As an asset sensitive bank therate cuts immediately impact approximately 60% of our portfolio loans. Sinceour deposit rates have not declined as quickly, this has put pressure on ournet interest margin.

 

The following table setsforth, for the periods indicated, information related to our average balancesheet and average yields on assets and average rates paid on liabilities.  The yield or rates were derived by dividingannualized income or expense by the average balance of the corresponding assetsor liabilities.  The average balances arecalculated from the daily balances from the periods indicated.

 

**Average Balances, Income andExpenses, and Rates**

**For the quarters ended March 31,**

** **

| ** **                                                                 | ** ** | **2008**    | ** **  | **2007**    | ** ** |
|----------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| ** **                                                                 | ** ** | **Average** | ** **  | **Income/** | ** ** | **Yield/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** |
| ** **                                                                 | ** ** | **Balance** | ** **  | **Expense** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** |
|                                                                       |       |        |        |        |       |   |   |   |   |   |   |   |   |
| Federal funds sold, short term investments and trust preferred  securities |       | $           | 9,129,816   |        | $          | 71,602 |   | 3.15 | % | $ | 5,744,755 |   | $ | 72,477 |   | 5.12 | % |
| Investment securities                                                      |       | 73,317,591  |        | 1,003,756   |       | 5.51 | % | 72,132,812 |   | 910,742 |   | 5.12 | % |
| Loans                                                                      |       | 526,467,333 |        | 10,159,454  |       | 7.76 | % | 428,506,579 |   | 9,700,238 |   | 9.18 | % |
| Total earning assets                                                       |       | $           | 608,914,740 |        | $          | 11,234,812 |   | 7.42 | % | $ | 506,384,146 |   | $ | 10,683,457 |   | 8.56 | % |
|                                                                       |       |        |        |        |       |   |   |   |   |   |   |   |   |
| Cash & Due from Banks                                             |       | 5,623,286   |        |        |       |   |   | 6,301,900 |   |   |   |   |   |
| Other Assets                                                               |       | 20,090,066  |        |        |       |   |   | 20,688,161 |   |   |   |   |   |
| Total Assets                                                               |       | $           | 634,628,092 |        |       |   |   |   | $ | 533,374,207 |   |   |   |   |   |
|                                                                       |       |        |        |        |       |   |   |   |   |   |   |   |   |
| Total interest-bearing deposits                                            |       | $           | 465,487,983 |        | $          | 5,097,125 |   | 4.40 | % | $ | 390,786,029 |   | $ | 4,467,284 |   | 4.64 | % |
|                                                                       |       |        |        |        |       |   |   |   |   |   |   |   |   |
| Other borrowings                                                           |       | 76,624,906  |        | 917,313     |       | 4.81 | % | 56,689,961 |   | 734,426 |   | 5.25 | % |
| Total interest- bearing liabilities                                        |       | $           | 542,112,889 |        | $          | 6,014,438 |   | 4.46 | % | $ | 447,475,990 |   | $ | 5,201,710 |   | 4.71 | % |
|                                                                       |       |        |        |        |       |   |   |   |   |   |   |   |   |
| Demand Deposits                                                            |       | 34,182,069  |        |        |       |   |   | 34,029,036 |   |   |   |   |   |
| Other Liabilities                                                          |       | 5,131,880   |        |        |       |   |   | 5,942,380 |   |   |   |   |   |
| Total Liabilities                                                          |       | $           | 581,426,838 |        |       |   |   |   | $ | 487,447,406 |   |   |   |   |   |
|                                                                       |       |        |        |        |       |   |   |   |   |   |   |   |   |
| Equity Capital                                                             |       | 53,201,254  |        |        |       |   |   | 45,926,801 |   |   |   |   |   |
|                                                                       |       |        |        |        |       |   |   |   |   |   |   |   |   |
| Total Liabilities and Equity                                               |       | $           | 634,628,092 |        |       |   |   |   | $ | 533,374,207 |   |   |   |   |   |
|                                                                       |       |        |        |        |       |   |   |   |   |   |   |   |   |
| Net interest spread                                                        |       |        |        |        |       | 2.96 | % |   |   |   |   | 3.84 | % |
| Net interest income/margin                                                 |       |        |        | $           | 5,220,374  |   | 3.45 | % |   |   | $ | 5,481,747 |   | 4.39 | % |

 

The following table setsforth the impact of the varying levels of earning assets and interest-bearingliabilities and the applicable rates have had on changes in net interest incomefor the periods presented.

 

11

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**Analysis of Changes in NetInterest Income**

**For the Quarters ended March 31,**

 
| ** **                                                                    | ** ** | **2008 versus 2007** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                    | ** ** | **Volume (1)**            | ** ** | **Rate (1)** | ** ** | **Net change** | ** ** |
| Federal funds sold and short term investments and trust preferred  securities |       | $                              | 51,349     |   | $ | (52,224 | ) | $ | (875 | ) |
| Investment securities                                                         |       | 7,654,450                      |       | (7,561,436 | ) | 93,014 |   |
| Loans                                                                         |       | 7,603,101                      |       | (7,143,885 | ) | 459,216 |   |
| Total earning assets                                                          |       | 15,308,900                     |       | (14,757,545 | ) | 551,355 |   |
| Interest-bearing deposits                                                     |       | 3,289,944                      |       | (2,660,103 | ) | 629,841 |   |
| Other borrowings                                                              |       | 329,255                        |       | (146,368 | ) | 182,887 |   |
| Total interest-bearing liabilities                                            |       | 3,619,199                      |       | (2,806,471 | ) | 812,728 |   |
|                                                                          |       |                           |       |   |   |   |   |
| Net interest income                                                           |       | $                              | 11,689,701 |   | $ | (11,951,074 | ) | $ | (261,373 | ) |

 

*Provision for Loan Losses*

 

Wehave established an allowance for loan losses through a provision for loanlosses charged as an expense on our statement of income.  We review our loan portfolio periodically toevaluate our outstanding loans and to measure both the performance of theportfolio and the adequacy of the allowance for loan losses.  The provision for loan losses was $746,000for the first three months of 2008, $351,200 for the same period of 2007, and$2.0 million for the year ended December 31, 2007.  The increase in the provision was the resultof management’s assessment of the adequacy of the reserve for possible loanlosses given the size, mix, and quality of the current loan portfolio, theincreases in non performing loans, and the current economic environment.  Please see the discussion below under “Allowancefor Loan Losses” for a description of the factors we consider in determiningthe amount of the provision we expense each period to maintain this allowance.

 

*Noninterest Income*

 

Noninterest incomedecreased to $1,380,023 for the three months ended March 31, 2008, down39.6% from $2,286,623 for the same period in 2007.   Noninterest income was $7,577,784 for theyear ended December 31, 2007.   Thisdecrease in noninterest income is primarily attributable to the decrease inincome from our mortgage operation, which fell from $1,772, 672 for the firstquarter of 2007 to $740,001 for the first quarter of 2008.  The reduction in income from our mortgageoperation is a reflection of the downturn in the economy in general and thereal estate and mortgage markets in particular.

 

*NoninterestExpense*

 

Total noninterest expense decreased 8.8% to $4,478,752for the three month period ended March 31, 2008 from $4,911,177 for thesame period in 2007 and was $18,933,344 for the year ended December 31,2007.  Salary and wages and employeebenefits expense decreased $634,249 to $2,099,089 during the three month periodended March 31, 2008 compared to the same period in 2007.  The reduction in salary and benefits relatesto the decline in mortgage production related income as well as reducedstaffing in the mortgage operation.

 

We had 145 full-time equivalent employees at March 31,2008 and 2007.  The mortgage operationFTE declined from 66 FTE to 52 FTE. Staffing increases were primarily due to overall growth and the additionof our 73rd avenue branch that opened in the first quarterof 2008.

 

For the three monthsended March 31, 2008, advertising and public relations costs increased$38,794 to $182,400 as compared to the same period in 2007. Advertising andpublic relations costs were $615,552 for the year ended December 31,2007.  These expenses continue to be amajor expense item as we develop our brand awareness in the market.  Professional fees increased $14,447 to$142,436 for the three month period ended March 31, 2008 compared to thesame 

 

12

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period in 2007, and were $725,122 for the year ended December 31,2007.  These fees continue to increasedue to our growth, the regulatory fees associated with such growth, and theescalating cost of accounting, auditing, and legal services for a publiccompany.

 

Occupancy expensesdecreased $53,668 to $410,615 during the three months ended March 31, 2008compared to the same period in 2007. This decrease is related to the reduction of facilities associated withthe mortgage operation and real estate taxes. As we continue to expand and add our newest branch, we expect thatoccupancy costs will increase.  Occupancyexpenses were $1,719,491 for the year ended December 31, 2007.

 

Data processing feesincreased during the three months ended March 31, 2008 to $186,300 from$171,457 during the same period in 2007, and were $748,446 for the year ended December 31,2007.  Data processing costs areprimarily related to the volume of loan and deposit accounts and transactionactivity.  We believe our data processingcosts are consistent with our expansion. During April 2008 we converted to new core operating systems. Thenet conversion costs are approximately $211,000.  This amount will be expensed in the secondquarter of 2008.  At the end of the firstquarter of 2008 we had paid $163,353 in costs associated with the conversion.

 

Other operating expensesincreased 70.7% to $809,364 during the three months ended March 31, 2008compared to $474,198 during the same period in 2007, and $2,680,943 for theyear ended December 31, 2007.  Theseincreases are primarily the result of increased operating expenses related tothe growth of the company, along with other expenses associated with theexpansion of loans and deposits. The increase in other operating expenses wasprimarily due to increase in telephone costs, FDIC fees, business development /donation expenses, director and advisory fees, and software maintenance.

 

Specifically, telephoneexpense increased $11,438, FDIC fees increased $57,609, business development /donations increased $53,267, director and advisory fees increased $65,050, andsoftware maintenance increased $75,470 collectively totaling $262,834, or 78%of the total increase of $335,166 during the three months ended March 31,2008 as compared to the same period in 2007.

 

The following tablepresents a comparison of other operating expenses by category with a balanceover $10,000.

 

**OtherOperating Expenses**

** **
| ** **                                        | ** ** | **For the three months ended** | ** **  | **For the year  ended  December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|-------------|------------------------------------------------------|------------|
| ** **                                        | ** ** | **March 31, 2008**                       | ** **  | **March 31, 2007**                         | ** ** | **2007** | ** ** |
| Telephone                                         |       | $                                                  | 43,254      |                                                 | $          | 31,816 |   | $ | 144,924 |   |
| Postage and  freight                              |       | 30,134                                             |        | 22,561                                               |       | 99,733 |   |
| Armored Car                                       |       | 20,774                                             |        | 19,836                                               |       | 91,508 |   |
| Credit and  collection-bank                       |       | 75,763                                             |        | 45,166                                               |       | 146,073 |   |
| Dues and  subscriptions                           |       | 42,272                                             |        | 33,959                                               |       | 136,788 |   |
| Employee travel,  conferences, meals, and lodging |       | 36,077                                             |        | 75,951                                               |       | 259,456 |   |
| Business  development and donations               |       | 79,398                                             |        | 26,130                                               |       | 362,261 |   |
| FDIC insurance                                    |       | 69,291                                             |        | 11,682                                               |       | 166,240 |   |
| Other insurance                                   |       | 12,570                                             |        | 24,780                                               |       | 70,542 |   |
| Debit/ATM                                         |       | 28,041                                             |        | 21,931                                               |       | 96,721 |   |
| Credit card  processing fees                      |       | 12,734                                             |        | 7,985                                                |       | 49,794 |   |
| Federal Reserve  charges                          |       | 10,831                                             |        | 9,710                                                |       | 43,870 |   |
| Software maintenance                              |       | 91,008                                             |        | 15,538                                               |       | 127,579 |   |
| Director and  advisory board fees                 |       | 65,750                                             |        | 700                                                  |       | 106,850 |   |
| Director  supplemental retirement plan            |       | 33,828                                             |        | 24,640                                               |       | 118,972 |   |
| NASDAQ                                            |       | 5,454                                              |        | 21,394                                               |       | 65,940 |   |
| Furniture and  equipment                          |       | 75,428                                             |        | 65,652                                               |       | 297,781 |   |
| Other operating  expenses                         |       | 76,757                                             |        | 14,767                                               |       | 295,911 |   |
| **Total**                                         | ** ** | **$**                                              | **809,364** | ** **                                           | **$**      | **474,198** | ** ** | **2,680,943** | ** ** |
|                                                   |            |                                                    |             |                                                      |            |  |  |  |  |  |

 

13

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**BalanceSheet Review**

 

*General*

 

We had total assets of $638.8 million at March 31,2008, an increase of 15.6% from $552.8 million at March 31, 2007, and anincrease of 5.4% from $606.0 million at December 31, 2007.  Total assets at March 31, 2008 consistedprimarily of $538.9 million in loans including mortgage loans held for sale,$66.3 million in investments, and $7.6 million in cash and due from banks.  Our liabilities at March 31, 2008totaled $585.0 million, consisting primarily of $493.9 million in deposits,$55.0 million in Federal Home Loan Bank (“FHLB”) advances, and $10.3 million ofjunior subordinated debentures.  Ourtotal deposits increased to $493.9 million at March 31, 2008, up 11.0%from $445.1 million at March 31, 2007, and up 6.4% from $464.2 million at December 31,2007.  Shareholders” equity increased$6.5 million to $53.8 million at March 31, 2008from $47.3 million at March 31,2007, and increased $1.2 million from $52.6 million at December 31, 2007.

 

## ***Investment Securities***

## ** **

Total investmentsecurities averaged $ million during the first three months of 2008 and totaled$66.3 million at March 31, 2008. Total investment securities averaged $73.3 million during the firstthree months of 2007 and totaled $69.2 million at March 31, 2007.   Total investment securities averaged $69.3million for the year ended December 31, 2007 and totaled $65.7 million at December 31,2007.  At March 31, 2008, our totalinvestment securities portfolio had a book value of $70.5 million and a fairmarket value of $70.8 million for an unrealized net loss of $278,691.  We primarily invest in short term U.S.Government Sponsored Enterprises and Federal Agency securities.

 

At March 31, 2008, short-term investments totaled$2.1 million, compared to $4.7 million at March 31, 2007 and $566,044 at December 31,2007.  These funds are one source of ourbank’s liquidity and are generally invested in an earning capacity on anovernight or short-term basis. This decline in short-term investments isprimarily due to higher loan demand during this quarter and the competitivemarket for deposits.

 

*Loans*

 

Since loans typically provide higher yields than othertypes of earning assets, a substantial percentage of our earning assets areinvested in our loan portfolio.  As of March 31,2008, loans represented 86.5% of average earning assets as compared to 84.6% atMarch 31, 2007, and 85.2% at December 31, 2007.  At March 31, 2008, net portfolio loans(portfolio loans less the allowance for loan losses and deferred loan fees)totaled $524.0 million, an increase of $96.1 million, or 22.4%, from March 31,2007 and an increase of $27.5 million, or 5.5% from December 31,2007.  Average gross loans increased to$526.5 million with a yield of 7.76% during the first three months of 2008 from$428.5 million with a yield of 9.18% during the same period in 2007.  Average gross loans were $458.7 million witha yield of 8.95% at December 31, 2007. The decrease in yield on loans during these periods is due to theinterest rate declines in 2007 and 2008. The interest rates charged on loans vary with the degree of risk, thematurity, the guarantees and the collateral on each loan.  Competitive pressures, money market rates,availability of funds, and government regulations also influence interestrates.

 

The following table shows the composition of the loanportfolio by category at March 31, 2008, March 31, 2007, and December 31,2007.

 
| ** **                          | ** ** | **Composition of Loan Portfolio** | ** **  |
|-------------------------------------|------------|--------------------------------------------------|-------------|
| ** **                          | ** ** | **March 31, 2008**                     | ** **  | **March 31, 2007** | ** ** | **December 31, 2007** | ** ** |
| ** **                          | ** ** | ** **                                       | ** **  | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                          | ** ** | **Amount**                                       | ** **  | **of Total** | ** ** | **Amount** | ** ** | **of Total** | ** ** | **Amount** | ** ** | **of Total** | ** ** |
|                                |       |                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                          |       | $                                                | 65,592,413  |   | 12.3 | %  | $ | 42,476,492 |   | 9.8 | %  | $ | 60,376,105 |   | 12.0 | % |
| Real estate –  construction    |       | 67,984,079                                       |        | 12.8 | %  | 39,645,111 |   | 9.1 | %  | 63,988,173 |   | 12.7 | % |
| Real estate –  mortgage        |       | 389,637,192                                      |        | 73.2 | %  | 344,092,327 |   | 79.2 | %  | 370,989,308 |   | 73.6 | % |
| Consumer                            |       | 8,776,754                                        |        | 1.7 | %  | 8,234,898 |   | 1.9 | %  | 8,504,685 |   | 1.7 | % |
| Portfolio loans,  gross             |       | 531,990,438                                      |        | 100.0 | %  | 434,448,828 |   | 100.0 | %  | 503,858,271 |   | 100.0 | % |
| Unearned loan fees  and costs, net  |       | (443,566                                         | )           |   |   | (319,487 | ) |   |   | (425,755 | ) |   |   |
| Allowance for  possible loan losses |       | (7,519,960                                       | )           |   |   | (6,172,091 | ) |   |   | (6,935,616 | ) |   |   |
| Portfolio loans,  net               |       | 524,026,912                                      |        |   |   | 427,957,250 |   |   |   | 496,496,900 |   |   |   |
| Loans held for  sale                |       | 7,356,399                                        |        |   |   | 13,865,389 |   |   |   | 6,475,619 |   |   |   |
| Loans, net                          |       | $                                                | 531,383,311 |   |   |   | $ | 441,822,639 |   |   |   | $ | 502,972,519 |   |   |   |
|                                     |            |                                                  |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

14

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The principal componentof our portfolio loans at March 31, 2008, March 31, 2007, and December 31,2007 was mortgage loans, which represented 73.2%, 79.2% and 73.6%,respectively.  In the context of thisdiscussion, a “real estate mortgage loan” is defined as any loan, other thanloans for construction purposes, secured by real estate, regardless of thepurpose of the loan.  We follow thecommon practice of financial institutions in our market area of obtaining asecurity interest in real estate whenever possible, in addition to any otheravailable collateral.  The collateral istaken to reinforce the likelihood of the ultimate repayment of the loan andtends to increase the magnitude of the real estate loan portfoliocomponent.  Generally, we limit theloan-to-value ratio to 80%.  We attemptto maintain a relatively diversified loan portfolio to help reduce the riskinherent in concentrations of collateral. Loans held for sale are consumer real estate loans that are pending saleto investors.

 

## ***Allowance for Loan Losses***

## ** **

We haveestablished an allowance for loan losses through a provision for loan losses chargedto expense on our statement of income. The allowance for loan losses represents an amount which we believe willbe adequate to absorb probable losses on existing loans that may becomeuncollectible.  Our judgment as to theadequacy of the allowance for loan losses is based on a number of assumptionsabout future events, which we believe to be reasonable, but which may or maynot prove to be accurate.  The evaluationof the allowance is segregated into general allocations and specificallocations.  For general allocations,the portfolio is segregated into risk-similar segments for which historicalloss ratios are calculated and adjusted for identified trends or changes incurrent portfolio characteristics.  Historicalloss ratios are calculated by product type for consumer loans (installment andrevolving), mortgage loans, and commercial loans and may be adjusted for otherrisk factors. To allow for modeling error, a range of probable loss ratios isthen derived for each segment.  Theresulting percentages are then applied to the dollar amounts of the loans ineach segment to arrive at each segment’s range of probable loss levels.  Certain nonperforming loans are individuallyassessed for impairment under SFAS No. 114 and assigned specificallocations.  Other identified high-riskloans or credit relationships based on internal risk ratings are alsoindividually assessed and assigned specific allocations.

 

The general allocationalso includes a component for probable losses inherent in the portfolio, basedon management’s analysis that is not fully captured elsewhere in theallowance.  This component serves toaddress the inherent estimation and imprecision risk in the methodology as wellas address management’s evaluation of various factors or conditions nototherwise directly measured in the evaluation of the general and specificallocations.  Such factors include thecurrent general economic and business conditions; geographic, collateral, orother concentrations of credit; system, procedural, policy, or underwritingchanges; experience of the lending staff; entry into new markets or new productofferings; and results from internal and external portfolio examinations.

 

Periodically, we adjustthe amount of the allowance based on changing circumstances.  We charge recognized losses to the allowanceand add subsequent recoveries back to the allowance for loan losses.  There can be no assurance that charge-offs ofloans in future periods will not exceed the allowance for loan losses asestimated at any point in time or that provisions for loan losses will not besignificant to a particular accounting period.

 

The allocation of theallowance to the respective loan segments is an approximation and notnecessarily indicative of future losses or future allocations.  The entire allowance is available to absorblosses occurring in the overall loan portfolio. In addition, the allowance is subject to examination and adequacytesting by regulatory agencies, which may consider such factors as themethodology used to determine adequacy and the size of the allowance relativeto that of peer institutions, and other adequacy tests.  Such regulatory agencies could require us toadjust the allowance based on information available to them at the time oftheir examination.

 

15

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At March 31, 2008,the allowance for loan losses was $7.5 million, or 1.41% of total outstandingloans, compared to an allowance for loan losses of $6.2 million, or 1.42% oftotal outstanding loans, at March 31, 2007 and $6.9 million, or 1.38% oftotal outstanding loans, at December 31, 2007.  During the first three months of 2008, we had$161,656 of charge-offs. During the same period in 2007, we had charge-offstotaling $18,857.  We had non-performingloans totaling $5.1 million, $1.1 million, and $2.9 million at March 31,2008, March 31, 2007, and December 31, 2007, respectively.  While there can be no assurances, we do notexpect significant losses relating to these nonperforming loans because webelieve that the collateral supporting these loans is largely sufficient tocover the outstanding loan balance.  Thefollowing table sets forth certain information with respect to our allowancefor loan losses and the composition of charge-offs and recoveries for the threemonths ended March 31, 2008, March 31, 2007, and December 31,2007.

 
| **Allowance for Loan Losses** |
|-------------------------------|

 
| ** **                                           | ** ** | **Three months ended March 31,** | ** **  | **December 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|-------------|-----------------------|------------|
| ** **                                           | ** ** | **2008**                                             | ** **  | **2007**              | ** ** | **2007** | ** ** |
|                                                 |       |                                                 |        |                  |       |   |   |
| Average total  loans outstanding                     |       | $                                                    | 526,467,333 |                  | $          | 428,506,579 |   | $ | 458,703,104 |   |
| Total loans  outstanding at period end               |       | 538,903,271                                          |        | 447,994,730           |       | 509,908,135 |   |
| Total  nonperforming loans                           |       | 5,119,312                                            |        | 1,088,422             |       | 2,902,888 |   |
|                                                 |       |                                                 |        |                  |       |   |   |
| Beginning  balance of allowance                      |       | $                                                    | 6,935,616   |                  | $          | 5,888,052 |   | $ | 5,888,052 |   |
|                                                 |       |                                                 |        |                  |       |   |   |
| Loans charged  off                                   |       | (167,432                                             | )           | (18,857               | )          | (984,430 | ) |
| Total recoveries                                     |       | 5,776                                                |        | 1,696                 |       | 36,394 |   |
| Net loans  charged off                               |       | (161,656                                             | )           | (17,161               | )          | (948,036 | ) |
| Transfer to  mortgage recourse                       |       | —                                               |        | (50,000               | )          | (50,000 | ) |
| Provision for  loan losses                           |       | 746,000                                              |        | 351,200               |       | 2,045,600 |   |
| Balance at  period end                               |       | $                                                    | 7,519,960   |                  | $          | 6,172,091 |   | $ | 6,935,616 |   |
|                                                 |       |                                                 |        |                  |       |   |   |
| Net charge-offs  to average total loans (annualized) |       | 0.12                                                 | %           | 0.02                  | %          | 0.21 | % |
| Allowance as a  percent of total loans               |       | 1.40                                                 | %           | 1.38                  | %          | 1.36 | % |
| Allowance as a  percentage of nonperforming loans    |       | 146.9                                                | %           | 567.1                 | %          | 238.9 | % |

 

The following table sets forth thebreakdown of the allowance for loan losses by loan category and the percentageof loans in each category to gross loans as of March 31, 2008.  We believe that the allowance can beallocated by category only on an approximate basis.  The allocation of the allowance to eachcategory is not necessarily indicative of further losses and does not restrictthe use of the allowance to absorb losses in any category.

 
| **As of March 31,  2008** |
|--------------------------------|

 
| Commercial                       |   | $         | 1,473,317 |   | 12.2   | % |
|----------------------------------|--------|-----------|-----------|--------|--------|---|
| Real estate -  construction      |   | 1,184,151 |      | 12.6   | %      |
| Real estate –  mortgage     |   | 4,660,742 |      | 73.6   | %      |
| Consumer                         |   | 148,098   |      | 1,6    | %      |
| Unallocated                      |   | 53,652    |      |   |   |
|                             |   |      |      |   |   |
| Total allowance  for loan losses |   | $         | 7,519,960 |   | 100.0  | % |

## ** **

*Nonperforming Assets / Other RealEstate Owned*

 

We discontinue accrual of interest on a loan when we conclude it isdoubtful that we will be able to collect interest from the borrower.  We reach this conclusion by taking intoaccount factors such as the borrower’s financial condition, economic andbusiness conditions, and the results of our previous collection efforts.  Generally, we will place a delinquent loan innonaccrual status when the loan becomes 90 days or more past due.  When we place a loan in nonaccrual status, wereverse all interest which has been accrued on the loan but remains unpaid andwe deduct this interest from earnings as a reduction of reported interestincome.  We do not accrue any additionalinterest on the loan balance until we conclude the collection of both principaland interest is reasonably certain.  At March 31,2008, there were no loans accruing interest which were 90 days or more past dueand we had no restructured loans.

 

Nonaccrual loans were $5,119,312, $1,088,422, and$2,902,888 as of March 31, 2008, March 31, 2007 and December 31,2007, respectively.  As the economycontinues to deteriorate, some of our borrowers find that they do not 

 

16

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have sufficientcash flow to make payments timely, and we place their loans on non-accrualstatus.  There are currently 15 borrowersthat are on non accrual at March 31, 2008. Four of those borrowers amount to 86% of the total nonaccrual amount.

 

If the bank takes properties from a loan work-out,  it places it in the other real estate ownedasset account (“OREO”).  The propertiesthat are received are recorded at the lower of cost or the current value of theloan in OREO.  Any write-down in value,before being placed into OREO, is included as a charge-off in the allowance forloan loss.  Any subsequent gain or loss,including expenses related to the sale, is recorded through the incomestatement.

 

At March 31, 2008 we had $1,545,647 in OREO, compared to $670,310at March 31, 2007 and $15,000 at December 31, 2007.  As of March 31, 2008 there are sixproperties in OREO, one of which is under contract.  All properties in OREO at March 31, 2008are residential lots or completed residential units.

 

## **Deposits**

## ** **

Averagetotal deposits were $499.7 million for the three months ended March 31,2008, up 17.6% from $424.8 million during the same period in 2007 and up 13.5%from $440.2 million at December 31, 2007. Average interest-bearing deposits were $465.5 million for three monthsended March 31, 2008, up 19.1% from $390.8 million during the same periodof 2007 and up 15.2% from $404.1 million at December 31, 2007.

 

The following table sets forth ourdeposits by category as of March 31, 2008, March 31, 2007, and December 31,2007.

 
| **Deposits** |
|--------------|

 
| ** **                          | ** ** | **March 31, 2008** | ** **  | **March 31, 2007** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------|------------|------------------------------|-------------|------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **Percent of**          | ** **  | **Percent of**          | ** ** | **Percent of**             | ** ** |
| ** **                          | ** ** | **Amount**                   | ** **  | **Deposits**                 | ** ** | **Amount**                      | ** ** | **Deposits** | ** ** | **Amount** | ** ** | **Deposits** | ** ** |
|                                |       |                         |        |                         |       |                            |       |   |   |   |   |   |   |
| Demand deposit  accounts            |       | $                            | 35,925,681  |                         | 7.3        | %                               | $          | 35,863,807 |   | 8.1 | % | $ | 33,138,936 |   | 7.1 | % |
| Interest bearing  checking accounts |       | 20,828,253                   |        | 4.2                          | %          | 24,161,644                      |       | 5.4 | % | 20,377,754 |   | 4.4 | % |
| Money market  accounts              |       | 93,574,372                   |        | 18.9                         | %          | 114,199,711                     |       | 25.7 | % | 103,821,154 |   | 22.4 | % |
| Savings accounts                    |       | 2,920,515                    |        | 0.6                          | %          | 2,449,946                       |       | 0.6 | % | 2,988,881 |   | 0.6 | % |
| Time deposits  less than $100,000   |       | 192,925,027                  |        | 39.7                         | %          | 155,153,653                     |       | 34.8 | % | 161,038,254 |   | 34.7 | % |
| Time deposits of  $100,000 or over  |       | 147,759,146                  |        | 29.9                         | %          | 113,228,262                     |       | 25.4 | % | 142,833,366 |   | 30.8 | % |
| Total deposits                      |       | $                            | 493,932,994 |                         | 100.0      | %                               | $          | 445,057,023 |   | 100.0 | % | $ | 464,198,345 |   | 100.0 | % |

 

Depositgrowth was attributable to brokered funds, internal growth, and the generationof new deposit accounts due primarily to special promotions and increasedadvertising.

 

Core deposits, which exclude certificates of deposit of $100,000 ormore, provide a relatively stable funding source for our loan portfolio andother earning assets.  Our core depositswere $346.2 million at March 31, 2008 compared to $331.8 million at March 31,2007 and $321.4 million at December 31, 2007.  Our brokered deposits were $68.3 million asof March 31, 2008, $29.6 million as of March 31, 2007, and $46.1million as of December 31, 2007.  Weexpect a stable base of deposits to be our primary source of funding to meetboth our short-term and long-term liquidity needs.  Core deposits as a percentage of totaldeposits were 70.1% at March 31, 2008, 74.6% at March 31, 2007, and69.2% at December 31, 2007. Our loan-to-deposit ratio was 109.1% at March 31,2008 versus 99.3% at March 31, 2007 and 108.4% at December 31, 2007.  The average loan-to-deposit ratio was 105.4%during the first three months of 2008, 101.0% during the same period of 2007and 104.2% at December 31, 2007.

 

**Advances from Federal Home Loan Bank**

 

In addition to deposits,we obtained funds from the FHLB to help fund our loan growth.  Average borrowings from the FHLB were $55.0million during the first quarter of 2008 and totaled $38.1 million at March 31,2007.  The following table reflects thecurrent borrowing terms.

 

17

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| **FHLB Description** | ** ** | **Balance** | ** ** | **Current  Rate** | ** ** | **Maturity Date** | ** ** |
|---------------------------|------------|-------------|------------|-------------------|------------|------------------------|------------|
| Fixed rate                |       | $           | 10,000,000 |              | 5.36       | %                      | 06/04/2010 |   |
| Fixed Rate  Hybrid        |       | 5,000,000   |       | 4.76              | %          | 10/21/2010             |       |
| Convertible               |       | 7,500,000   |       | 4.51              | %          | 11/23/2010             |       |
| Convertible               |       | 5,000,000   |       | 3.68              | %          | 07/13/2015             |       |
| Convertible               |       | 5,000,000   |       | 4.06              | %          | 09/29/2015             |       |
| Convertible               |       | 5,000,000   |       | 4.16              | %          | 03/17/2017             |       |
| Convertible               |       | 7,500,000   |       | 4.39              | %          | 04/13/2017             |       |
| Prime Based  Advance      |       | 10,000,000  |       | 2.41              | %          | 09/19/2011             |       |
|                      |       | $           | 55,000,000 |              |       |                   |       |   |

 

**Junior Subordinated Debentures**

 

The average and period end balances of the floating rate trust preferred securities through BFNB Trust I and BFNB Trust II (the “Trusts”) totaled $10.3 million for all periods reported. These trust preferred securities are reported on our consolidated balance sheet as junior subordinated debentures 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 6.55% and 4.70% at March 31, 2008.  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 $32,693 at March 31, 2008, $39,745 at March 31, 2007, and $33,943 at December 31, 2007.   These costs are included in other assets on our consolidated balance sheet.  Amortization of debt issuance costs from trust preferred debt totaled $1,250 for the three month period ended March 31, 2008 and $834 for the three month period ended March 31, 2007, and $5,005 for the year ended December 31, 2007.  These costs are reported in other noninterest expense on the consolidated statement of income.

 

## **Capital Resources**

## ** **

TheFederal Reserve Board and bank regulatory agencies require bank holdingcompanies and financial institutions to maintain capital at adequate levelsbased on a percentage of assets and off-balance sheet exposures, adjusted forrisk weights ranging from 0% to 100%. Under the capital adequacy guidelines, regulatory capital is classifiedinto two tiers.  These guidelines requirean institution to maintain a certain level of Tier 1 and Tier 2 capital torisk-weighted assets.  Tier 1 capitalconsists of common shareholders’ equity, excluding the unrealized gain or losson securities available for sale, minus certain intangible assets.  In determining the amount of risk-weightedassets, all assets, including certain off-balance sheet assets, are multipliedby a risk-weight factor of 0% to 100% based on the risks believed to beinherent in the type of asset.  Tier 2capital consists of Tier 1 capital plus the general reserve for loan losses,subject to certain limitations.  We arealso required to maintain capital at a minimum level based on total averageassets, which is known as the Tier 1 leverage ratio.  At both the holding company and bank level,we are subject to various regulatory capital requirements administered by thefederal banking agencies.  To beconsidered “well-capitalized,” we must maintain total risk-based capital of atleast 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.

 

AtMarch 31, 2008, our total shareholders’ equity was $53.8 million ($54.4million at the bank level).  At March 31,2008, our Tier 1 capital ratio was 12.3% (10.6% at the bank level), our totalrisk-based capital ratio was 13.5% (11.9% at the bank level), and our Tier 1leverage ratio was 10.1% (8.70% at the bank level).  The bank was considered “well capitalized”and the holding company met or exceeded its applicable regulatory capital requirements.

 

**LiquidityManagement**

 

Liquidity represents the ability of a company toconvert assets into cash or cash equivalents without significant loss, and theability to raise additional funds by increasing liabilities.  Liquidity management involves monitoring oursources and uses of funds in order to meet our day-to-day cash flowrequirements while maximizing profits. Liquidity management is made more complicated because different balancesheet components are subject to varying degrees of management control.  For example, the timing of maturities of ourinvestment portfolio is fairly predictable and subject to a 

 

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high degree of control at the timeinvestment decisions are made.  However,net deposit inflows and outflows are far less predictable and are not subjectto the same degree of control.

 

Ourprimary sources of liquidity are deposits, scheduled repayments on our loans,and interest on and maturities of our investments.  We plan to meet our future cash needs throughthe liquidation of temporary investments and the generation of deposits.  All of our securities have been classified asavailable for sale.  Occasionally, wemight sell investment securities in connection with the management of our interestsensitivity gap or to manage cash availability. We may also utilize our cash and due from banks, security repurchaseagreements, and federal funds sold to meet liquidity requirements as needed.  In addition, we have the ability, on ashort-term basis, to purchase federal funds from other financialinstitutions.  Presently, we have madearrangements with commercial banks for short-term unsecured advances of up to$31.8 million.  We maintain a securedline of credit in the amount of $13.0 million with our primarycorrespondent.  We also have a line ofcredit with the FHLB to borrow up to 80% of our 1 to 4 family loans, resultingin an availability of funds of $64.9 million at March 31, 2008.  The FHLB has approved borrowings up to 15% ofthe bank’s total assets less advances outstanding.  The borrowings are available by pledgingadditional collateral and purchasing FHLB stock.  At March 31, 2008, we had borrowed $55.0million on this line of credit.  Webelieve that our existing stable base of core deposits, our bond portfolio,borrowings from the FHLB, and short-term federal funds lines will enable us tosuccessfully meet our liquidity needs for the next 12 months.

 

**Interest Rate Sensitivity**

 

A significant portion ofour assets and liabilities are monetary in nature, and consequently they arevery sensitive to changes in interest rates. This interest rate risk is our primary market risk exposure, and it canhave a significant effect on our net interest income and cash flows.  We review our exposure to market risk on aregular basis, and we manage the pricing and maturity of our assets andliabilities to diminish the potential adverse impact that changes in interestrates could have on our net interest income.

 

We actively monitor and manage our interest rate riskexposure principally by measuring our interest sensitivity “gap,” which is thepositive or negative dollar difference between assets and liabilities that aresubject to interest rate repricing within a given period of time.  A gap is considered positive when the amountof interest-rate sensitive assets exceeds the amount of interest-rate sensitiveliabilities, and it is considered negative when the amount of interest-ratesensitive liabilities exceeds the amount of interest-rate sensitive assets.  We generally would benefit from increasingmarket interest rates when we have an asset-sensitive, or a positive, interestrate gap and we would generally benefit from decreasing market interest rateswhen we have liability-sensitive, or a negative, interest rate gap.  When measured on a “gap” basis, we areliability-sensitive over the cumulative one-year time frame and asset-sensitiveafter one year as of March 31, 2008. However, our gap analysis is not a precise indicator of our interestsensitivity position.  The analysispresents only a static view of the timing of maturities and repricingopportunities, without taking into consideration that changes in interest ratesdo not affect all assets and liabilities equally.  For example, rates paid on a substantialportion of core deposits may change contractually within a relatively shorttime frame, but we believe those rates are significantly lessinterest-sensitive than market-based rates such as those paid on noncoredeposits.

 

Net interest income is also affected by othersignificant factors, including changes in the volume and mix ofinterest-earning assets and interest-bearing liabilities.  We perform asset/liability modeling to assessthe impact of varying interest rates and the impact that balance sheet mixassumptions will have on net interest income. We attempt to manage interest rate sensitivity by repricing assets orliabilities, selling securities available-for-sale, replacing an asset orliability at maturity, or adjusting the interest rate during the life of anasset or liability.  Managing the amountof assets and liabilities that reprice in the same time interval helps us tohedge risks and minimize the impact on net interest income of rising or fallinginterest rates.  We evaluate interest sensitivityrisk and then formulate guidelines regarding asset generation and repricing,funding sources and pricing, and off-balance sheet commitments in order todecrease interest rate sensitivity risk.

 

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**OffBalance Sheet Risk**

 

Through the operations ofour bank, we have made contractual commitments to extend credit in the ordinarycourse of our business activities.  Thesecommitments are legally binding agreements to lend money to our customers atpredetermined interest rates for a specified period of time.  We evaluate each customer’s credit worthinesson a case-by-case basis.  The amount ofcollateral obtained, if deemed necessary by us upon extension of credit, isbased on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory,property, plant and equipment, commercial and residential real estate.  We manage the credit risk on thesecommitments by subjecting them to normal underwriting and risk management processes.

 

At March 31, 2008, the bank had issuedcommitments to extend credit of $39.7 million through various types of lendingarrangements, of which $6.1 million was at variable rates.  The commitments expire over the next 18months.  Past experience indicates thatmany of these commitments to extend credit will expire unused.  We believe that we have adequate sources ofliquidity to fund commitments that are drawn upon by the borrowers.

 

In addition tocommitments to extend credit, we also issue standby letters of credit which areassurances to a third party that they will not suffer a loss if our customerfails to meet its contractual obligation to the third party.  Standby letters of credit totaled $11.0million at March 31, 2008.  Pastexperience indicates that many of these standby letters of credit will expireunused.  However, through our varioussources of liquidity, we believe that we will have the necessary resources tomeet these obligations should the need arise.

 

Exceptas disclosed in this report, we are not involved in off-balance sheetcontractual relationships, unconsolidated related entities that haveoff-balance sheet arrangements or transactions that could result in liquidityneeds or other commitments or significantly impact earnings.

 

**Impact of Inflation**

 

The effect of relative purchasingpower over time due to inflation has not been taken into account in ourconsolidated financial statements. Rather, our financial statements have been prepared on an historicalcost basis in accordance with generally accepted accounting principles.

 

Unlikemost industrial companies, our assets and liabilities are primarily monetary innature.  Therefore, the effect of changesin interest rates will have a more significant impact on our performance thanwill the effect of changing prices and inflation in general.  In addition, interest rates may generallyincrease as the rate of inflation increases, although not necessarily in thesame magnitude.  As discussed previously,we seek to manage the relationships between interest sensitive assets andliabilities in order to protect against wide rate fluctuations, including thoseresulting from inflation.

 

**Recently Issued AccountingStandards**

 

The following is a summary of recent authoritativepronouncements that could impact the accounting, reporting, and / or disclosureof financial information by us.

 

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 acceptedaccounting principles, and expands disclosures about fair value measurements.This standard eliminates inconsistencies found in various prior pronouncementsbut does not require any new fair value measurements.  SFAS 157 is effective for the Company on January 1,2008.  See note 6, “Fair ValueMeasurements”, for disclosure required under SFAS 157.

 

In December 2007,the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS 141(R)”)which replacesSFAS 141. SFAS 141(R) establishes principles and requirements for how anacquirer in a business combination 

 

 

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recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, and any controlling interest;recognizes and measures goodwill acquired in the business combination or a gainfrom a bargain purchase; and determines what information to disclose to enableusers of the financial statements to evaluate the nature and financial effectsof the business combination. FAS 141(R) is effective for acquisitions bythe Company taking place on or after January 1, 2009. Early adoption isprohibited. Accordingly, a calendar year-end company is required to record anddisclose business combinations following existing accounting guidance until January 1,2009. The Company will assess the impact of SFAS 141(R) if and when afuture acquisition occurs.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160establishes new accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary. Beforethis statement, limited guidance existed for reporting noncontrolling interests(minority interest). As a result, diversity in practice exists. In some casesminority interest is reported as a liability and in others it is reported inthe mezzanine section between liabilities and equity. Specifically, SFAS 160requires the recognition of a noncontrolling interest (minority interest) asequity in the consolidated financials statements and separate from the parent’sequity. The amount of net income attributable to the noncontrolling interestwill be included in consolidated net income on the face of the incomestatement. SFAS 160 clarifies that changes in a parent’s ownership interest ina subsidiary that do not result in deconsolidation are equity transactions ifthe parent retains its controlling financial interest. In addition, thisstatement requires that a parent recognize gain or loss in net income when asubsidiary is deconsolidated. Such gain or loss will be measured using the fairvalue of the noncontrolling equity investment on the deconsolidation date. SFAS160 also includes expanded disclosure requirements regarding the interests ofthe parent and its noncontrolling interests. SFAS 160 is effective for theCompany on January 1, 2009.  Earlier adoption is prohibited. At this time, the Company believes thatupon adoption, SFAS 160 will not materially impact on its financial position,results of operations or cash flows.

 

In February 2008,the FASB issued FASB Staff Position No. 140-3, “Accounting for Transfersof Financial Assets and Repurchase Financing Transactions” (“FSP 140-3”). This FSP provides guidance on accounting for a transfer of a financial assetand the transferor’s repurchase financing of the asset.  This FSP presumesthat an initial transfer of a financial asset and a repurchase financing areconsidered part of the same arrangement (linked transaction) under SFAS No. 140.However, if certain criteria are met, the initial transfer and repurchasefinancing are not evaluated as a linked transaction and are evaluatedseparately under Statement 140.  FSP 140-3 will be effective for financialstatements issued for fiscal years beginning after November 15, 2008, andinterim periods within those fiscal years and earlier application is notpermitted. Accordingly, this FSP is effective for the Company on January 1,2009.  The Company is currently evaluating the impact, if any, theadoption of FSP 140-3 will have on its financial position, results ofoperations and cash flows.

 

InApril 2008, the FASB issued FASB Staff Position No. 142-3, “Determinationof the Useful Life of Intangible Assets” (“FSP 142-3”).  This FSP amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”.  The intent of this FSP is to improve theconsistency between the useful life of a recognized intangible asset under SFASNo. 142 and the period of expected cash flows used to measure the fairvalue of the asset under SFAS No. 141(R), “Business Combinations,”**andother U.S. generally accepted accounting principles.  This FSP is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those fiscal years and early adoption isprohibited.  Accordingly, this FSP iseffective for the Company on January 1, 2009.  The Company does not believe the adoption ofFSP 142-3 will have a material impact on its financial position, results ofoperations or cash flows.

 

In March 2008, theFASB issued Statement of Financial Accounting Standard (“SFAS”) No. 161, “Disclosuresabout Derivative Instruments and Hedging” (“SFAS 161”). SFAS 161 requiresenhanced disclosures about an entity’s derivative and hedging activities. It isintended to enhance the current disclosure framework in SFAS 133 by requiringthat the use of derivative instruments be disclosed in terms of underlying riskand accounting designation with the objective of better conveying the purposeof derivative use in terms of the risks that the entity is intending tomanage.  SFAS 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008, with early application encouraged.  The Company has elected to adopt SFAS 161effective the first quarter of 2008. See note 5, “Derivative FinancialInstruments – Interest rate SWAP,” for disclosures required by SFAS 161.   See note 5, “Derivative FinancialInstruments – Interest Rate SWAP”, for disclosure required under SFAS 161.

 

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

 

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**Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk.**

 

Marketrisk is the risk of loss from adverse changes in market prices and rates.  Our market risk arises principally frominterest rate risk inherent in our lending, deposit, and borrowingactivities.  Management actively monitorsand manages its interest rate risk exposure. In addition to other risks that we manage in the normal course ofbusiness, such as credit quality and liquidity, management considers interestrate risk to be a significant market risk that could potentially have amaterial effect on our financial condition and results of operations.  The information contained in Item 2 in thesection captioned “Interest Rate Sensitivity” is incorporated herein byreference.  Other types of market risks,such as foreign currency risk and commodity price risk, do not arise in thenormal course of our business activities.

 

Theprimary objective of asset and liability management is to manage interest raterisk and achieve reasonable stability in net interest income throughoutinterest rate cycles.  This is achievedby maintaining the proper balance of rate-sensitive earning assets andrate-sensitive interest-bearing liabilities. The relationship of rate-sensitive earning assets to rate-sensitiveinterest-bearing liabilities is the principal factor in projecting the effectthat fluctuating interest rates will have on future net interest income.  Rate-sensitive assets and liabilities arethose that can be repriced to current market rates within a relatively shorttime period. Management monitors the rate sensitivity of earning assets andinterest-bearing liabilities over the entire life of these instruments, butplaces particular emphasis on the next twelve months.  At March 31, 2008, on a cumulative basisthrough 12 months, rate-sensitive liabilities exceeded rate-sensitive assets by$34.9 million.  This liability-sensitiveposition is largely attributable to short-term certificates of deposit, moneymarket accounts and interest bearing checking accounts, which totaled $402.4million at March 31, 2008.

 

**Item 4. Controls and Procedures****.**

 

Asof the end of the period covered by this report, we carried out an evaluation,under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).  Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that our currentdisclosure controls and procedures are effective as of March 31,2008.  There have been no significantchanges in our internal controls over financial reporting during the fiscalquarter ended March 31, 2008 that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

 

Thedesign of any system of controls and procedures is based in part upon certainassumptions about the likelihood of future events.  There can be no assurance that any designwill succeed in achieving its stated goals under all potential futureconditions, regardless of how remote.

 

**PART II**

**OTHERINFORMATION**

**Item1.  Legal Proceedings.**

 

Thereare no material legal proceedings to which the company or any of oursubsidiaries is a party or of which any of our property is the subject.

 

**Item 1A. Risk Factors.**

 

There were no material changes from the risk factors presented inour annual report on Form 10-K for the year ended December 31, 2007.

 

**Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds.**

 

Not applicable.

 

**Item3.  Defaults Upon Senior Securities.**

 

Not applicable.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders.**

 

Notapplicable.

 

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**Item5.  Other Information.**

 

Notapplicable.

 

**Item6.  Exhibits.**

 
| **Exhibit** | ** ** | **Description**                                                            |
|-------------|------------|----------------------------------------------------------------------------|
|        |       |                                                                       |
| 31.1        |       | Rule 13a-14(a) Certification  of the Principal Executive Officer |
|        |       |                                                                       |
| 31.2        |       | Rule 13a-14(a) Certification of the Principal  Financial Officer |
|        |       |                                                                       |
| 32          |       | Section 1350  Certifications                                          |

 

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SIGNATURES

 

In accordance withthe requirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|   |             |   |   | BEACH FIRST  NATIONAL BANCSHARES, INC. |
|--------|------------------|--------|--------|----------------------------------------|
|   |             |   |   |                                   |   |   |
|   |             |   |   |                                   |   |   |
| Date:  | May 9, 2008 |   | By:    | /s/Walter  E. Standish, III       |   |
|   |             |   |   |                                   | Walter  E. Standish, III |   |
|   |             |   |   |                                   | President  and Chief Executive Officer |   |
|   |             |   |   |                                   |   |   |
|   |             |   |   |                                   |   |   |
| Date:  | May 9, 2008 |   | By:    | /s/Gary S.  Austin                     |   |
|   |             |   |   |                                   |    Gary S. Austin |   |
|   |             |   |   |                                   | Chief Financial  and Principal Accounting Officer |   |

 

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INDEX TO EXHIBITS

 
| **Exhibit** | ** ** | ** **                                                                 |
|-------------|------------|----------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                            |
|        |       |                                                                       |
| 31.1        |       | Rule 13a-14(a) Certification  of the Principal Executive Officer |
|        |       |                                                                       |
| 31.2        |       | Rule 13a-14(a) Certification of the  Principal Financial Officer |
|        |       |                                                                       |
| 32          |       | Section 1350  Certifications                                          |

 

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