** **

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**Form 10-K**

 

**(Mark One)**

**x****                              AnnualReport under Section 13 or 15(d) of the Securities Exchange Act of1934**

**For thefiscal year ended December 31, 2007**

**or**

**o****                                 TransitionReport under Section 13 or 15(d) of the Securities Exchange Act of1934**

**For thetransition period from           to          **

 

**Commissionfile no. 000-22503**

 

**BEACH FIRST NATIONAL BANCSHARES, INC.**

(Name ofRegistrant as Specified in Its Charter)

 

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

 

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

 

**(843)626-2265**

Issuer’s TelephoneNumber, Including Area Code

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

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

 

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

 

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

 

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

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

Yes x  No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, tothe best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one): 

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

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes o No x

 

The aggregate marketvalue of the voting stock held by non-affiliates (shareholders holding lessthan 5% of an outstanding class of stock, excluding directors and executiveofficers), as of June 29, 2007, was approximately $79.2 million.  This calculation was based on the commonstock closing price on June 29, 2007 of $22.42.

 

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

 

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

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

 

 

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**Part I**

 

**Item 1. Business**

 

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

 

**General Overview**

 

The main office islocated at the corner of Grissom Parkway and 38th Avenue in Myrtle Beach, SouthCarolina.  In June 2001, the first branch office was opened at thenorthwest corner of the intersection of S.C. Highway 544 and U.S. Highway 17 inSurfside Beach, South Carolina, followed by the second branch office in November 2002at the Gator Hole Shopping Center in North Myrtle Beach, South Carolina. In February 2003, the bank opened its third branch overall and firstlocation on Hilton Head Island, South Carolina, at Pineland Station.  In July 2004,the fourth branch office opened in the Litchfield/Pawleys Island area at theLitchfield Market Village. In January 2005, the fifth branch office andsecond location on Hilton Head Island opened in The Village at Wexford. At December 31,2007, the division had six loan production offices in South Carolina, NorthCarolina, and Virginia. The South Carolina office in Little River includes themortgage operation’s staff. The North Carolina offices are in Raleigh andGastonia, and the three offices in Virginia are located in Burke,Fredericksburg, and Sterling.  In December 2006,the Company moved into its new corporate headquarters and plans to expandoperations to serve other coastal areas of South Carolina. The Companymaintains an internet web site at http://www.beachfirst.com.  The information on the Company’s website isnot incorporated by reference into this report.

 

**MarketingFocus**

 

Most of the banks in theGrand Strand and on Hilton Head Island are local branches of regional,super-regional, and large national banks. Larger banks have certain advantages in competing for large corporatebusiness, including higher lending limits and the ability to offer services inother areas of South Carolina and the Southeast.  As a result, the Company generally does notattempt to compete for large corporate banking relationships but concentratesits efforts on individuals and small- to medium-sized businesses.  The Company believes it can fill this void inthe community banking market in the Myrtle Beach and Hilton Head Island areas.

 

**Operatingand Growth Strategy**

 

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

 

**DepositProducts**

 

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

 

**Other Financial Services**

 

TheCompany offers NetTeller Internet banking with PowerPay bill payment and cashmanagement services.  With NetTeller andPowerPay, customers can perform a variety of banking functions from their homeor office computer.  

 

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

 

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

 

**Lending Activities**

 

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

 

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

 

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

 

*Loanssecured by real estate*. The majority of the Company’s loans are secured bysome form of real estate.  Real estateloans are subject to the same general risks as other loans and are particularlysensitive to fluctuations in the economy and the value of real estate.  Fluctuations in the value of real estate, aswell as other factors arising after a loan has been made, could negatively affecta borrower’s cash flow, creditworthiness, and ability to repay the loan.

 

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

 

·                  *Real Estate Construction Loans.* The Companyoffers primarily adjustable rates on residential and commercial constructionloans to builders, developers, and consumers who wish to build their ownhomes.  The duration of our constructionloans are generally limited to no more than 18 months, although payments may bestructured on a longer basis or amortized if necessary.  Construction loans generally carry a higherdegree of risk than long-term financing of existing properties, becauserepayment depends on the ultimate completion of the project or home and usuallyon the sale of the property or permanent financing.  Specific risks include cost overruns,mismanaged construction, mismanaged draw requests, pre-sale commitmentfall-out, inferior or improper construction techniques, economic changes ordownturns during construction, rising interest rates which may prevent sale ofthe property, and failure to sell completed projects in a timely manner.

 

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

 

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

 

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

 

The Company offers smallbusiness loans utilizing government enhancements such as the Small BusinessAdministration’s (“SBA”) 7 (a) program and SBA’s 504 programs.  These loans typically are partiallyguaranteed by the government, which helps to reduce their risk.  SBA loans generally carry a 75% guarantee ofthe loan.

 

*ConsumerLoans**. *The Company makes a variety of loans to individualsfor personal and household purposes, including secured and unsecuredinstallment loans, credit cards, and revolving lines of credit.  Consumer loans are underwritten based on theborrower’s income, current debt level, past credit history, and theavailability and value of collateral. Consumer rates are both fixed and variable with various terms dependingon the product type.  Our installmentloans typically amortize over periods up to 60 months.  The Company offers consumer loans with asingle maturity date when a specific source of repayment is available.  The Company typically requires monthlypayments of interest and a portion of the principal on its revolving loan productsand credit cards.  Consumer loans aregenerally considered to have greater risk than first or second mortgages onreal estate because they may be unsecured, or if they are secured, the value ofthe collateral may be difficult to assess and more likely to decrease in valuethan real estate.  At December 31,2007, consumer loans amounted to $8.5 million, or 1.7% of our loan portfolio.

 

*Credit Administration and LoanReview*. TheCompany emphasizes a strong credit culture focused on safety and soundness. TheCompany employs experienced relationship managers with solid knowledge of themarkets. The Company maintains a continuous internal loan review system andengages an independent consultant on an annual basis to review loan files toconfirm its loan grading system and to identify any issues that may needimprovement. Each loan officer is responsible for managing his or her own loanportfolio, regardless of whether other individuals or committees joined in theapproval. This responsibility continues until the loan is repaid. Thecompensation of our lending officers is dependent, in part, on the assetquality of their loan portfolios.

 

*UnderwritingProcedures, Collateral, and Risk. *The Company uses established creditpolicies and procedures when underwriting each type of loan.  Although there are minor variances in thecharacteristics and criteria for each loan type, which variances may requireadditional underwriting procedures, the Company generally evaluates borrowersusing the following defined criteria:

 

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

 

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

 

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

 

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

 

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

 

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

 

Each type of loan carriesa credit risk, simply defined as the potential that the borrower will not bewilling or able to repay the debt.  Whilereal estate loans have various risks common to all types of loans, certaintypes of real estate loans have specific risk characteristics that vary accordingto the collateral type securing the loan and the terms and repayment sourcesfor the loan.  Real estate loans are allsensitive to fluctuations in the value of the real estate securing theloan.  In addition, commercial realestate loans have risk that the primary source of repayment will beinsufficient to service the debt. Construction and development real estate loans generally carry a higherdegree of risk than long term financing of existing properties.  These projects are usually dependent on thecompletion of the project on schedule and within cost estimates and on thetimely sale of the property.  Inferior orimproper construction techniques, cost overruns, changes in economic conditionsduring the construction and marketing period, and rising interest rates whichmay slow the sale of the property are all risks unique to this type ofloan.  Residential mortgage loans, incontrast to commercial real estate loans, generally have longer terms and mayhave fixed or adjustable interest rates. Commercial loans primarily have risk that the primary source ofrepayment will be insufficient to service the debt.  Often this occurs as the result of changes inlocal economic conditions or in the industry in which the borrower operateswhich impact cash flow or collateral value. Consumer loans, other than home equity loan products, are generallyconsidered to have more risk than loans to individuals secured by first orsecond mortgages on real estate due to dependence on the borrower’s employmentstatus as the sole source of repayment. By following defined underwriting criteria as noted above, the Companyseeks to reduce these risks. Additionally, the Company reduces the risk that the underlyingcollateral may not be sufficient to pay the outstanding balance by usingappraisals or taking other steps to determine that the value of the collateralis adequate, and lending amounts based upon lower loan-to-value ratios.  The Company controls risk by reducingconcentration of its  loan portfolio inany one type of loan.  A concentration ofcredit report based upon NAICS codes, collateral codes, and other factors arereviewed on a quarterly basis by the Board of Directors.

 

*Loan Approval.* Certain credit risks are inherent inmaking loans. These include prepayment risks, risks resulting from uncertaintiesin the future value of collateral, risks resulting from changes in economic andindustry conditions, and risks inherent in dealing with individual borrowers. TheCompany attempts to mitigate these risks by adhering to internal creditpolicies and procedures. These policies and procedures include officer andcustomer lending limits, a multi-layered approval process for larger loans,documentation examination, and follow-up procedures for any exceptions tocredit policies. Our loan approval policies provide for various levels ofofficer lending authority. Individual loan authorities are granted based onhistorical performance and experience. When the amount of aggregate loans to asingle borrower exceeds an individual officer’s lending authority or the executiveinternal loan committee limit, then the Board of Directors’ loan committee mayapprove the loan up to the Bank’s legal lending limit. The Company does notmake any loans to any of its directors or executive officers unless the loan isapproved by the loan committee and reviewed by the Board of Directors. Theseloans are made on terms that are not more favorable to the director orexecutive officer than would be available to a person not affiliated with us. TheCompany takes steps to protect against losses due to hurricanes and weather byrequiring customers to carry appropriate insurance.

 

**Competition**

 

The Myrtle Beach andHilton Head Island markets are highly competitive markets. The competitionamong financial institutions is based on a variety of factors, includinginterest rates on deposits and loans, service charges, quality of services, andconvenience of banking facilities.  TheCompany also competes with other financial institutions including securitiesfirms, savings and loans, insurance companies, credit unions, leasingcompanies, and finance companies.  TheCompany believes it has competed effectively in the market by offering qualityand personal service to small to medium sized businesses and individuals.

 

**Employees**

 

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

 

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**SUPERVISIONAND REGULATION**

 

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

 

**Beach First National Bancshares, Inc.**

 

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

 

***Permitted Activities***. ** **Under the Bank HoldingCompany Act, a bank holding company is generally permitted to engage in, oracquire direct or indirect control of more than 5% of the voting shares of anycompany engaged in, activities such as  banking or managing or controlling banks,    furnishing services to or performingservices for its subsidiaries, and other activities that the Federal Reservedetermines to be so closely related to banking as to be a proper incident tothe business of banking.

 

Activities that theFederal Reserve has found to be so closely related to banking as to be a properincident to the business of banking include:

 

·                  factoring accounts receivable

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

·                  leasing personal or real property

·                  operating a non-bank depository institution (such as a savingsassociation, trust company functions, financial and investment advisoryactivities)

·                  conducting discount securities brokerage activities

·                  underwriting and dealing in government obligations and money marketinstruments

·                  providing specified management consulting and counseling activities

·                  performing selected data processing services and support services

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

 

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

 

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

 

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

 

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

 

***Sourceof Strength.***  In accordance with Federal Reserve Boardpolicy, the Company is expected to act as a source of financial strength to theBank and to commit resources to support the Bank in circumstances in which theCompany might not otherwise do so.  Underthe Bank Holding Company Act, the Federal Reserve Board may require a bankholding company to terminate any activity or relinquish control of a non-banksubsidiary, other than a non-bank subsidiary of a bank, upon the FederalReserve’s determination that such activity or control constitutes a seriousrisk to the financial soundness or stability of any depository institutionsubsidiary of a bank holding company. Further, federal bank regulatory authorities have additional discretionto require a bank holding company to divest itself of any bank or non-banksubsidiaries if the agency determines that divestiture may aid the depositoryinstitution’s financial condition.   Further, any loans by a bank holding company to a subsidiary bank aresubordinate in right of payment to deposits and certain other indebtedness ofthe subsidiary bank.  In the event of abank holding company’s bankruptcy, any commitment by the bank holding companyto a federal bank regulatory agency to maintain the capital of a subsidiarybank at a certain level would be assumed by the bankruptcy trustee and entitledto priority payment.

 

***CapitalRequirements.***  The Federal Reserve Board imposes certaincapital requirements on the bank holding company under the Bank Holding CompanyAct, including a minimum leverage ratio and a minimum ratio of “qualifying”capital to risk-the weighted assets. These requirements are essentially the same as those that apply to theBank and are described below under “Beach First National Bank - CapitalRegulations.”  Subject to these capitalrequirements and certain other restrictions, the Company is able to borrowmoney to make a capital contribution to the bank, and these loans may be repaidfrom dividends paid from the Bank to the Company.  Our ability to pay dividends depends on theBank’s ability to pay dividends to us, which is subject to regulatoryrestrictions as described below in “Beach First National Bank — Dividends.”  The Company is also able to raise capital forcontribution to the Bank by issuing securities without having to receiveregulatory approval, subject to compliance with federal and state securitieslaws.

 

***SouthCarolina State Regulation.***  As a SouthCarolina bank holding company under the South Carolina Banking and BranchingEfficiency Act, the Company is subject to limitations on sale or merger and toregulation by the South Carolina Board of Financial Institutions (the “S.C.Board”).  The Company is not required toobtain the approval of the S.C. Board prior to acquiring the capital stock of anational bank, but the Company must notify the S. C. Board at least 15 daysprior to doing so.  The Company mustreceive the S. C. Board’s approval prior to engaging in the acquisition of aSouth Carolina state chartered bank or another South Carolina bank holdingcompany.

 

**Beach First National Bank (Bank)**

 

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

 

·                                          security devices and procedures;

·                                          adequacy of capitalization and lossreserves;

·                                          loans;

·                                          investments;

·                                          borrowings;

·                                          deposits;

·                                          mergers;

·                                          issuances of securities;

·                                          payment of dividends;

·                                          interest rates payable on deposits;

·                                          interest rates or fees chargeable onloans;

·                                          establishment of branches;

·                                          corporate reorganizations;

·                                          maintenance of books and records; and

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

 

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The OCC requires that the Bank maintain specifiedcapital ratios of capital to assets and imposes limitations on the Bank’saggregate investment in real estate, bank premises, and furniture andfixtures.  Two categories of regulatorycapital are used in calculating these ratios—Tier 1 capital and totalcapital.  Tier 1 capital generallyincludes common equity, retained earnings, a limited amount of qualifyingpreferred stock, and qualifying minority interests in consolidated subsidiaries,reduced by goodwill and certain other intangible assets, such as core depositintangibles, and certain other assets. Total capital generally consists of Tier 1 capital plus Tier 2 capital,which includes the allowance for loan losses, preferred stock that did notqualify as Tier 1 capital, certain types of subordinated debt and a limitedamount of other items.

 

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

 

The minimum capital ratios for both the company andthe Bank are generally 8% for total capital, 4% for Tier 1 capital and 4% forleverage.  To be eligible to beclassified as “well-capitalized,” the Bank must generally maintain a totalcapital ratio of 10% or more, a Tier 1 capital ratio of 6% or more, and aleverage ratio of 5% or more.  Certainimplications of the regulatory capital classification system are discussed ingreater detail below.

 

***Prompt Corrective Action.***  The FederalDeposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) established a “promptcorrective action” program in which every bank is placed in one of fiveregulatory categories, depending primarily on its regulatory capitallevels.  The OCC and the other federalbanking regulators are permitted to take increasingly severe action as a bank’scapital position or financial condition declines below the “AdequatelyCapitalized” level described below. Regulators are also empowered to place in receivership or require thesale of a bank to another depository institution when a bank’s leverage ratioreaches two percent. Better capitalized institutions are generally subject toless onerous regulation and supervision than banks with lesser amounts ofcapital.  The OCC’s regulations set forthfive capital categories, each with specific regulatory consequences.  The categories are:

 

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

 

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

 

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

 

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

 

·                                          Critically Undercapitalized — The institutionfails to meet a critical capital level set by the appropriate federal bankingagency.  A critically undercapitalizedinstitution is one having a ratio of tangible equity to total assets that isequal to or less than 2%.

 

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

 

If a bank is not well capitalized, it cannotaccept brokered deposits without prior FDIC approval and, if approval is granted,cannot offer an effective yield in excess of 75 basis points on interests paidon deposits of comparable size and maturity in such institution’s normal marketarea for deposits accepted from within its normal market area, or national ratepaid on deposits of comparable size and maturity for deposits accepted outsidethe bank’s normal market area.  Moreover,if a bank becomes less than adequately capitalized, it must adopt a capitalrestoration plan acceptable to the OCC that is subject to a limited performanceguarantee by the corporation.  The bankalso would become subject to increased regulatory oversight, and isincreasingly restricted in the scope of its permissible activities.  Each company having control over anundercapitalized institution also must provide a limited guarantee that theinstitution will comply with its capital restoration plan.  Except under limited circumstances consistentwith an accepted capital restoration plan, an undercapitalized institution maynot grow.  An undercapitalizedinstitution may not acquire another institution, establish additional branchoffices or engage in any new line of business unless determined by theappropriate Federal banking agency to be consistent with an accepted capitalrestoration plan, or unless the FDIC determines that the proposed action willfurther the purpose of prompt corrective action.  The appropriate federal banking agency maytake any action authorized for a significantly undercapitalized institution ifan undercapitalized institution fails to submit an acceptable capitalrestoration plan or fails in any material respect to implement a plan acceptedby the agency.  A criticallyundercapitalized institution is subject to having a receiver or conservatorappointed to manage its affairs and for loss of its charter to conduct bankingactivities.

 

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

 

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

 

***Standards forSafety and Soundness.    *** The FDIA also requires the federalbanking regulatory agencies to prescribe, by regulation or guideline,operational and managerial standards for all insured depository institutions relatingto: (i) internal controls, information systems and internal audit systems;(ii) loan documentation; (iii) credit underwriting; (iv) interestrate risk exposure; and (v) asset growth. The agencies also must prescribestandards for asset quality, earnings, and stock valuation, as well asstandards for compensation, fees and benefits. The federal banking agencies have adopted regulations and InteragencyGuidelines Prescribing Standards for Safety and Soundness to implement theserequired standards. These guidelines set forth the safety and soundnessstandards that the federal banking agencies use to identify and addressproblems at insured depository institutions before capital becomesimpaired.  Under the regulations, if theOCC determines that the Bank fails to meet any standards prescribed by theguidelines, the agency may require the Bank to submit to the agency anacceptable plan to achieve compliance with the standard, as required by theOCC.  The final regulations establishdeadlines for the submission and review of such safety and soundness complianceplans.

 

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

 

All insured institutions must undergo regular on-siteexaminations by their appropriate banking agency.  The cost of examinations of insureddepository institutions and any affiliates may be assessed by the appropriatefederal banking agency against each institution or affiliate as it deemsnecessary or appropriate.  Insuredinstitutions are required to submit annual reports to the FDIC, their federalregulatory agency, and state supervisor when applicable.  The FDIC has developed a method for insureddepository institutions to provide supplemental disclosure of the estimatedfair market value of assets and liabilities, to the extent feasible andpracticable, in any balance sheet, financial statement, report of condition orany other report of any insured depository institution.  The federal banking regulatory agencies toprescribe, by regulation, standards for all insured depository institutions anddepository institution holding companies relating, among other things, to thefollowing:

 

·                  internal controls;

·                  information systems and audit systems;

·                  loan documentation;

·                  credit underwriting;

·                  interest rate risk exposure; and

 

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·                  asset quality.

 

***Deposit Insuranceand Assessments.***  Deposits at the Bank are insured by theDeposit Insurance Fund (the “DIF”) as administered by the FDIC, up to theapplicable limits established by law—generally $100,000 per accountholder and$250,000 for certain retirement accountholders.  In November 2006, the FDIC adopted finalregulations that set the deposit insurance assessment rates that took effect in2007.  The FDIC uses a risk-basedassessment system that assigns insured depository institutions to one of fourrisk categories based on three primary sources of information—supervisory riskratings for all institutions, financial ratios for most institutions, includingthe Company, and long-term debt issuer ratings for large institutions that havesuch ratings.  The new premium rate structureimposes a minimum assessment of from five to seven cents for every $100 ofdomestic deposits on institutions that are assigned to the lowest riskcategory.  This category is expected toencompass substantially all insured institutions, including the Bank.  A one time assessment credit is available tooffset up to 100% of the 2007 assessment. Any remaining credit can be used to offset up to 90% of subsequentannual assessments through 2010.  Forinstitutions assigned to higher risk categories, the premium that took effectin 2007 ranges from ten cents to forty-three cents per $100 of deposits.

 

The FDIC also collects adeposit-based assessment from insured financial institutions on behalf of TheFinancing Corporation (FICO).  The fundsfrom these assessments are used to service debt issued by FICO in its capacityas a financial vehicle for the Federal Savings and Loan InsuranceCorporation.  The FICO assessment rate isset quarterly and in 2006 ranged from 1.32 cents to 1.24 cents per $100 ofassessable deposits.  For the firstquarter of 2007, the FICO assessment rate was 1.22 cents per $100 of assessabledeposits.

 

***Transactions with Affiliates and Insiders.*** The Company is a legal entity separate anddistinct from the Bank and its other subsidiaries.  Various legal limitations restrict the Bankfrom lending or otherwise supplying funds to the Company or its non-banksubsidiaries.  The Company and the Bankare subject to Sections 23A and 23B of the Federal Reserve Act and FederalReserve Regulation W.  Section 23Aof the Federal Reserve Act places limits on the amount of loans or extensionsof credit to, or investments in, or certain other transactions with, affiliatesand on the amount of advances to third parties collateralized by the securitiesor obligations of affiliates.  Theaggregate of all covered transactions is limited in amount, as to any oneaffiliate, to 10% of the Bank’s capital and surplus and, as to all affiliatescombined, to 20% of the Bank’s capital and surplus.  Furthermore, within the foregoing limitationsas to amount, each covered transaction must meet specified collateralrequirements.  The Bank is forbidden topurchase low quality assets from an affiliate.

 

Section 23B of theFederal Reserve Act, among other things, prohibits an institution from engagingin certain transactions with certain affiliates unless the transactions are onterms substantially the same, or at least as favorable to such institution orits subsidiaries, as those prevailing at the time for comparable transactionswith nonaffiliated companies.

 

Regulation W generallyexcludes all non-bank and non-savings association subsidiaries of banks fromtreatment as affiliates, except to the extent that the Federal Reserve Boarddecides to treat these subsidiaries as affiliates. The regulation also limitsthe amount of loans that can be purchased by a bank from an affiliate to notmore than 100% of the bank’s capital and surplus.

 

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

 

***Dividends. ***The Company’s principal source of cashflow, including cash flow to pay dividends to its shareholders, is dividends itreceives from the Bank.  Statutory andregulatory limitations apply to the Bank’s payment of dividends to theCompany.  As a general rule, the amountof a dividend may not exceed, without prior regulatory approval, the sum of netincome in the calendar year to date and the retained net earnings of theimmediately preceding two calendar years. A depository institution may not pay any dividend if payment would causethe institution to become undercapitalized or if it already isundercapitalized.  The OCC may preventthe payment of a dividend if it determines that the payment would be an unsafeand unsound banking practice.  The OCCalso has advised that a national bank should generally pay dividends only outof current operating earnings.

 

***Branching.***  National banksare required by the National Bank Act to adhere to branch office banking lawsapplicable to state banks in the states in which they are located.  Under current South Carolina law, the Bankmay open branch offices throughout South Carolina with the prior approval ofthe OCC.  In addition, with priorregulatory approval, the Bank is able to acquire existing banking operations inSouth Carolina.   Furthermore, federallegislation permits interstate branching, including out-of-state acquisitionsby bank holding companies, interstate branching by banks if allowed by 

 

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state law, and interstatemerging by banks.  South Carolina law,with limited exceptions, currently permits branching across state lines onlythrough interstate mergers.

 

***Anti-Tying Restrictions. ***Underamendments to the BHCA and Federal Reserve regulations, a bank is prohibitedfrom engaging in certain tying or reciprocity arrangements with itscustomers.  In general, a bank may notextend credit, lease, sell property, or furnish any services or fix or vary theconsideration for these on the condition that (i) the customer obtain orprovide some additional credit, property, or services from or to the bank, thebank holding company or subsidiaries thereof or (ii) the customer may notobtain some other credit, property, or services from a competitor, except tothe extent reasonable conditions are imposed to assure the soundness of thecredit extended.  Certain arrangementsare permissible: a bank may offer combined-balance products and may otherwiseoffer more favorable terms if a customer obtains two or more traditional bankproducts; and certain foreign transactions are exempt from the generalrule.  A bank holding company or any bankaffiliate also is subject to anti-tying requirements in connection withelectronic benefit transfer services.

 

***Community Reinvestment Act.*** The Community Reinvestment Act requires that the OCC evaluate the recordof the Bank in meeting the credit needs of its local community, including lowand moderate income neighborhoods.  Thesefactors are also considered in evaluating mergers, acquisitions, andapplications to open a branch or facility. Failure to adequately meet these criteria could impose additionalrequirements and limitations on the Bank.

 

***Finance Subsidiaries.*** Under theGramm-Leach-Bliley Act (the “GLBA”), subject to certain conditions imposed bytheir respective banking regulators, national and state-chartered banks arepermitted to form “financial subsidiaries” that may conduct financial orincidental activities, thereby permitting bank subsidiaries to engage incertain activities that previously were impermissible.  The GLBA imposes several safeguards andrestrictions on financial subsidiaries, including that the parent bank’s equityinvestment in the financial subsidiary be deducted from the bank’s assets andtangible equity for purposes of calculating the bank’s capital adequacy.   In addition, the GLBA imposes newrestrictions on transactions between a bank and its financial subsidiariessimilar to restrictions applicable to transactions between banks and non-bankaffiliates.

 

***Consumer Protection Regulations.*** Activities of the Bank are subject to avariety of statutes and regulations designed to protect consumers.  Interest and other charges collected orcontracted for by the Bank are subject to state usury laws and federal lawsconcerning interest rates.  The Bank’sloan operations are also subject to federal laws applicable to credittransactions, such as:

 

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

 

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

 

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

 

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

 

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

 

·                          the rules and regulations of thevarious federal agencies charged with the responsibility of implementing suchfederal laws.

 

The deposit operations of the Bank also are subjectto:

 

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

 

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

 

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***Enforcement Powers.***  The Bank andits “institution-affiliated parties,” including its management, employeesagents independent contractors and consultants such as attorneys andaccountants and others who participate in the conduct of the financial institution’saffairs, are subject to potential civil and criminal penalties for violationsof law, regulations or written orders of a government agency.  These practices can include the failure of aninstitution to timely file required reports or the filing of false ormisleading information or the submission of inaccurate reports.  Civil penalties may be as high as $1,000,000a day for such violations.  Criminalpenalties for some financial institution crimes have been increased to twentyyears.  In addition, regulators areprovided with greater flexibility to commence enforcement actions againstinstitutions and institution-affiliated parties.  Possible enforcement actions include thetermination of deposit insurance. Furthermore, banking agencies’ power to issue cease-and-desist orderswere expanded.  Such orders may, amongother things, require affirmative action to correct any harm resulting from aviolation or practice, including restitution, reimbursement, indemnificationsor guarantees against loss.  A financialinstitution may also be ordered to restrict its growth, dispose of certainassets, rescind agreements or contracts, or take other actions as determined bythe ordering agency to be appropriate.

 

***Anti-Money Laundering. ***Financialinstitutions must maintain anti-money laundering programs that includeestablished internal policies, procedures, and controls; a designatedcompliance officer; an ongoing employee training program; and testing of theprogram by an independent audit function. The Company and the Bank are alsoprohibited from entering into specified financial transactions and accountrelationships and must meet enhanced standards for due diligence and “knowingyour customer” in their dealings with foreign financial institutions andforeign customers. Financial institutions must take reasonable steps to conductenhanced scrutiny of account relationships to guard against money launderingand to report any suspicious transactions, and recent laws provide lawenforcement authorities with increased access to financial informationmaintained by banks. Anti-money laundering obligations have been substantiallystrengthened as a result of the USA Patriot Act, enacted in 2001 and renewed in2006. Bank regulators routinely examine institutions for compliance with theseobligations and are required to consider compliance in connection with theregulatory review of applications. The regulatory authorities have been activein imposing “cease and desist” orders and money penalty sanctions againstinstitutions found to be violating these obligations.

 

***USA PATRIOT Act/Bank Secrecy Act. ***Financial institutions must maintain anti-moneylaundering programs that include established internal policies, procedures, andcontrols; a designated compliance officer; an ongoing employee trainingprogram; and testing of the program by an independent audit function.*** ***The USA PATRIOT Act, amended, in part, the Bank SecrecyAct and provides for the facilitation of information sharing among governmentalentities and financial institutions for the purpose of combating terrorism andmoney laundering by enhancing anti-money laundering and financial transparencylaws, as well as enhanced information collection tools and enforcementmechanics for the U.S. government, including: (i) requiring standards forverifying customer identification at account opening; (ii) rules topromote cooperation among financial institutions, regulators, and lawenforcement entities in identifying parties that may be involved in terrorismor money laundering; (iii) reports by nonfinancial trades and businessesfiled with the Treasury Department’s Financial Crimes Enforcement Network fortransactions exceeding $10,000; and (iv) filing suspicious activitiesreports if a bank believes a customer may be violating U.S. laws andregulations and requires enhanced due diligence requirements for financialinstitutions that administer, maintain, or manage private bank accounts orcorrespondent accounts for non-U.S. persons. Bank regulators routinely examine institutions for compliance with theseobligations and are required to consider compliance in connection with theregulatory review of applications.

 

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

 

The Office of ForeignAssets Control (“OFAC”), which is a division of the U.S. Department of theTreasury, is responsible for helping to insure that United States entities donot engage in transactions with “enemies” of the United States, as defined byvarious Executive Orders and Acts of Congress. OFAC has sent, and will send, our banking regulatory agencies lists ofnames of persons and organizations suspected of aiding, harboring or engagingin terrorist acts.  If the Bank finds aname on any transaction, account or wire transfer that is on an OFAC list, itmust freeze such account, file a suspicious activity report and notify theFBI.  The Bank has appointed an OFACcompliance officer to oversee the inspection of its accounts and the filing ofany notifications.  The Bank activelychecks high-risk OFAC areas such as new accounts, wire transfers and customerfiles.  The Bank performs these checksutilizing software, which is updated each time a modification is made to thelists provided by OFAC and other agencies of Specially Designated Nationals andBlocked Persons.

 

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

 

 

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

 

Like other lendinginstitutions, the Bank utilizes credit bureau data in its underwritingactivities.  Use of such data isregulated under the Federal Credit Reporting Act on a uniform, nationwidebasis, including credit reporting, prescreening, sharing of information betweenaffiliates, and the use of credit data. The Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”)permits states to enact identity theft laws that are not inconsistent with theconduct required by the provisions of the FACT Act.

 

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

 

·                          allowing check truncation without makingit mandatory;

 

·                          demanding that every financialinstitution communicate to accountholders in writing a description of itssubstitute check processing program and their rights under the law;

 

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

 

·                          retaining in place the previouslymandated electronic collection and return of checks between financialinstitutions only when individual agreements are in place;

 

·                          requiring that when accountholdersrequest verification, financial institutions produce the original check (or acopy that accurately represents the original) and demonstrate that the accountdebit was accurate and valid; and

 

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

 

***Effect of Governmental Monetary Policies*****.** Our earnings are affected by domestic economic conditions and themonetary and fiscal policies of the United States government and itsagencies.  The Federal Reserve Bank’smonetary policies have had, and are likely to continue to have, an importantimpact on the operating results of commercial banks through its power toimplement national monetary policy in order, among other things, to curbinflation or combat a recession.  Themonetary policies of the Federal Reserve Board have major effects upon thelevels of bank loans, investments and deposits through its open marketoperations in United States government securities and through its regulation ofthe discount rate on borrowings of member banks and the reserve requirementsagainst member bank deposits.  It is notpossible to predict the nature or impact of future changes in monetary andfiscal policies.

 

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

 

 

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**Item 1A.**  **Risk Factors**

 

***The Company’srecent operating results may not be indicative of future operating results.***

 

The Company may not be able to sustain its historical rate of growthand may not even be able to grow the business at all. Because of our relativelysmall size and short operating history, it will be difficult for us to generatesimilar earnings growth as the Company continues to expand, and consequentlyour historical results of operations will not necessarily be indicative of ourfuture operations. Various factors, such as economic conditions, regulatory andlegislative considerations, and competition, may also impede our ability toexpand our market presence. If the Company experiences a significant decreasein its historical rate of growth, its results of operations and financialcondition may be adversely affected because a high percentage of its operatingcosts are fixed expenses.

 

***TheCompany’s decisions regarding credit risk and reserves for loan losses maymaterially and adversely affect its business.***

 

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

 

The Company attempts tomaintain an appropriate allowance for loan losses to provide for potentiallosses in its loan portfolio.  TheCompany periodically determines the amount of the allowance based onconsideration of several factors, including an ongoing review of the quality,mix, and size of its overall loan portfolio, its historical loan lossexperience, evaluation of economic conditions, regular reviews of loandelinquencies and loan portfolio quality, the amount and quality of collateral,including guarantees, securing the loans, and concentration of credit risk.

 

There is no precisemethod of predicting credit losses; therefore, the Company faces the risk thatcharge-offs in future periods will exceed its allowance for loan losses andthat additional increases in the allowance for loan losses will berequired.  These risks will likelyincrease as the Bank’s average loan size continues to increase.  Additions to the allowance for loan losseswould result in a decrease of our net income, and possibly our capital.

 

***Lackof seasoning of a portion of the Company’s loan portfolio may increase the riskof credit defaults in the future.***

 

Due to the rapid growthof the Bank and the type of loans originated in the past several years, aportion of the loan portfolio and the lending relationships are of relativelyrecent origin.  In general, new loans havemore uncertainty in terms of credit quality until they have been outstandingfor a period of time, a process the Company refers to as “seasoning.”  As a result, a portfolio of older loans willusually behave more predictably than a newer loan portfolio.  Because the Company’s loan portfolio has someunseasoned loans, the current level of delinquencies and defaults may not berepresentative of the level that will prevail when the portfolio becomesseasoned.  If delinquencies and defaultsincrease, the Company may be required to increase its provision for loanlosses, which would adversely affect its results of operations and financialcondition.

 

***Aneconomic downturn, especially one affecting the Horry, Beaufort, and Georgetowncounties, could reduce the Company’s customer base, level of deposits, anddemand for financial products such as loans.***

 

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

 

 

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***Changesin prevailing interest rates may reduce profitability.***

 

Results of operationsdepend in large part upon the level of the Company’s net interest income, whichis the difference between interest income from interest-earning assets, such asloans and mortgage-backed securities, and interest expense on interest-bearingliabilities, such as deposits and other borrowings.  Depending on the terms and maturities ofassets and liabilities, a significant change in interest rates could have amaterial adverse effect on profitability. Many factors cause changes in interest rates, including governmentalmonetary policies and domestic and international economic and politicalconditions.  While the Company intends tomanage the effects of changes in interest rates by adjusting the terms,maturities, and pricing of its assets and liabilities, the efforts may not beeffective and its financial condition and results of operations couldsuffer.  The recent interest ratedeclines by the Federal Reserve have had an adverse impact on the Company’s netinterest rate margin. The Company anticipates that it will be harmed from adeclining interest rate environment in the short term (1-3 months) but isexpected to benefit over a one year time period.   No assurance can be given as to when and inwhat direction the Federal Reserve will adjust interest rates or that theresults the Company anticipates will actually occur.

 

***TheCompany is dependent on key individuals and the loss of one or more of thesekey individuals could curtail growth and adversely affect its prospects.***

 

Our success depends, inpart, on the executive management group and the continued ability to attractand retain experienced loan personnel, as well as other managementpersonnel.  The loss of the services ofseveral key personnel could adversely affect the Company’s growth strategy andprospects to the extent the Company is unable to replace such personnel.

 

***The Company issubject to extensive regulation that could limit or restrict its activities.***

 

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

 

Thelaws and regulations applicable to the banking industry could change at anytime, and the Company cannot predict the effects of these changes on itsbusiness and profitability.  Becausegovernment regulation greatly affects the business and financial results of allcommercial banks and bank holding companies, the cost of compliance couldadversely affect the Company’s ability to operate profitably.

 

TheSarbanes-Oxley Act of 2002, and the related rules and regulationspromulgated by the Securities and Exchange Commission, have increased thescope, complexity, and costs of corporate governance, reporting, and disclosurepractices.  The Company has experienced,and expects to continue to experience, greater compliance costs, includingcosts related to internal controls, as a result of the Sarbanes-Oxley Act.

 

The Company has evaluated its internal controls to allow management toreport on its internal controls, and for its independent registered publicaccounting firm to attest to its internal controls for 2007.  Effectiveinternal controls are necessary to produce reliable financial reports andare important to helping prevent financial fraud.

 

***The Company’scontinued pace of growth may require it to raise additional capital in thefuture, but that capital may not be available when it is needed.***

 

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

 

 

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***TheCompany faces strong competition for customers, which could prevent it fromobtaining customers and may cause it to pay higher interest rates to attractcustomers.***

 

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

 

***The Company willface risks with respect to future expansion and acquisitions or mergers.***

 

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

 

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

 

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

 

·                  the incurrence and possible impairment of goodwillassociated with an acquisition and possible adverse effects on our results ofoperations; and

 

·                  the risk of loss of key employees and customers.

 

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

 

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

 

***Alarge percentage of the loans in our portfolio currently include exceptions tothe Company’s loan policies and supervisory guidelines.***

 

All of the company loansare subject to written loan policies adopted by the Board of Directors andsupervisory guidelines imposed by regulators. The Company’s loan policies are designed to reduce the risks associatedwith the loans by requiring Company personnel to perform certain tasks as partof the underwriting, pricing, and loan closing process.  Loans that do not fully comply with our loanpolicies are known as “exceptions.”  TheCompany categorizes exceptions as policy exceptions, financial statementexceptions and collateral exceptions.  Asof December 31, 2007, approximately 17.5% of the loans in the portfolio includedcollateral exceptions to loan policies. As a result of these exceptions, such loans may have a higher risk ofloss than the loans that comply with the loan policies.  In addition, the Company may be subject toregulatory action by federal or state banking authorities if they believe thenumber of exceptions in the loan portfolio represents an unsafe bankingpractice.

 

The Company generallyunderwrites loans in the portfolio in accordance with its own internalunderwriting guidelines and regulatory supervisory guidelines. In certaincircumstances the Company has approved loans which exceed either its internalunderwriting guidelines, supervisory guidelines, or both.  As of December 31, 2007, approximately$48.0 million of loans, or 80.3% of the Bank’s capital, had loan-to-valueratios that exceeded regulatory supervisory guidelines, of which 14 loanstotaling approximately $1.8 million had loan-to-value ratios of 100% ormore.  Supervisory limits on commercialloan to value exceptions are set at 30% of the Bank’s capital.  At December 31, 2007, $13.7 million ofthe commercial loans, or 22.6% of the Bank’s capital, exceeded the supervisoryloan to value ratio.  The number of loansin the portfolio with loan-to-value ratios in excess of supervisory guidelines,internal guidelines, or both could increase the risk of delinquencies anddefaults in the portfolio.

 

 

16

----

 

**Item 1B.**  **Unresolved Staff Comments:** Not applicable.

 

**Item 2.    Properties.**

 

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

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

----

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

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

 

The Company’snew headquarters, built in partnership with Nelson Mullins Riley & Scarborough,LLP (NMRS), opened in December 2006 at the corner of 38th Avenue North and Grissom Parkway.  The Company has moved the main office to thislocation and NMRS has relocated its Myrtle Beach legal office to thebuilding.  The Company purchased the landfor approximately $1.8 million, and contributed the land to BFNM Building, LLC,an entity of which the Company owns two-thirds and NMRS owns one-third.  The Company financed the construction projectthrough a third-party lender with each of the owners being responsible fortheir respective interests in the project. The total land and construction project cost was $8.8 million, exclusiveof tenant improvements. The Company leases two-thirds of the building (approximately30,000 square feet) from BFNM Building, LLC, the entity that owns thebuilding.  Because the Company 

 

 

17

----

 

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

 

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

 

**Item 3.        Legal Proceedings.**

 

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

 

**Item 4.        Submission of Matters to a Vote ofSecurity Holders.**

 

No matter was submittedto a vote of security holders during the fourth quarter of the fiscal yearcovered by this report.

 

 

18

----

 

**Part II**

 

**Item 5.        Market for Common Equity and RelatedStockholder Matters.**

 

TheCompany’s common stock was approved for listing on The NASDAQ GlobalMarket in June 2005 under the symbol “BFNB.” As of February 29, 2008, the Company hadapproximately 3,068 shareholders of record. Unless otherwise noted, the following table shows the high and lowclosing sales prices published by NASDAQ for each quarter within the last twofiscal years.

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

----

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

 

Todate, the Company has not paid cash dividends on common stock.  The Company currently intends to retainearnings to support operations and finance expansion.  Cash and stock dividends are discussed regularlyat the Board meetings.    All of the outstanding shares of commonstock are entitled to share equally in dividends from funds legally availablewhen, and if, declared by the Board of Directors.  TheCompany declared and paid a 3 for 2 stock split in 2006 and has not paid anycash dividends to date.

** **

** **

**19**

----

** **

**Item 6.  Selected Financial Data.**

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

** **

**20**

----

** **

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

** **

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

** **

**Item 7A. Quantitativeand Qualitative Disclosures About Market Risk.**

** **

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

** **

**Item 8.    Financial Statements and Supplementary Data**

 

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

 

**Item 9.  Changes in and Disagreements with Accountantson Accounting and Financial Disclosure**

 

None.

 

**Item9A.  Controls and Procedures**

 

**DisclosureControls and Procedures**

 

The Company’s managementis responsible for establishing and maintaining effective disclosure controlsand procedures, as defined under Rules 13a-15(e) and 15d-15(e) ofthe Securities Exchange Act of 1934.  Asof December 31, 2007, an evaluation was performed under the supervisionand with the participation of management, including the Chief Executive Officerand Chief Financial Officer, of the effectiveness of the design and operationof the Company’s disclosure controls and procedures.  Based on that evaluation, managementconcluded that disclosure controls and procedures as of December 31, 2007were effective in ensuring material information required to be disclosed inthis Annual Report on Form 10-K was recorded, processed, summarized, andreported on a timely basis. Additionally, there were no changes in internal controls during thequarter ended December 31, 2007 that have materially affected, or arereasonably likely to materially affect, internal control over financialreporting.

 

**Management’sReport on Internal Control over Financial Reporting**

 

Management’sresponsibilities related to establishing and maintaining effective disclosurecontrols and procedures include maintaining effective internal controls overfinancial reporting that are designed to produce reliable financial statementsin accordance with accounting principles generally accepted in the UnitedStates.  The Report on Management’sAssessment of Internal Control Over Financial Reporting is disclosed in theCompany’s Annual Report on page 24 and is incorporated herein byreference.  Based on this assessment,management believes that, as of December 31, 2007, its system of internalcontrol over financial reporting met the criteria described in such report andis effective.

 

**AttestationReport of the Independent Registered Public Accounting Firm**

 

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

 

**Item 9B. Other Information**.  None.

 

 

21

----

 

 

**Part III**

 

**Item10.  Directors, Executive Officers andCorporate Governance**

 

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

 

The Company has adopted a Code of Ethics that applies to the Board ofDirectors, principal executive officer, principal financial officer, seniorfinancial officers, and other executive officers in accordance with theSarbanes-Oxley Corporate Responsibility Act of 2002. The Code of Ethics isavailable without charge to shareholders upon request. Shareholders shouldcontact Chief Financial Officer, Gary S. Austin, at the main office to obtain acopy.

 

**Item11.  Executive Compensation**

 

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

 

**Item12.  Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

 

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

 

**EquityCompensation Plan Information**

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

 

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

 

**Item13.  Certain Relationships and RelatedTransactions and Director Independence**

 

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

 

**Item 14. Principal Accounting Fees and Services**

 

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

 

22

----

 

**Part IV**

 

**Item 15.****               ****Exhibits, Financial StatementSchedules**

 

(a)(1)  FinancialStatements

 

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

 
|   | Report of Independent  Registered Public Accounting Firm                                                                                                    |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | Consolidated Balance  Sheets as of December 31, 2007 and 2007                                                                                          |
|   | Consolidated Statements  of Income for the years ended December 31, 2007, 2006 and 2005                                                                |
|   | Consolidated  Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss)  for the years ended December 31, 2007, 2006 and 2005 |
|   | Consolidated Statements  of Cash Flows for the years ended December 31, 2007, 2006 and 2005                                                            |
|   | Notes to the  Consolidated Financial Statements                                                                                                             |

 
|   | (2) | Financial Statement  Schedules |
|--------|-----|--------------------------------|

 

These schedules have beenomitted because they are not required, are not applicable or have been includedin our consolidated financial statements.

 
|   | (3) | Exhibits |
|--------|-----|----------|

 

The following exhibitsare required to be filed with this Report on Form 10-K by Item 601 ofRegulation S-K.

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

 

23

----

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

----

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

 

24

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**SIGNATURES**

 

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

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

 

KNOW ALL MEN BYTHESE PRESENTS, that each person whose signature appears below constitutes andappoints Walter E. Standish, III, his true and lawful attorney-in-fact andagent, with full power of substitution and resubstitution, for him and in hisname, place and stead, in any and all capacities, to sign any and allamendments to this Annual Report on Form 10-K, and to file the same, withall exhibits thereto, and other documents in connection therewith, with theSecurities and Exchange Commission, granting unto attorney-in-fact and agentfull power and authority to do and perform each and every act and thingrequisite or necessary to be done in and about the premises, as fully to allintents and purposes as he might or could do in person, hereby ratifying andconfirming all that attorney-in-fact and agent, or his substitute orsubstitutes, may lawfully do or cause to be done by virtue hereof.

 

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

 

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

 

25

----

 

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

 

26

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**Exhibit List**:

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

 

27

----

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

----

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

 

28

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