**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

**FORM 10-Q**

| **(Mark One)** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **x**          | ** ** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                 |
|           |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|           |       | **For the quarterly period ended: March 31, 2007**                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** **     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **o**          | ** ** | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                |
| ** **     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** **     | ** ** | **For the transition  period from                                     to                                  ** |

 

**Commission file number: 000-22503**

**BEACH FIRSTNATIONAL BANCSHARES, INC.**

(Exact name of registrantas specified in its charter)

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

 

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

(Address of principal executiveoffices)

**(843)626-2265**

(Issuer’s telephone number)

**NotApplicable**

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

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

Indicate by checkmark whether the registrant is a large accelerated file, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.

| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer x |
|---------------------------|--------|---------------------|--------|-------------------------|
|                      |   |                |   |                    |

Indicate by check mark whether the registrant isshell company (as defined in Rule 12b-2 of the ExchangeAct).    Yes  o    No  x

State the number ofshares outstanding of each of the issuer’s classes of common equity, as of thelatest practicable date:  On April 30,2007, 4,819,741 shares of the issuer’s common stock, par value $1.00 per share,were issued and outstanding.

 

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**PART I**

**FINANCIAL INFORMATION**

**Item 1.  Financial Statements.**

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

**ConsolidatedCondensed Balance Sheets**
| ** **                                                                                                                                                                     | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **2007**           | ** **  | **2006**              | ** ** | **2006** | ** ** |
| ** **                                                                                                                                                                     | ** ** | **(unaudited)**    | ** **  | **(unaudited)**       | ** ** | **(audited)** | ** ** |
| **ASSETS**                                                                                                                                                                     | ** ** | ** **         | ** **  | ** **            | ** ** | ** ** | ** ** |
| Cash and due from banks                                                                                                                                                        |       | $                  | 7,654,093   |                  | $          | 4,599,760 |   | $ | 5,198,945 |   |
| Federal funds sold and  short-term investments                                                                                                                                 |       | 4,655,718          |        | 6,133,853             |       | 14,010,667 |   |
| Investment securities  available for sale                                                                                                                                      |       | 69,191,574         |        | 52,099,895            |       | 68,474,531 |   |
| Loans, net                                                                                                                                                                     |       | 427,957,250        |        | 344,306,128           |       | 392,848,582 |   |
| Mortgage loans held for  sale                                                                                                                                                  |       | 13,865,389         |        | —                |       | 12,478,222 |   |
| Federal Reserve Bank  stock                                                                                                                                                    |       | 984,000            |        | 534,000               |       | 984,000 |   |
| Federal Home Loan Bank  stock                                                                                                                                                  |       | 2,607,800          |        | 2,318,100             |       | 2,475,600 |   |
| Premises and equipment,  net                                                                                                                                                   |       | 14,967,965         |        | 8,373,573             |       | 14,344,330 |   |
| Cash value of life  insurance                                                                                                                                                  |       | 3,456,030          |        | 3,331,263             |       | 3,424,586 |   |
| Other assets                                                                                                                                                                   |       | 7,467,395          |        | 5,012,133             |       | 5,961,876 |   |
| Total assets                                                                                                                                                                   |       | $                  | 552,807,214 |                  | $          | 426,708,705 |   | $ | 520,201,339 |   |
|                                                                                                                                                                           |       |               |        |                  |       |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                  | ** ** | ** **         | ** **  | ** **            | ** ** | ** ** | ** ** |
| **LIABILITIES:**                                                                                                                                                               | ** ** | ** **         | ** **  | ** **            | ** ** | ** ** | ** ** |
| Deposits                                                                                                                                                                       |       |               |        |                  |       |   |   |
| Noninterest  bearing deposits                                                                                                                                                  |       | $                  | 35,863,807  |                  | $          | 28,884,753 |   | $ | 37,194,469 |   |
| Interest bearing  deposits                                                                                                                                                     |       | 409,193,216        |        | 308,985,257           |       | 379,162,660 |   |
| Total deposits                                                                                                                                                                 |       | 445,057,023        |        | 337,870,010           |       | 416,357,129 |   |
| Advances from Federal  Home Loan Bank                                                                                                                                          |       | 37,500,000         |        | 32,500,000            |       | 37,500,000 |   |
| Other borrowings                                                                                                                                                               |       | 7,133,561          |        | 3,299,945             |       | 7,209,820 |   |
| Junior subordinated  debentures                                                                                                                                                |       | 10,310,000         |        | 10,310,000            |       | 10,310,000 |   |
| Other liabilities                                                                                                                                                              |       | 5,526,823          |        | 2,648,541             |       | 3,364,811 |   |
| Total  liabilities                                                                                                                                                             |       | 505,527,407        |        | 386,628,496           |       | 474,741,760 |   |
|                                                                                                                                                                           |       |               |        |                  |       |   |   |
| ** SHAREHOLDERS’ EQUITY:**                                                                                                                                           | ** ** | ** **         | ** **  | ** **            | ** ** | ** ** | ** ** |
| Common  stock, $1 par value; 10,000,000 sharesauthorized; 4,779,241 issued and outstanding at March 31, 2007,  3,174,458 at March 31, 2006, and 4,768,413 at December 31, 2006 |       | 4,779,241          |        | 3,174,458             |       | 4,768,413 |   |
| Paid-in capital                                                                                                                                                                |       | 28,695,185         |        | 30,215,578            |       | 28,657,576 |   |
| Retained earnings                                                                                                                                                              |       | 14,319,179         |        | 7,725,389             |       | 12,706,795 |   |
| Accumulated other  comprehensive loss                                                                                                                                          |       | (513,798           | )           | (1,035,216            | )          | (673,205 | ) |
| Total  shareholders’ equity                                                                                                                                               |       | 47,279,807         |        | 40,080,209            |       | 45,459,579 |   |
| Total  liabilities and shareholders’ equity                                                                                                                               |       | $                  | 552,807,214 |                  | $          | 426,708,705 |   | $ | 520,201,339 |   |

 

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

2

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

**ConsolidatedCondensed Statements of Income**
| ** **                                                    | ** ** | **Three Months Ended  March 31,** | ** ** | **For the Year Ended  December 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                         | ** ** | **2006**                                                 | ** ** | **2006** | ** ** |
| ** **                                                    | ** ** | **(unaudited)**                                  | ** ** | **(unaudited**                                           | ** ** | **(audited)** | ** ** |
| **INTEREST  INCOME**                                          | ** ** | ** **                                       | ** ** | ** **                                               | ** ** | ** ** | ** ** |
| Interest and fees on loans                                    |       | $                                                | 9,716,457  |                                                     | $          | 6,823,870 |   | $ | 33,096,343 |   |
| Investment securities                                         |       | 904,843                                          |       | 582,144                                                  |       | 2,897,719 |   |
| Federal funds sold                                            |       | 69,027                                           |       | 145,054                                                  |       | 469,819 |   |
| Other                                                         |       | 5,900                                            |       | 5,256                                                    |       | 22,929 |   |
| Total interest income                                         |       | 10,696,227                                       |       | 7,556,324                                                |       | 36,486,810 |   |
|                                                          |       |                                             |       |                                                     |       |   |   |
| **INTEREST  EXPENSE**                                         | ** ** | ** **                                       | ** ** | ** **                                               | ** ** | ** ** | ** ** |
| Deposits                                                      |       | 4,467,285                                        |       | 2,696,889                                                |       | 13,711,212 |   |
| Advances from the FHLB and federal funds purchased            |       | 428,816                                          |       | 341,889                                                  |       | 1,546,286 |   |
| Junior subordinated debentures                                |       | 318,380                                          |       | 177,247                                                  |       | 771,740 |   |
| Total interest expense                                        |       | 5,214,481                                        |       | 3,216,025                                                |       | 16,029,238 |   |
|                                                          |       |                                             |       |                                                     |       |   |   |
| Net interest income                                           |       | 5,481,746                                        |       | 4,340,299                                                |       | 20,457,572 |   |
|                                                          |       |                                             |       |                                                     |       |   |   |
| **PROVISION  FOR POSSIBLE LOAN LOSSES**                       |       | 351,200                                          |       | 522,200                                                  |       | 2,174,400 |   |
| Net interest income after provision for possible  loan losses |       | 5,130,546                                        |       | 3,818,099                                                |       | 18,283,172 |   |
|                                                          |       |                                             |       |                                                     |       |   |   |
| **NONINTEREST  INCOME**                                       | ** ** | ** **                                       | ** ** | ** **                                               | ** ** | ** ** | ** ** |
| Service fees on deposit accounts                              |       | 135,488                                          |       | 127,965                                                  |       | 514,286 |   |
| Gain on sale of loans                                         |       | —                                           |       | 22,259                                                   |       | 60,392 |   |
| Gain on sale of fixed asset                                   |       | 3,850                                            |       | —                                                   |       | — |   |
| Loss on sale of investment securities                         |       | —                                           |       | —                                                   |       | 1,007 |   |
| Income from cash value life insurance                         |       | 36,759                                           |       | 34,850                                                   |       | 143,717 |   |
| Income from mortgage operations                               |       | 1,773,197                                        |       | 66,385                                                   |       | 2,136,250 |   |
| Other income                                                  |       | 384,807                                          |       | 60,061                                                   |       | 1,134,697 |   |
| Total noninterest income                                      |       | 2,334,101                                        |       | 311,520                                                  |       | 3,990,349 |   |
|                                                          |       |                                             |       |                                                     |       |   |   |
| **NONINTEREST  EXPENSES**                                     | ** ** | ** **                                       | ** ** | ** **                                               | ** ** | ** ** | ** ** |
| Salaries and wages                                            |       | 2,332,432                                        |       | 1,023,484                                                |       | 6,018,633 |   |
| Employee benefits                                             |       | 400,906                                          |       | 234,307                                                  |       | 1,138,653 |   |
| Supplies and printing                                         |       | 51,182                                           |       | 28,439                                                   |       | 126,705 |   |
| Advertising and public relations                              |       | 143,606                                          |       | 83,515                                                   |       | 387,056 |   |
| Professional fees                                             |       | 127,989                                          |       | 77,522                                                   |       | 311,627 |   |
| Depreciation and amortization                                 |       | 315,739                                          |       | 130,402                                                  |       | 518,551 |   |
| Occupancy                                                     |       | 448,618                                          |       | 189,484                                                  |       | 1,065,091 |   |
| Data processing fees                                          |       | 171,457                                          |       | 116,969                                                  |       | 547,747 |   |
| Other operating expenses                                      |       | 966,725                                          |       | 353,671                                                  |       | 2,461,594 |   |
| Total noninterest expenses                                    |       | 4,958,654                                        |       | 2,237,793                                                |       | 12,575,657 |   |
|                                                          |       |                                             |       |                                                     |       |   |   |
| Income before income taxes                                    |       | 2,505,993                                        |       | 1,891,826                                                |       | 9,697,864 |   |
|                                                          |       |                                             |       |                                                     |       |   |   |
| **INCOME  TAX EXPENSE**                                       |       | 893,609                                          |       | 680,019                                                  |       | 3,502,136 |   |
|                                                          |       |                                             |       |                                                     |       |   |   |
| Net income                                                    |       | $                                                | 1,612,384  |                                                     | $          | 1,211,807 |   | $ | 6,195,728 |   |
|                                                          |       |                                             |       |                                                     |       |   |   |
| **BASIC  NET INCOME PER COMMON SHARE**                        |       | $                                                | .34        |                                                     | $          | .26 |   | $ | 1.30 |   |
| **DILUTED  NET INCOME PER COMMON SHARE**                      |       | $                                                | .33        |                                                     | $          | .25 |   | $ | 1.27 |   |
| Weighted average common shares outstanding - basic            |       | 4,769,102                                        |       | 4,758,162                                                |       | 4,764,072 |   |
| Weighted average  common shares outstanding – diluted    |       | 4,926,803                                        |       | 4,864,620                                                |       | 4,874,562 |   |

 

Theaccompanying notes are an integral part of these consolidated condensed financialstatements.

3

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**BeachFirst National Bancshares, Inc. and Subsidiaries**

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

(Unaudited)
| ** **                                                          | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated  Other** | ** ** | **Total**  | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                                          | ** ** | **Common stock** | ** ** | **Paid-in** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Shareholders’** | ** ** |
| ** **                                                          | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**  | ** ** | **Earnings**      | ** ** | **Income**             | ** ** | **Equity** | ** ** |
| BALANCE,  DECEMBER 31, 2005                                         |       | 3,169,958             |       | $           | 3,169,958  |         | $          | 30,157,843        |       | $                      | 6,513,582  |       | $          | (715,970 | ) | $ | 39,125,413 | ** ** |
| Net income                                                          |       | —                |       | —      |       | —       |       | 1,211,807         |       | —                 |       | 1,211,807  |       |
| Other  comprehensive income, net of taxes:                          |       |                  |       |        |       |         |       |              |       |                   |       |       |       |
| Unrealized gain on investment securities                            |       | —                |       | —      |       | —       |       | —            |       | (319,246               | )          | (319,246   | )          |
| Plus Reclassification adjustments for gains included  in net income |       | —                |       | —      |       | —       |       | —            |       | —                 |       | —     |       |
| Comprehensive income                                                |       | —                |       | —      |       | —       |       | —            |       | —                 |       | 892,561    |       |
| Exercise of stock options                                           |       | 4,500                 |       | 4,500       |       | 57,735       |       | —            |       | —                 |       | 62,235     |       |
| BALANCE, MARCH 31, 2006                                             |       | 3,174,458             |       | $           | 3,174,458  |         | $          | 30,215,578        |       | $                      | 7,725,389  |       | $          | (1,035,216 | ) | $ | 40,080,209 |   |
|                                                                |       |                  |       |        |       |         |       |              |       |                   |       |       |       |

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

 

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

4

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**BeachFirst National Bancshares, Inc. and SubsidiariesMyrtle Beach, South CarolinaConsolidated Condensed Statements of Cash Flows**
| ** **                                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** | **For the Year Ended  December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2007**                                         | ** ** | **2006**                                                 | ** ** | **2006** | ** ** |
| ** **                                                                                   | ** ** | **(unaudited)**                                  | ** ** | **(unaudited)**                                          | ** ** | **(audited)** | ** ** |
| **OPERATING  ACTIVITIES**                                                                    | ** ** | ** **                                       | ** ** | ** **                                               | ** ** | ** ** | ** ** |
| Net income                                                                                   |       | $                                                | 1,612,384  |                                                     | $          | 1,211,807 |   | $ | 6,195,728 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                                             |       |                                                     |       |   |   |
| Proceeds from sale of mortgages held for sale                                                |       | 78,275,688                                       |       | —                                                   |       | 93,107,365 |   |
| Disbursements for mortgages held for sale                                                    |       | (80,036,130                                      | )          | —                                                   |       | (105,251,847 | ) |
| Deferred income taxes                                                                        |       | 616,493                                          |       | (747,735                                                 | )          | (747,736 | ) |
| Provisions for loan losses                                                                   |       | 351,200                                          |       | 522,200                                                  |       | 2,174,400 |   |
| Depreciation and amortization                                                                |       | 315,739                                          |       | 130,402                                                  |       | 518,551 |   |
| Accretion of deferred loan fees                                                              |       | 677,847                                          |       | 317,004                                                  |       | (1,926,017 | ) |
| Loss on sale of investment securities                                                        |       | —                                 |       | —                                                   |       | 57,276 |   |
| Discount accretion and premium amortization                                                  |       | 36,971                                           |       | 16,180                                                   |       | (79,569 | ) |
| Loss on sale of property and equipment                                                       |       | 3,768                                            |       | —                                                   |       | (583,011 | ) |
| Increase in other assets                                                                     |       | (1,587,690                                       | )          | (436,277                                                 | )          | (1,559,511 | ) |
| Increase in other liabilities                                                                |       | 2,085,754                                        |       | 1,092,939                                                |       | 1,809,209 |   |
| Loss on sale of other real estate owned                                                      |       | —                                           |       | —                                                   |       | 6,031 |   |
| Net cash provided by (used in) operating activities                                          |       | 2,352,024                                        |       | 2,106,520                                                |       | (6,279,131 | ) |
|                                                                                         |       |                                             |       |                                                     |       |   |   |
| **INVESTING  ACTIVITIES**                                                                    | ** ** | ** **                                       | ** ** | ** **                                               | ** ** | ** ** | ** ** |
| Proceeds from paydowns of investment securities                                              |       | —                                           |       | —                                                   |       | 4,180,510 |   |
| Proceeds from sale of investment securities                                                  |       | —                                           |       | —                                                   |       | 4,473,361 |   |
| Purchase of investment securities                                                            |       | (717,043                                         | )          | (8,623,906                                               | )          | (33,065,437 | ) |
| Purchase of FHLB stock                                                                       |       | (132,200                                         | )          | (306,700                                                 | )          | (464,200 | ) |
| Purchase of Federal Reserve stock                                                            |       | —                                           |       | —                                                   |       | (450,000 | ) |
| Decrease in Federal funds sold                                                               |       | 9,354,949                                        |       | 19,387,218                                               |       | 11,510,404 |   |
| Increase in loans, net                                                                       |       | (36,495,835                                      | )          | (37,720,897                                              | )          | (86,426,270 | ) |
| Purchase of premises and equipment                                                           |       | (623,635                                         | )          | (1,831,468                                               | )          | (123,169 | ) |
| Purchase of life insurance contracts                                                         |       | (31,443                                          | )          | (29,846                                                  | )          | — |   |
| Purchase of property and equipment                                                           |       | —                                           |       | —                                                   |       | (9,107,363 | ) |
| Proceeds from sale of property and equipment                                                 |       | —                                           |       | —                                                   |       | 1,500,000 |   |
| Proceeds from sale of other real estate owned                                                |       | —                                           |       | —                                                   |       | 400,969 |   |
| Net cash used in investing activities                                                        |       | (28,645,207                                      | )          | (29,125,599                                              | )          | (107,571,195 | ) |
|                                                                                         |       |                                             |       |                                                     |       |   |   |
| **FINANCING  ACTIVITIES**                                                                    | ** ** | ** **                                       | ** ** | ** **                                               | ** ** | ** ** | ** ** |
| Advances from Federal Home Loan Bank                                                         |       | —                                           |       | (1,500,000                                               | )          | 3,500,000 |   |
| Net increase in deposits                                                                     |       | 28,699,894                                       |       | 26,975,800                                               |       | 105,462,919 |   |
| Exercise of stock options                                                                    |       | 48,437                                           |       | 62,235                                                   |       | 98,188 |   |
| Cash paid in lieu of fractional shares                                                       |       | —                                           |       | —                                                   |       | (2,515 | ) |
| Proceeds from other borrowings                                                               |       | —                                           |       | 1,795,936                                                |       | 5,730,991 |   |
| Repayments of other borrowings                                                               |       | —                                           |       | —                                                   |       | (25,180 | ) |
| Net cash provided by financing activities                                                    |       | 28,748,331                                       |       | 27,333,971                                               |       | 114,764,403 |   |
|                                                                                         |       |                                             |       |                                                     |       |   |   |
| Net increase in cash and cash equivalents                                                    |       | 2,455,148                                        |       | 314,892                                                  |       | 914,077 |   |
|                                                                                         |       |                                             |       |                                                     |       |   |   |
| **CASH  AND DUE FROM BANKS, BEGINNING OF PERIOD**                                            | ** ** | $                                                | 5,198,945  | ** **                                               | $          | 4,284,868 | ** ** | $ | 4,284,868 | ** ** |
| **CASH  AND DUE FROM BANKS, END OF PERIOD**                                                  | ** ** | $                                                | 7,654,093  | ** **                                               | $          | 4,599,760 | ** ** | $ | 5,198,945 | ** ** |
| ** **                                                                                   | ** ** |                                             | ** ** |                                                     | ** ** |   | ** ** |
| **CASH  PAID FOR**                                                                           | ** ** | ** **                                       | ** ** | ** **                                               | ** ** | ** ** | ** ** |
| Income taxes                                                                                 |       | $                                                | 893,609    |                                                     | $          | 680,019 |   | $ | 3,502,136 |   |
| Interest                                                                                     |       | $                                                | 5,214,481  |                                                     | $          | 3,216,025 |   | $ | 16,029,238 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

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**Beach First National Bancshares,Inc.**

**Notes toConsolidated Condensed Financial Statements (Unaudited)**

**1.****                   Basis ofPresentation**

The accompanying consolidated condensed financialstatements for Beach First National Bancshares, Inc. (“Company”) were preparedin accordance with instructions for Form 10-Q and, therefore, do not includeall disclosures necessary for a complete presentation of financial condition,results of operations, and cash flows in conformity with generally acceptedaccounting principles.  All adjustments,consisting only of normal recurring accruals, which are, in the opinion ofmanagement, necessary for fair presentation of the interim consolidatedfinancial statements have been included. The results of operations for the three month period ended March 31,2007 are not necessarily indicative of the results that may be expected for theentire year.  These consolidatedfinancial statements do not include all disclosures required by generallyaccepted accounting principles and should be read in conjunction with theCompany’s audited consolidated financial statements and related notes for theyear ended December 31, 2006.

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

The accompanying consolidated condensed financialstatements include the accounts of the Company and its subsidiaries, BeachFirst National Bank and BFNM Building, LLC (“LLC”) (See No. 4  “Investment in LLC” below).  The Company also owns two grantor trusts,Beach First National Trust I and Beach First National Trust II.  All significant inter-company items andtransactions have been eliminated in consolidation.  In accordance with current accountingguidance, the financial statements of the trusts have not been included in theCompany’s financial statements.

**3.****              Earnings PerShare**

TheCompany calculates earnings per share in accordance with Statement of FinancialAccounting Standard No. 128, “Earnings Per Share” (“SFAS 128”).  SFAS 128 specifies the computation,presentation, and disclosure requirements for earnings per share (EPS) forentities with publicly held common stock or potential common stock such asoptions, warrants, convertible securities, or contingent stock agreements ifthose securities trade in a public market.

This standard specifies computation and presentationrequirements for both basic EPS and, for entities with complex capitalstructures, diluted EPS.  Basic earningsper share are computed by dividing net income by the weighted average commonshares outstanding.  Diluted earnings pershare is similar to the computation of basic earnings per share except that thedenominator is increased to include the number of additional common shares thatwould have been outstanding if the dilutive potential common shares had beenissued.  The dilutive effect of optionsoutstanding under the Company’s stock option plan is reflected in dilutedearnings per share by application of the treasury stock method.

**RECONCILIATION OF THE NUMERATORSAND DENOMINATORS OF THE BASIC AND DILUTED EPS COMPUTATIONS:**
|                                                              | ** ** | **For the Three Months Ended** | ** **    | **For the Year Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------|---------------|---------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                           | ** **    | **2006**                              | ** ** | **2006** | ** ** |
| **Basic  earnings per share:**                               | ** ** | ** **                                         | ** **    | ** **                            | ** ** | ** ** | ** ** |
| Net income  available to common shareholders                 | ** ** | **$**                                              | **1,612,384** | ** **                            | **$**      | **1,211,807** | ** ** | **$** | **6,195,728** | ** ** |
|                                                         |       |                                               |          |                                  |       |   |   |
| Average common  shares outstanding – basic              |       | 4,769,102                                          |          | 4,758,162                             |       | 4,764,072 |   |
|                                                         | ** ** | ** **                                         | ** **    | ** **                            | ** ** | ** ** | ** ** |
| Basic earnings  per share                                    | ** ** | **$**                                              | **0.34**      | ** **                            | **$**      | **0.26** | ** ** | **$** | **1.30** | ** ** |
| ** **                                                   | ** ** | ** **                                         | ** **    | ** **                            | ** ** | ** ** | ** ** |
| **Diluted  earnings per share:**                             | ** ** | ** **                                         | ** **    | ** **                            | ** ** | ** ** | ** ** |
| Net income  available to common shareholders                 | ** ** | **$**                                              | **1,612,384** | ** **                            | **$**      | **1,211,807** | ** ** | **$** | **6,195,728** | ** ** |
|                                                         |       |                                               |          |                                  |       |   |   |
| Average common  shares outstanding – basic              |       | 4,769,102                                          |          | 4,758,162                             |       | 4,764,072 |   |
|                                                         |       |                                               |          |                                  |       |   |   |
| Incremental  shares from assumed conversion of stock options |       | 157,701                                            |          | 106,458                               |       | 110,490 |   |
|                                                         |       |                                               |          |                                  |       |   |   |
| Average common  shares outstanding – diluted            |       | 4,926,803                                          |          | 4,864,620                             |       | 4,874,562 |   |
|                                                         | ** ** | ** **                                         | ** **    | ** **                            | ** ** | ** ** | ** ** |
| Diluted earnings per  share                                  | ** ** | **$**                                              | **0.33**      | ** **                            | **$**      | **0.25** | ** ** | **$** | **1.27** | ** ** |

 

6

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**4.  Investment in LLC**

The LLC is in partnership with our legal counsel, Nelson MullinsRiley & Scarborough LLP, for purposes of acquiring a parcel of land andconstructing an office building on the property.  The Company owns two-thirds of the LLC andNelson Mullins Riley & Scarborough owns the remaining one-third.  The building is a three-story, 46,066 squarefoot office building located on 3.5 acres at the southwest corner of RobertGrissom Parkway and 38th Avenue North in Myrtle Beach, South Carolina.  The Company moved its main office to thislocation in December 2006. Nelson Mullins Riley & Scarborough LLP alsorelocated its Myrtle Beach legal office to the building in December 2006.  The LLC purchased the land for approximately$1.8 million and financed the construction project through a third-party lenderwith each of the owners being responsible for their respective interests in theproject.  The total land and constructionproject cost approximately $7.0 million, exclusive of tenant improvements.  The Company leases two-thirds of the building(approximately 30,000 square feet) from the LLC.  Because the Company only occupiesapproximately 12,500 square feet of space, it intends to lease the other 17,500square feet of its portion to outside tenants. Nelson Mullins Riley & Scarborough also leases one-third of thebuilding from the LLC.  As of March 31,2007, 4,700 square feet of the 17,500 available have been leased.

Uponcompletion of construction, the construction financing note from the third-partylender was converted to a term loan payable by the LLC to the third-party bankand is secured by the building. The loan requires 107 installments of principaland interest based on a fifteen year amortization, with all remaining principaland interest due on June 15, 2015. The interest rate is variable based onone-month LIBOR plus 1.40%. The outstanding balance on the loan at March 31,2007 is $7,133,561 and is shown as other borrowings in the accompanying balancesheet.

**5.  Interest Rate SWAP - DerivativeFinancial Instrument **

TheLLC entered into an interest rate swap agreement as a risk management tool tohedge the interest rate risk associated with the variable rate building loandiscussed above. This swap instrument is a derivative financial instrumentdesignated as a cash flow hedge and is accounted for in accordance with theprovisions of Statement of Financial Accounting Standard No. 133 (“SFAS 133”).Under the swap, the LLC pays a fixed rate of 4.62% and receives interestpayments that vary based on LIBOR. Through the swap, the LLC has converted thebuilding loan to a fixed effective rate of 6.02%.

In accordance withSFAS 133, the LLC has formally documented the relationship between the buildingloan and the swap, as well as the risk-management objective and strategy forundertaking the hedge transaction. In connection with this process, the LLC hasdetermined that the swap is highly effective as a cash flow hedge and theentire fair value of the swap was initially recorded in other comprehensiveincome. Under SFAS 133, any material ineffectiveness must be reclassified toearnings. During the formal documentation process, the LLC also determined thatno hedge ineffectiveness is anticipated because the terms of the swap soclosely match the terms of the building loan.

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

The following is our discussion and analysis ofcertain significant factors that have affected our financial position andoperating results and those of our subsidiary, Beach First National Bank,during the periods included in the accompanying financial statements.  This commentary should be read in conjunctionwith the financial statements and the related notes and the other statisticalinformation included in this report.

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

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

·                  changes in theinterest rate environment which could reduce anticipated or actual margins;

7

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·                  changes inpolitical conditions or the legislative or regulatory environment;

·                  general economicconditions, either nationally or regionally and especially in our primaryservice area, becoming less favorable than expected resulting in, among otherthings, a deterioration in credit quality;

·                  changesoccurring in business conditions and inflation;

·                  changes inmanagement;

·                  changes intechnology;

·                  changes indeposit flows;

·                  the level ofallowance for loan loss;

·                  the rate ofdelinquencies and amounts of charge-offs;

·                  the rates ofloan growth;

·                  adverse changesin asset quality and resulting credit risk-related losses and expenses;

·                  changes inmonetary and tax policies;

·                  loss of consumerconfidence and economic disruptions resulting from terrorist activities;

·                  changes in thesecurities markets; and

·                  otherrisks and uncertainties detailed from time to time in our filings with theSecurities and Exchange Commission.

**CriticalAccounting Policies**

We have adoptedvarious accounting policies that govern the application of accountingprinciples generally accepted in the United States and with general practiceswithin the banking industry in the preparation of our consolidated financialstatements.  Our significant accountingpolicies are described in the footnotes to our audited consolidated financialstatements as of December 31, 2006 as filed on our Form 10-K.

Certainaccounting policies involve significant judgments and assumptions by managementwhich have a material impact on the carrying value of certain assets andliabilities.  We consider such accountingpolicies to be critical accounting policies. The judgments and assumptions we use are based on historical experienceand other factors, which are believed to be reasonable under thecircumstances.  Because of the nature ofthe judgments and assumptions we make, actual results could differ from thesejudgments and estimates.  These differencescould have a material impact on our carrying values of assets and liabilitiesand our results of operations.

Webelieve the allowance for loan losses is the critical accounting policy thatrequires the most significant judgment and estimates used in preparation of ourconsolidated financial statements.  Someof the more critical judgments supporting the amount of our allowance for loanlosses include judgments about the credit worthiness of borrowers, the estimatedvalue of the underlying collateral, the assumptions about cash flow,determination of loss factors for estimating credit losses, the impact ofcurrent events, and conditions, and other factors impacting the level ofprobable inherent losses.  Underdifferent conditions or using different assumptions, the actual amount ofcredit losses incurred by us may be different from management’s estimatesprovided in our consolidated financial statements.  Refer to the subsection entitled “Allowancefor Possible Loan Losses” below for a more complete discussion of our processesand methodology for determining our allowance for loan losses.

**Overview**

Thefollowing discussion describes our results of operations for the quarter endedMarch 31, 2007 as compared to the quarter ended March 31, 2006, and alsoanalyzes our financial condition as of March 31, 2007 as compared to December31, 2006.  Like most community banks, wederive most of our income from interest we receive on our loans andinvestments.  Our primary source of fundsfor making these loans and investments is our deposits, on which we payinterest.  Consequently, one of the keymeasures of our success is our amount of net interest income, or the differencebetween the income on our interest-earning assets, such as loans andinvestments, and the expense on our interest-bearing liabilities, such asdeposits.  Another key measure is thespread between the yield we earn on these interest-earning assets and the ratewe pay on our interest-bearing liabilities.

Ofcourse, there are risks inherent in all loans, so we maintain an allowance forloan losses to absorb probable losses on existing loans that may becomeuncollectible.  We establish and maintainthis allowance by charging a provision for loan losses against our operatingearnings.  In the following section, wehave included a detailed discussion of this process.

8

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Inaddition to earning interest on our loans and investments, we earn incomethrough fees and other expenses we charge to our customers.  We describe the various components of thisnoninterest income, as well as our noninterest expense, in the followingdiscussion.

#### The followingdiscussion and analysis also identifies significant factors that have affectedour financial position and operating results during the periods included in theaccompanying financial statements.  Weencourage you to read this discussion and analysis in conjunction with thefinancial statements and the related notes and the other statisticalinformation also included in this report.

#### **Results of Operations**

***EarningsReview***

Ournet income was $1,612,384, or $0.33 diluted net income per common share, forthe three months ended March 31, 2007 as compared to $1,211,807, or $0.25diluted net income per common share, for the same period in 2006, and was$6,195,728, or $1.27 diluted net income per common share, for the year endedDecember 31, 2006.  The increase in netincome reflects our continued growth, with average earning assets increasing to$506.4 million during the first three months of 2007 from $398.5 million duringthe same period of 2006.  The return onaverage assets for the three month period ended March 31, 2007 was 1.21% ascompared to 1.17% for the same period in 2006, and was 1.33% for the year endedDecember 31, 2006.  The return on averageequity was 14.04% for the three month period ended March 31, 2007 versus 12.02%for the same period in 2006, and was 14.53% for the year ended December 31,2006.

*NetInterest Income*

Ourprimary source of revenue is net interest income, which represents thedifference between the income on interest-earning assets and expense oninterest-bearing liabilities.  During thefirst three months of 2007, net interest income increased 26.3% to $5,481,746from $4,340,299 for the same period of 2006 and was $20.5 million for the yearended December 31, 2006.  The growth innet interest income for the first three months of 2007 resulted from anincrease of $3,139,903 in interest income, partially offset by an increase ininterest expense of $1,998,456.  Ourlevel of net interest income is determined by the level of our earning assetsand the management of our net interest margin. The continued growth of our loan portfolio and the increases in theprime rate are the primary drivers of the increase in net interest income.  Average total loans increased from $333.8million in the first three months of 2006 to $428.5 million in the same periodin 2007.  Average total loans increased$56.0 million from $372.8 million for the year ended December 31, 2006 ascompared to $428.5 million for the three months ended March 31, 2007.  In addition, average securities increased to$72.1 million in the first three months of 2007 compared to $51.0 million forthe first three months of 2006, and increased $11.9 million from $60.2 millionfor the year ended December 31, 2006. Net interest spread, the difference between the rate we earn oninterest-earning assets and the rate we pay on interest-bearing liabilities,was 3.84% in the first three months of 2007 compared to 3.88% during the sameperiod of 2006, and 4.06% for the year ended December 31, 2006.  The net interest margin was 4.39% for thethree month period ended March 31, 2007 compared to 4.42% for the same periodof 2006, and 4.62% for the year ended December 31, 2006.  The decline in the net interest spread andthe net interest margin are due to the rising interest rate environment and theincreased competition in our markets for deposits.

*Provisionfor Loan Losses*

Wehave established an allowance for loan losses through a provision for loanlosses charged as an expense on our statement of income.  We review our loan portfolio periodically toevaluate our outstanding loans and to measure both the performance of theportfolio and the adequacy of the allowance for loan losses.  The provision for loan losses was $351,200for the first three months of 2007, $522,200 for the same period of 2006, and$2.2 million for the year ended December 31, 2006.  The decrease in the provision was the resultof management’s assessment of the adequacy of the reserve for possible loanlosses given the size, mix, and quality of the current loan portfolio.  Please see the discussion below under “Allowancefor Possible Loan Losses” for a description of the factors we consider indetermining the amount of the provision we expense each period to maintain thisallowance.

*NoninterestIncome*

Noninterest incomeincreased to $2,334,101 for the three months ended March 31, 2007, up 649.3%from $311,520 for the same period in 2006. This increase in noninterest incomeis related to the income from our mortgage operations that we added in June of2006.   Noninterest income was $3,990,349for the year ended December 31, 2006.

9

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Prior to the formation ofour mortgage operations, income from mortgage operations represented referralfees on mortgage loans where the bank was acting as an agent for a third partyoriginator.  With the formation of thecompany’s mortgage operations during the second quarter of 2006, all sources ofincome from this division are included in income from mortgage operations.  The four key components of the revenue areloan referral fees, document preparation fees for both retail and wholesaleloans which includes origination fees, servicing release premiums for bothretail and wholesale loans, and the net gains on the sale of mortgageloans.  The respective amounts for thethree month period ended March 31, 2007 are $136,795, $552,884, $634,452, and$424,971.  With these amounts included,mortgage operations income increased to $1,773,197 at March 31, 2007 ascompared to $66,385 at March 31, 2006. Changes in federal law regarding the oversight of mortgage brokers andlenders could increase our costs of operations and affect our mortgageorigination volume which could negatively impact our noninterest income in thefuture. Additional information on the expenses associated with the mortgagedivision can be found below in the “Noninterest Expense” section.

*NoninterestExpense*

Totalnoninterest expense increased 121.6% to $4,958,654 for the three month periodended March 31, 2007 from $2,237,793 for the same period in 2006 and was$12,575,657 for the year ended December 31, 2006.  Salary and wages and employee benefitsexpense increased $1,475,547 to $2,733,338 during the three month period endedMarch 31, 2007 compared to the same period in 2006.  Of the increase, $1,010,443 is directlyrelated to salary and wages for the mortgage operations.  Another $128,577 is directly related toemployee benefits for the mortgage operations employees.  All other increases are the result of personneladditions, normal compensation adjustments, and higher costs associated withgroup benefits.

                Wehad 144 full-time equivalent employees at March 31, 2007, an increase of 76, ofwhich 66 were for the mortgage operations, as compared to the same period in2006.    Staffing increases wereprimarily due to the addition of the mortgage operations and overall growth.

Forthe three months ended March 31, 2007, advertising and public relations costsincreased $60,091 to $143,606 as compared to the same period in 2006.Advertising and public relations costs were $387,056 for the year endedDecember 31, 2006.  These expensescontinue to be a major expense item as we develop our presence in the newmarkets. This increase was related primarily to special promotions, such asnewspaper advertisements, to attract deposits in all markets, as well as,contracting with a professional advertising agency.  Professional fees increased $50,467 to$127,989 for the three month period ended March 31, 2007 compared to the sameperiod in 2006, and were $311,627 for the year ended December 31, 2006.  These fees continue to increase due to ourgrowth, the regulatory fees associated with such growth, and the escalatingcost of accounting, auditing, and legal services for a public company.   We expect our expense for Sarbanes Oxleycompliance to increase in 2007 as we formally prepare to meet the requirementsof these comprehensive regulations.

Occupancyexpenses increased $259,134 to $448,618 during the three months ended March 31,2007 compared to the same period in 2006. This increase is related to the addition of the facilities associatedwith the mortgage operations, as well as, the expense related to the newcorporate headquarters.  This increasewas also the result of increases on lease payments for most locations. As wecontinue to expand, we expect that occupancy costs will continue toincrease.  Occupancy expenses were1,065,091 for the year ended December 31, 2006.

Dataprocessing fees increased during the three months ended March 31, 2007 to$171,457 from $116,969 during the same period in 2006, and were $547,747 forthe year ended December 31, 2006.  Dataprocessing costs are primarily related to the volume of loan and deposit accountsand associated transaction activity.  Strong security of data processing and relatedsystems is paramount to our operation. We expanded the security features of our internet banking product, inaddition to upgrading all security measures for internal and externalsystems.  We believe our data processingcosts are consistent with our expansion.

Otheroperating expenses increased 173.3% to $966,725 during the three months endedMarch 31, 2007 compared to $353,671 during the same period in 2006, and$2,461,594 for the year ended December 31, 2006.  These increases are primarily the result ofincreased operating expenses related to the growth of the company, along withother expenses associated with the expansion of loans and deposits. Theincrease in other operating expenses was primarily due to increase in creditand collection expenses, merchant expenses, higher travel and lodging expenses,furniture and equipment expenses, and NASDAQ fees.

Specifically,credit and collection expenses increased $400,922, merchant expenses increased$104,702, due to the expansion of merchant related activity, travel expensesincreased $31,570, furniture and equipment increased $20,880, 

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NASDAQ feesincreased $15,270 collectively totaling $573,343, or 90% of the total increaseof $634,493. The increase in credit and collection expenses is primarily due toinvestor funding fees and fees paid to brokers for mortgage loans.

Thefollowing table presents a comparison of other operating expenses by categorywith a balance over $10,000.

**Other Operating Expenses**
|                                        | ** ** | **For the three months ended** | ** ** | **For the year   ended** | ** ** |
|----------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                             | ** ** | **March 31, 2007**                       | ** ** | **March 31, 2006**            | ** ** | **December, 31  2006** | ** ** |
| **Telephone**                          |       | 31,733                                             |       | 17,091                                  |       | 84,081 |   |
| Postage and  freight                   |       | 22,561                                             |       | 13,025                                  |       | 73,884 |   |
| Armored Car                            |       | 19,836                                             |       | 19,449                                  |       | 86,482 |   |
| **Credit  and collection**             |       | 425,863                                            |       | 24,941                                  |       | 446,017 |   |
| Dues and  subscriptions                |       | 33,959                                             |       | 27,816                                  |       | 117,976 |   |
| **Travel**                             |       | 75,952                                             |       | 44,382                                  |       | 189,603 |   |
| Entertainment                          |       | 26,130                                             |       | 14,124                                  |       | 106,137 |   |
| FDIC insurance                         |       | 11,682                                             |       | 8,843                                   |       | 41,037 |   |
| Other insurance                        |       | 12,570                                             |       | 10,736                                  |       | 44,898 |   |
| Debit/ATM                              |       | 21,931                                             |       | 19,433                                  |       | 77,871 |   |
| **Merchant**                           |       | 111,829                                            |       | 7,127                                   |       | 167,866 |   |
| Software  maintenance                  |       | 15,538                                             |       | 11,899                                  |       | 61,610 |   |
| Director  Supplemental Retirement Plan |       | 24,640                                             |       | 47,946                                  |       | 137,289 |   |
| **NASDAQ**                             |       | 21,395                                             |       | 6,125                                   |       | 24,500 |   |
| **Furniture  and equipment**           |       | 65,652                                             |       | 44,772                                  |       | 427,015 |   |
| **Total**                              | ** ** | **921,271**                                        | ** ** | **317,709**                             | ** ** | **2,086,266** | ** ** |

 

**BalanceSheet Review**

*General*

Wehad total assets of $552.8 million at March 31, 2007, an increase of 30.0% from$426.7 million at March 31, 2006, and an increase of 6.3% from $520.2 millionat December 31, 2006.  Total assetsconsisted primarily of $441.8 million in net loans including mortgage loansheld for sale, $72.8 million in investments, $4.7 million in federal funds soldand short-term investments, and $7.7 million in cash and due from banks.  Our liabilities at March 31, 2007 totaled$505.5 million, consisting primarily of $445.1 million in deposits, $37.5million in FHLB advances, and $10.3 million of junior subordinateddebentures.  Our total deposits increasedto $445.1 million at March 31, 2007, up 31.7% from $337.9 million at March 31,2006, and up 6.9% from $416.4 million at December 31, 2006.  Shareholder’s equity increased $7.2 millionto $47.3 million at March 31, 2007 from $40.1 million, and increased $1.8million from $45.5 million at December 31, 2006.

## *Investment Securities*

Total investmentsecurities averaged $72.1 million during the first three months of 2007 andtotaled $72.8 million at March 31, 2007. Total investment securities averaged $51.0 million during the firstthree months of 2006 and totaled $55.5 million at March 31, 2006.   Total investment securities averaged $60.2million for the year ended December 31, 2006 and totaled $71.9 million atDecember 31, 2006.   At March 31, 2007,our total investment securities portfolio had a book value of $70.1 million anda fair market value of $69.2 million for an unrealized net loss of$875,939.  We primarily invest in U.S.Government Sponsored Enterprises and Federal Agency securities.

AtMarch 31, 2007, short-term investments totaled $4.7 million, compared to $6.1million at March 31, 2006 and $14.0 million at December 31, 2006.  These funds are one source of our bank’sliquidity and are generally invested in an earning capacity on an overnight orshort-term basis. This decline in short-term investments is primarily due tohigher loan demand during this quarter and the competitive market for deposits.

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*Loans*

Sinceloans typically provide higher yields than other types of earning assets, asubstantial percentage of our earning assets are invested in our loanportfolio.  As of March 31, 2007, loansrepresented 84.6% of average earning assets as compared to 83.8% at March 31,2006, and 84.2% at December 31, 2006.  AtMarch 31, 2007, net loans (gross loans less the allowance for loan losses anddeferred loan fees) totaled $441.8 million, an increase of $97.5 million, or28.3%, from March 31, 2006 and an increase of $36.5 million, or 9.0% fromDecember 31, 2006.  Average gross loansincreased to $428.5 million with a yield of 9.20% during the first three monthsof 2007 from $333.8 million with a yield of 8.29% during the same period in2006.  Average gross loans were $372.8million with a yield of 8.88% at December 31, 2006.  The increase in yield on loans during theseperiods is due to the increasing interest rate environment in 2006 and2007.  The interest rates charged onloans vary with the degree of risk and the maturity and amount of theloan.  Competitive pressures, moneymarket rates, availability of funds, and government regulations also influenceinterest rates.

The followingtable shows the composition of the loan portfolio by category at March 31,2007, March 31, 2006, and December 31, 2006.
| ** **                          | ** ** | **Composition of Loan Portfolio** | ** **  |
|-------------------------------------|------------|--------------------------------------------------|-------------|
| ** **                          | ** ** | **March 31, 2007**                     | ** **  | **March 31, 2006** | ** ** | **December 31, 2006** | ** ** |
| ** **                          | ** ** | **Amount**                                       | ** **  | **Percent of  Total** | ** ** | **Amount** | ** ** | **Percent of  Total** | ** ** | **Amount** | ** ** | **Percent  of Total** | ** ** |
| Commercial                          |       | $                                                | 42,476,492  |   | 9.5 | % | $ | 44,178,927 |   | 12.7 | % | 43,974,792 |   | 10.7 | % |
| Real estate —  construction    |       | 39,645,111                                       |        | 8.8 | % | 35,068,148 |   | 10.0 | % | 44,032,693 |   | 10.7 | % |
| Real estate —  mortgage (1)    |       | 357,957,716                                      |        | 79.9 | % | 262,940,150 |   | 75.2 | % | 315,689,304 |   | 76.7 | % |
| Consumer                            |       | 8,234,898                                        |        | 1.8 | % | 7,318,855 |   | 2.1 | % | 7,784,157 |   | 1.9 | % |
| Loans, gross                        |       | 448,314,217                                      |        | 100.0 | % | 349,506,080 |   | 100.0 | % | 411,480,946 |   | 100.0 | % |
| Unearned loan  fees and costs, net  |       | (319,487                                         | )           |   |   | (317,004 | ) |   |   | (266,090 | ) |   |   |
| Allowance for  possible loan losses |       | (6,172,091                                       | )           |   |   | (4,882,948 | ) |   |   | (5,888,052 | ) |   |   |
| Loans, net                          |       | $                                                | 441,822,639 |   |   |   | $ | 344,306,128 |   |   |   | $ | 405,326,804 |   |   |   |
|                                     |            |                                                  |             |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Includesmortgage loans held for sale

Theprincipal component of our loan portfolio at March 31, 2007, March 31, 2006,and December 31, 2006 was mortgage loans, which represented 79.9%, 75.2% and76.7%, respectively.  In the context ofthis discussion, a “real estate mortgage loan” is defined as any loan, otherthan loans for construction purposes, secured by real estate, regardless of thepurpose of the loan.  We follow thecommon practice of financial institutions in our market area of obtaining asecurity interest in real estate whenever possible, in addition to any otheravailable collateral.  The collateral istaken to reinforce the likelihood of the ultimate repayment of the loan andtends to increase the magnitude of the real estate loan portfoliocomponent.  Generally, we limit theloan-to-value ratio to 80%.  We attemptto maintain a relatively diversified loan portfolio to help reduce the riskinherent in concentrations of collateral.

## *Allowance for Possible Loan Losses*

We have established an allowance for loan lossesthrough a provision for loan losses charged to expense on our statement of income.  The allowance for loan losses represents anamount which we believe will be adequate to absorb probable losses on existingloans that may become uncollectible.  Ourjudgment as to the adequacy of the allowance for loan losses is based on anumber of assumptions about future events, which we believe to be reasonable,but which may or may not prove to be accurate. The evaluation of the allowance is segregated into general allocationsand specific allocations.  For generalallocations, the portfolio is segregated into risk-similar segments for whichhistorical loss ratios are calculated and adjusted for identified trends orchanges in current portfolio characteristics. Historical loss ratios are calculated by product type for consumer loans(installment and revolving), mortgage loans, and commercial loans and may beadjusted for other risk factors. To allow for modeling error, a range ofprobable loss ratios is then derived for each segment.  The resulting percentages are then applied tothe dollar amounts of the loans in each segment to arrive at each segment’srange of probable loss levels.  Certainnonperforming loans are individually assessed for impairment under SFAS No. 114and assigned specific allocations.  Otheridentified high-risk loans or credit relationships based on internal riskratings are also individually assessed and assigned specific allocations.

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Thegeneral allocation also includes a component for probable losses inherent inthe portfolio, based on management’s analysis that is not fully capturedelsewhere in the allowance.  Thiscomponent serves to address the inherent estimation and imprecision risk in themethodology as well as address management’s evaluation of various factors orconditions not otherwise directly measured in the evaluation of the general andspecific allocations.  Such factorsinclude the current general economic and business conditions; geographic,collateral, or other concentrations of credit; system, procedural, policy, or underwritingchanges; experience of the lending staff; entry into new markets or new productofferings; and results from internal and external portfolio examinations.

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

Theallocation of the allowance to the respective loan segments is an approximationand not necessarily indicative of future losses or future allocations.  The entire allowance is available to absorblosses occurring in the overall loan portfolio. In addition, the allowance is subject to examination and adequacytesting by regulatory agencies, which may consider such factors as themethodology used to determine adequacy and the size of the allowance relativeto that of peer institutions, and other adequacy tests.  Such regulatory agencies could require us toadjust the allowance based on information available to them at the time oftheir examination.

AtMarch 31, 2007, the allowance for loan losses was $6.2 million, or 1.38% oftotal outstanding loans, compared to an allowance for loan losses of $4.9million, or 1.40% of total outstanding loans, at March 31, 2007 and $5.9million, or 1.43% of total outstanding loans, at December 31, 2006.  During the first three months of 2006, we hadone charge-off totaling $18,857.  Duringthe same period in 2006, we had one charge-off totaling $5,496.  We had non-performing loans totaling $1.1million, $1.9 million, and $1.6 million at March 31, 2007, March 31, 2006, andDecember 31, 2006, respectively.  Whilethere can be no assurances, we do not expect significant losses relating tothese nonperforming loans because we believe that the collateral supportingthese loans is largely sufficient to cover the outstanding loan balance.  The following table sets forth certaininformation with respect to our allowance for loan losses and the compositionof charge-offs and recoveries for the three months ended March 31, 2007, March31, 2006, and December 31, 2006.

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**Allowance for Loan Losses**
| ** **                                          | ** ** | **Three months ended March 31,** | ** **  | **December 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|-------------|-----------------------|------------|
| ** **                                          | ** ** | **2007**                                             | ** **  | **2006**              | ** ** | **2006** | ** ** |
|                                                |       |                                                 |        |                  |       |   |   |
| Average total  loans outstanding                    |       | $                                                    | 428,506,579 |                  | $          | 333,815,888 |   | $ | 372,791,961 |   |
| Total loans  outstanding at period end              |       | 447,994,730                                          |        | 349,189,076           |       | 411,214,857 |   |
| Total  nonperforming loans                          |       | 1,088,422                                            |        | 1,899,166             |       | 1,625,511 |   |
|                                                |       |                                                 |        |                  |       |   |   |
| Beginning  balance of allowance                     |       | $                                                    | 5,888,052   |                  | $          | 4,364,287 |   | $ | 4,364,287 |   |
|                                                |       |                                                 |        |                  |       |   |   |
| Loans charged  off                                  |       | (18,857                                              | )           | (5,496                | )          | (792,188 | ) |
| Total recoveries                                    |       | 1,696                                                |        | 1,957                 |       | 141,553 |   |
| Net loans  charged off                              |       | (17,161                                              | )           | (3,539                | )          | (650,635 | ) |
|                                                |       |                                                 |        |                  |       |   |   |
| Provision for  loan losses                          |       | 301,200                                              |        | 522,200               |       | 2,174,400 |   |
| Balance at  period end                              |       | $                                                    | 6,172,091   |                  | $          | 4,882,948 |   | $ | 5,888,052 |   |
|                                                |       |                                                 |        |                  |       |   |   |
| Net charge-offs  to average total loans             |       | 0.004                                                | %           | 0.001                 | %          | 0.17 | % |
| Allowance as a  percent of total loans              |       | 1.38                                                 | %           | 1.40                  | %          | 1.43 | % |
| Nonperforming  loans as a percentage of total loans |       | 0.24                                                 | %           | 0.54                  | %          | 0.40 | % |
| Nonperforming loans as  a percentage of allowance   |       | 17.63                                                | %           | 38.89                 | %          | 27.59 | % |

 

Thefollowing table sets forth the breakdown of the allowance for loan losses byloan category and the percentage of loans in each category to gross loans as ofMarch 31, 2007.  We believe that theallowance can be allocated by category only on an approximate basis.  The allocation of the allowance to eachcategory is not necessarily indicative of further losses and does not restrictthe use of the allowance to absorb losses in any category.

**As of March 31, 2007**
| Commercial                       |   | $         | 1,091,799 |   | 9.47   | % |
|----------------------------------|--------|-----------|-----------|--------|--------|---|
| Real estate -  construction      |   | 556,341   |      | 8.84   |   |
| Real estate –  mortgage     |   | 3,859,367 |      | 79.85  |   |
| Consumer                         |   | 133,655   |      | 1.84   |   |
| Unallocated.                     |   | 530,929   |      | — |   |
| Total allowance for  loan losses |   | $         | 6,172,091 |   | 100.0  | % |

 

*Nonperforming Assets*

We discontinue accrual of interest on a loan when weconclude it is doubtful that we will be able to collect interest from theborrower.  We reach this conclusion bytaking into account factors such as the borrower’s financial condition,economic and business conditions, and the results of our previous collectionefforts.  Generally, we will place adelinquent loan in nonaccrual status when the loan becomes 90 days or more pastdue.  When we place a loan in nonaccrualstatus, we reverse all interest which has been accrued on the loan but remainsunpaid and we deduct this interest from earnings as a reduction of reportedinterest income.  We do not accrue anyadditional interest on the loan balance until we conclude the collection ofboth principal and interest is reasonably certain.  At March 31, 2007, there were no loansaccruing interest which were 90 days or more past due and we had norestructured loans.

## *Deposits*

Averagetotal deposits were $424.8 million for the three months ended March 31, 2007,up 30.1% from $326.5 million during the same period in 2006 and up 15.7% from$367.1 million at December 31, 2006. Average interest-bearing deposits were $390.8 million for three monthsended March 31, 2007, up 31.8% from $296.5 million during the same period of2006 and up 17.1% from $333.6 million at December 31, 2006.

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Thefollowing table sets forth our deposits by category as of March 31, 2007, March31, 2006, and December 31, 2006.

**Deposits**
| ** **                          | ** ** | **March 31, 2007  Percent of** | ** **  | **March 31, 2006  Percent of** | ** ** | **December 31, 2006  Percent of** | ** ** |
|-------------------------------------|------------|-----------------------------------------------|-------------|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **Amount**                                    | ** **  | **Deposits**                                  | ** ** | **Amount**                                       | ** ** | **Deposits** | ** ** | **Amount** | ** ** | **Deposits** | ** ** |
|                                |       |                                          |        |                                          |       |                                             |       |   |   |   |   |   |   |
| Demand deposit  accounts            |       | $                                             | 35,863,807  |                                          | 8.1        | %                                                | $          | 28,884,753 |   | 8.5 | % | $ | 37,194,469 |   | 8.9 | % |
| Interest bearing  checking accounts |       | 24,161,644                                    |        | 5.4                                           | %          | 23,135,091                                       |       | 6.9 | % | 21,336,836 |   | 5.1 | % |
| Money market  accounts              |       | 114,199,711                                   |        | 25.7                                          | %          | 69,333,354                                       |       | 20.5 | % | 103,056,865 |   | 24.8 | % |
| Savings accounts                    |       | 3,449,946                                     |        | 0.6                                           | %          | 3,268,256                                        |       | 1.0 | % | 3,303,763 |   | 0.8 | % |
| Time deposits  less than $100,000   |       | 155,153,653                                   |        | 34.8                                          | %          | 115,576,388                                      |       | 34.2 | % | 154,191,755 |   | 37.0 | % |
| Time deposits of  $100,000 or over  |       | 113,228,262                                   |        | 25.4                                          | %          | 97,672,168                                       |       | 28.9 | % | 97,273,441 |   | 23.4 | % |
| Total deposits                      |       | $                                             | 445,057,023 |                                          | 100.0      | %                                                | $          | 337,870,010 |   | 100.0 | % | $ | 416,357,129 |   | 100.0 | % |

 

Depositgrowth was attributable to internal growth and the generation of new depositaccounts due primarily to special promotions and increased advertising.  Demand deposit accounts increased as a resultof an expanded focus on demand deposit accounts.  Interest bearing checking accounts increasedprimarily due to a change mandated by the South Carolina Bar Associationrequiring that all lawyer trust accounts be interest bearing.  This created a shift from demand depositaccounts to interest bearing checking accounts.

Core deposits, which exclude certificates of depositof $100,000 or more, provide a relatively stable funding source for our loanportfolio and other earning assets.  Ourcore deposits were $331.8 million at March 31, 2007 compared to $240.2 millionat March 31, 2006 and $319.1 million at December 31, 2006.  Our brokered deposits were $29.6 million asof March 31, 2007, $29.6 million as of March 31, 2006, and $34.6 million as ofDecember 31, 2006.  We expect a stablebase of deposits to be our primary source of funding to meet both ourshort-term and long-term liquidity needs. Core deposits as a percentage of total deposits were 74.6% at March 31,2007, 71.1% at March 31, 2006, and 76.6% at December 31, 2006.  Our loan-to-deposit ratio was 99.3% at March31, 2007 versus 103.4% at March 31, 2006 and 98.8% at December 31, 2006.  The average loan-to-deposit ratio was 101.0%during the first three months of 2007, 100.0% during the same period of 2006and 102.0% at December 31, 2006.

**Advances from Federal Home LoanBank**

In addition to deposits,we obtained funds from the FHLB to help fund our loan growth.  Average borrowings from the FHLB were $38.1million during the first quarter of 2007 and totaled $37.5 million at March 31,2007.  The following table reflects thecurrent borrowing terms.
| FHLB Description | ** ** | **Balance** | ** ** | **Current Rate** | ** ** | **Maturity Date** | ** ** |
|-----------------------|------------|-------------|------------|-----------------------|------------|------------------------|------------|
| Fixed Rate  Hybrid    |       | $           | 5,000,000  |                  | 4.76       | %                      | 10/21/2010 |   |
| Convertible           |       | 7,500,000   |       | 4.51                  | %          | 11/29/2010             |       |
| Convertible           |       | 5,000,000   |       | 3.68                  | %          | 07/13/2015             |       |
| Convertible           |       | 5,000,000   |       | 4.06                  | %          | 09/29/2015             |       |
| Convertible           |       | 5,000,000   |       | 4.16                  | %          | 03/13/2017             |       |
| Prime Based  Advance  |       | 10,000,000  |       | 5.41                  | %          | 09/19/2011             |       |
|                  |       | $           | 37,500,000 |                  |       |                   |       |   |

 

**Junior Subordinated Debentures**

On May 27, 2004 we raised $5.0 million and on March 30, 2005 we raised an additional $5.0 million through the issuance and sale of floating rate trust preferred securities through BFNB Trust I and BFNB Trust II (the “Trusts”).  These trust preferred securities are reported on our consolidated balance sheet as junior subordinated debentures.  The Trusts loaned these proceeds to our holding company to use for general corporate purposes.  Trust preferred securities currently qualify as Tier 1 capital under Federal Reserve Board guidelines.

Debt issuance costs, net of accumulated amortization, from the junior subordinated debentures totaled $39,745 at March 31, 2007, $44,534 at March 31, 2006, and $41,067 at December 31, 2006.  These costs are included in other assets

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on our consolidated balance sheet.  Amortization of debt issuance costs from trust preferred debt totaled $834 for the three month period ended March 31, 2007 and $836 for the three month period ended March 31, 2006, and $4,588 for the year ended December 31, 2006.  These costs are reported in other noninterest expense on the consolidated statement of income.

The trust preferred securities accrue and pay distributions annually at a rate per annum equal to the three month LIBOR plus 270 and 190 basis points, respectively, which was 8.060% and 7.255% at March 31, 2007.  The distribution rate payable on these securities is cumulative and payable quarterly in arrears.  We have the right, subject to events of default, to defer payments of interest on the trust preferred securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity dates of May 27, 2034 and March 30, 2035, respectively.  We have no current intention to exercise our right to defer payments of interest on the trust preferred securities.  We have the right to redeem the trust preferred securities, in whole or in part, on or after May 27, 2009 and March 30, 2010, respectively.  We may also redeem the trust preferred securities prior to such dates upon occurrence of specified conditions and the payment of a redemption premium.

## **Capital Resources**

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

In October 2006, the Company announced a 3-for-2stock split effected in the form of a 50% stock dividend to shareholders ofrecord on December 1, 2006.  The dividendwas paid on December 21, 2006.  Allearnings per share amounts for all periods have been adjusted to reflect this3-for-2 split.

At March 31, 2007, our total shareholders’equity was $47.3 million ($47.8 million at the bank level).  At March 31, 2007, our Tier 1 capital ratiowas 13.0% (11.4% at the bank level), our total risk-based capital ratio was14.4% (12.7% at the bank level), and our Tier 1 leverage ratio was 10.9% (9.26%at the bank level).  The bank wasconsidered “well capitalized” and the holding company met or exceeded itsapplicable regulatory capital requirements.

**LiquidityManagement**

Liquidity represents the ability of acompany to convert assets into cash or cash equivalents without significantloss, and the ability to raise additional funds by increasing liabilities.  Liquidity management involves monitoring oursources and uses of funds in order to meet our day-to-day cash flowrequirements while maximizing profits. Liquidity management is made more complicated because different balancesheet components are subject to varying degrees of management control.  For example, the timing of maturities of ourinvestment portfolio is fairly predictable and subject to a high degree ofcontrol at the time investment decisions are made.  However, net deposit inflows and outflows arefar less predictable and are not subject to the same degree of control.

Ourprimary sources of liquidity are deposits, scheduled repayments on our loans,and interest on and maturities of our investments.  We plan to meet our future cash needs throughthe liquidation of temporary investments and the generation of deposits.  All of our securities have been classified asavailable for sale.  Occasionally, wemight sell investment securities in connection with the management of ourinterest sensitivity gap or to manage cash availability.  We may also utilize our cash and due frombanks, security repurchase agreements, and federal funds sold to meet liquidityrequirements as needed.  In addition, wehave the ability, on a short-term basis, to purchase federal funds from otherfinancial institutions.  Presently, wehave made arrangements with commercial banks for short-term unsecured advancesof up to $21.4 million.  We maintain asecured line of credit in the amount of $10.0 million with our primarycorrespondent.  We also have a line ofcredit with the FHLB to borrow up to 80% of our 1 to 4 family loans, resultingin an availability of funds of $12.4 million at March 31, 2007.  The FHLB has approved borrowings up to 15% ofthe bank’s total assets less 

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advancesoutstanding.  The borrowings are availableby pledging additional collateral and purchasing FHLB stock.  At March 31, 2007, we had borrowed $37.5million on this line.  We believe thatour existing stable base of core deposits, our bond portfolio, borrowings fromthe FHLB, and short-term federal funds lines will enable us to successfullymeet our liquidity needs for the next 12 months.

**InterestRate Sensitivity**

Asignificant portion of our assets and liabilities are monetary in nature, andconsequently they are very sensitive to changes in interest rates.  This interest rate risk is our primary marketrisk exposure, and it can have a significant effect on our net interest incomeand cash flows.  We review our exposureto market risk on a regular basis, and we manage the pricing and maturity ofour assets and liabilities to diminish the potential adverse impact thatchanges in interest rates could have on our net interest income.

We actively monitor and manage our interest rate riskexposure principally by measuring our interest sensitivity “gap,” which is thepositive or negative dollar difference between assets and liabilities that aresubject to interest rate repricing within a given period of time.  A gap is considered positive when the amountof interest-rate sensitive assets exceeds the amount of interest-rate sensitiveliabilities, and it is considered negative when the amount of interest-ratesensitive liabilities exceeds the amount of interest-rate sensitiveassets.  We generally would benefit fromincreasing market interest rates when we have an asset-sensitive, or apositive, interest rate gap and we would generally benefit from decreasingmarket interest rates when we have liability-sensitive, or a negative, interestrate gap.  When measured on a “gap”basis, we are liability-sensitive over the cumulative one-year time frame andasset-sensitive after one year as of March 31, 2007.  However, our gap analysis is not a preciseindicator of our interest sensitivity position. The analysis presents only a static view of the timing of maturities andrepricing opportunities, without taking into consideration that changes ininterest rates do not affect all assets and liabilities equally.  For example, rates paid on a substantialportion of core deposits may change contractually within a relatively shorttime frame, but we believe those rates are significantly lessinterest-sensitive than market-based rates such as those paid on noncoredeposits.

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

**Off Balance Sheet Risk**

Through theoperations of our bank, we have made contractual commitments to extend creditin the ordinary course of our business activities.  These commitments are legally bindingagreements to lend money to our customers at predetermined interest rates for aspecified period of time.  We evaluateeach customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemednecessary by us upon extension of credit, is based on our credit evaluation ofthe borrower.  Collateral varies but mayinclude accounts receivable, inventory, property, plant and equipment,commercial and residential real estate. We manage the credit risk on these commitments by subjecting them tonormal underwriting and risk management processes.

AtMarch 31, 2007, the bank had issued commitments to extend credit of $38.3million through various types of lending arrangements, of which $33.0 millionwas at variable rates.  The commitmentsexpire over the next 18 months.  Pastexperience indicates that many of these commitments to extend credit willexpire unused.  We believe that we haveadequate sources of liquidity to fund commitments that are drawn upon by theborrowers.

Inaddition to commitments to extend credit, we also issue standby letters ofcredit which are assurances to a third party that they will not suffer a lossif our customer fails to meet its contractual obligation to the thirdparty.  Standby letters of credit totaled$20.2 million at March 31, 2007.  Pastexperience indicates that many of these standby letters of credit will expireunused.  However, through our varioussources of liquidity, we believe that we will have the necessary resources tomeet these obligations should the need arise.

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Except as disclosed in this report, we are notinvolved in off-balance sheet contractual relationships, unconsolidated relatedentities that have off-balance sheet arrangements or transactions that couldresult in liquidity needs or other commitments or significantly impactearnings.

**Impact ofInflation**

The effect of relative purchasing power over time due toinflation has not been taken into account in our consolidated financialstatements.  Rather, our financialstatements have been prepared on an historical cost basis in accordance withgenerally accepted accounting principles.

Unlike most industrial companies, our assets andliabilities are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a moresignificant impact on our performance than will the effect of changing pricesand inflation in general.  In addition,interest rates may generally increase as the rate of inflation increases,although not necessarily in the same magnitude. As discussed previously, we seek to manage the relationships betweeninterest sensitive assets and liabilities in order to protect against wide ratefluctuations, including those resulting from inflation.

**RecentlyIssued Accounting Standards**

Thefollowing is a summary of recent authoritative pronouncements that could impactthe accounting, reporting, and / or disclosure of financial information by us.

InFebruary 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting (“SFAS”) No. 155, “Accounting for CertainHybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.”This Statement amends SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicingof Financial Assets and Extinguishments of Liabilities.” This Statementresolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Applicationof Statement 133 to Beneficial Interests in Securitized Financial Assets.” FAS155 permits fair value re-measurement for any hybrid financial instrument thatcontains an embedded derivative that otherwise would require bifurcation,clarifies which interest only-strips and principal-only strips are not subjectto the requirements of Statement 133, establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or that are hybrid financial instruments that containan embedded derivative requiring bifurcation, clarifies that concentrations ofcredit risk in the form of subordination are not embedded derivatives, andamends Statement 140 to eliminate the prohibition on a qualifying specialpurpose entity from holding a derivative financial instrument that pertains toa beneficial interest other than another derivative financial instrument. SFASNo. 155 is effective for all financial instruments acquired or issued afterJanuary 1, 2007. The Company does not believe that the adoption of SFAS No. 155will have a material impact on its financial position, results of operations orcash flows.

In March 2006, the FASBissued SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendmentof FASB Statement No. 140.”  ThisStatement amends FASB No. 140, “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities,” with respect to theaccounting for separately recognized servicing assets and servicingliabilities. SFAS No. 156 requires an entity to recognize a servicing asset orservicing liability each time it undertakes an obligation to service afinancial asset by entering into a servicing contract; requires all separatelyrecognized servicing assets and servicing liabilities to be initially measuredat fair value, if practicable; permits an entity to choose its subsequentmeasurement methods for each class of separately recognized servicing assetsand servicing liabilities; at its initial adoption, permits a one-time reclassificationof available-for-sale securities to trading securities by entities withrecognized servicing rights, without calling into question the treatment ofother available-for-sale securities under Statement 115, provided that theavailable-for-sale securities are identified in some manner as offsetting theentity’s exposure to changes in fair value of servicing assets or servicingliabilities that a servicer elects to subsequently measure at fair value; andrequires separate presentation of servicing assets and servicing liabilitiessubsequently measured at fair value in the statement of financial position andadditional disclosures for all separately recognized servicing assets andservicing liabilities. The required adoption date for SFAS No. 156 is January1, 2007. The Company does not believe the adoption of SFAS No. 156 willhave a material impact on its financial position, results of operations or cashflows.

InJuly 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accountingfor Uncertainty in Income Taxes”. FIN 48 clarifies the accounting foruncertainty in income taxes recognized in enterprises’ financial statements inaccordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48prescribes a recognition threshold and measurement attributable for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in 

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interim periods,disclosures and transitions. FIN 48 is effective for fiscal years beginningafter December 15, 2006. The Company does not believe that FIN 48 will have amaterial impact on its financial position, results of operations or cash flows.

In September 2006, the FASBissued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements.This standard does not require any new fair value measurements, but rathereliminates inconsistencies found in various prior pronouncements. SFAS 157 iseffective for the Company on January 1, 2008 and will not impact the Company’saccounting measurements but it is expected to result in some additionaldisclosures.

InSeptember 2006, the FASB issued SFAS No. 158, “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans” (“SFAS 158”), whichamends SFAS 87 and SFAS 106 to require recognition of the overfunded orunderfunded status of pension and other postretirement benefit plans on thebalance sheet. Under SFAS 158, gains and losses, prior service costs andcredits, and any remaining transition amounts under SFAS 87 and SFAS 106 thathave not yet been recognized through net periodic benefit cost will berecognized in accumulated other comprehensive income, net of tax effects, untilthey are amortized as a component of net periodic cost. The measurement date —the date at which the benefit obligation and plan assets are measured — isrequired to be the company’s fiscal year end. SFAS 158 is effective forpublicly held companies for fiscal years ending after December 15, 2006, exceptfor the measurement date provisions, which are effective for fiscal yearsending after December 15, 2008. The Company does not have a defined benefitpension plan. Therefore, SFAS 158 will not impact the Company’s financialcondition or results of operations.

InSeptember, 2006, The FASB ratified the consensuses reached by the FASB’sEmerging Issues Task Force (“EITF”) relating to EITF 06-4 “Accounting for theDeferred Compensation and Postretirement Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements”. EITF 06-4 addresses employer accounting for endorsement split-dollarlife insurance arrangements that provide a benefit to an employee that extendsto postretirement periods should recognize a liability for future benefits inaccordance with SFAS No. 106, “Employers’Accounting for Postretirement Benefits Other Than Pensions”*,*or Accounting Principles Board (“APB”)Opinion No. 12, “Omnibus Opinion—1967”*. *EITF06-4 is effective for fiscal years beginning after December 15, 2007. Entitiesshould recognize the effects of applying this Issue through either (a) a changein accounting principle through a cumulative-effect adjustment to retainedearnings or to other components of equity or net assets in the statement offinancial position as of the beginning of the year of adoption or (b) a changein accounting principle through retrospective application to all priorperiods.  The Company is currentlyanalyzing the effect of adoption of EITF 06-4 on its financial position,results of operations and cash flows.

InSeptember 2006, the FASB ratified the consensus reached related to EITF 06-5, “Accountingfor Purchases of Life Insurance—Determining the Amount That Could Be Realizedin Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchasesof Life Insurance.”  EITF 06-5 states that a policyholder should considerany additional amounts included in the contractual terms of the insurancepolicy other than the cash surrender value in determining the amount that couldbe realized under the insurance contract.  EITF 06-5 also states that apolicyholder should determine the amount that could be realized under the lifeinsurance contract assuming the surrender of an individual-life byindividual-life policy (or certificate by certificate in a group policy). EITF 06-5is effective for fiscal years beginning after December 15, 2007.  TheCompany is currently analyzing the effect of adoption of EITF 06-5) on itsfinancial position, results of operations and cash flows.

InDecember 2006, the FASB issued a Staff Position (“FSP”) on EITF 00-19-2, “Accountingfor Registration Payment Arrangements (“FSP EITF 00-19-2”). This FSP specifiesthat the contingent obligation to make future payments or otherwise transferconsideration under a registration payment arrangement, whether issued as aseparate agreement or included as a provision of a financial instrument orother agreement, should be separately recognized and measured in accordancewith SFAS No. 5, “Accounting for Contingencies.” If the transfer ofconsideration under a registration payment arrangement is probable and can bereasonably estimated at inception, the contingent liability under theregistration payment arrangement is included in the allocation of proceeds fromthe related financing transaction (or recorded subsequent to the inception of aprior financing transaction) using the measurement guidance in SFAS No. 5.  This FSP is effective immediately forregistration payment arrangements and the financial instruments subject tothose arrangements that are entered into or modified subsequent to the issuanceof the FSP. For prior arrangements, the FSP is effective for financialstatements issued for fiscal years beginning after December 15, 2006 andinterim periods within those years. The Company does not believe the adoptionof this FSP will have a material impact on its financial position, results ofoperations and cash flows.

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InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities – Including an amendment of FASBStatement No. 115.” This statement permits, but does not require, entities tomeasure many financial instruments at fair value. The objective is to provideentities with an opportunity to mitigate volatility in reported earnings causedby measuring related assets and liabilities differently without having to applycomplex hedge accounting provisions. Entities electing this option will applyit when the entity first recognizes an eligible instrument and will reportunrealized gains and losses on such instruments in current earnings.   This statement 1) applies to all entities,2) specifies certain election dates, 3) can be applied on aninstrument-by-instrument basis with some exceptions, 4) is irrevocable and 5)applies only to entire instruments. One exception is demand deposit liabilitieswhich are explicitly excluded as qualifying for fair value. With respect toSFAS 115, available-for-sale and held-to-maturity securities at the effectivedate are eligible for the fair value option at that date. If the fair valueoption is elected for those securities at the effective date, cumulativeunrealized gains and losses at that date shall be included in thecumulative-effect adjustment and thereafter, such securities will be accountedfor as trading securities. SFAS 159 is effective for the Company on January 1,2008. The Company is currently analyzing the fair value option that ispermitted, but not required, under SFAS 159.

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

**Item3.  Quantitative and QualitativeDisclosures About Market Risk.**

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

Theprimary objective of asset and liability management is to manage interest raterisk and achieve reasonable stability in net interest income throughoutinterest rate cycles.  This is achievedby maintaining the proper balance of rate-sensitive earning assets andrate-sensitive interest-bearing liabilities. The relationship of rate-sensitive earning assets to rate-sensitiveinterest-bearing liabilities is the principal factor in projecting the effectthat fluctuating interest rates will have on future net interest income.  Rate-sensitive assets and liabilities arethose that can be repriced to current market rates within a relatively shorttime period. Management monitors the rate sensitivity of earning assets andinterest-bearing liabilities over the entire life of these instruments, butplaces particular emphasis on the next twelve months.  At March 31, 2007, on a cumulative basisthrough 12 months, rate-sensitive liabilities exceeded rate-sensitive assets by$70.4 million.  This liability-sensitiveposition is largely attributable to short-term certificates of deposit, moneymarket accounts and interest bearing checking accounts, which totaled $402.6million at March 31, 2007.

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

As of the end of the period covered by thisreport, we carried out an evaluation, under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of our disclosure controls andprocedures as defined in Exchange Act Rule 13a-15(e).  Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that our currentdisclosure controls and procedures are effective as of March 31, 2007.  There have been no significant changes in ourinternal controls over financial reporting during the fiscal quarter endedMarch 31, 2007 that have materially affected, or are reasonably likely tomaterially affect, our internal controls over financial reporting.

The design of any system of controls and procedures isbased in part upon certain assumptions about the likelihood of futureevents.  There can be no assurance thatany design will succeed in achieving its stated goals under all potentialfuture conditions, regardless of how remote.

**PART II**

**OTHER INFORMATION**

**Item 1.  Legal Proceedings.**

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

**Item1A.  Risk Factors.**

There were no material changes from the risk factors presented inour annual report on Form 10-K for the year ended December 31, 2006.

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds.**

Not applicable.

**Item 3.  Defaults Upon Senior Securities. **

Not applicable.

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

Notapplicable.

**Item5.  Other Information. **

Notapplicable.

**Item 6.  Exhibits.**
| Exhibit | ** ** | **Description**                                                  |
|---------|------------|------------------------------------------------------------------|
|    |       |                                                             |
| 31.1    |       | Rule 13a-14(a) Certification of the Principal  Executive Officer |
|    |       |                                                             |
| 31.2    |       | Rule 13a-14(a) Certification of the Principal  Financial Officer |
|    |       |                                                             |
| 32      |       | Section 1350 Certifications                                      |

 

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SIGNATURES

In accordance withthe requirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.
|        | BEACH FIRST NATIONAL BANCSHARES, INC. |
|--------|---------------------------------------|
|   |                                  |   |   |
|   |                                  |   |   |
| Date:  | May 11, 2007                          |   | By: | /s/ Walter E. Standish,  III |   |
|   |                                  |        Walter E.  Standish, III |   |
|   |                                  |     President and Chief  Executive Officer |   |
|   |                                  |   |   |
|   |                                  |   |   |
| Date:  | May 11, 2007                          |   | By: | /s/ Richard N. Burch |   |
|   |                                  | Richard N. Burch |
|   |                                  | Chief Financial  and Principal Accounting Officer |   |

 

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

 

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