# UNITED STATESSECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549

# FORM 10-Q

| | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
| | ---------------------------------------------------------------------------------
| | For the quarterly period ended:   June 30, 2007                                  

| | 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 FIRST NATIONAL BANCSHARES, INC.(Exact name of registrant as specified in its charter)

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

3751 Grissom Parkway, Suite 100, Myrtle Beach, South Carolina 29577
(Address of principal executive offices)

(843) 626-2265(Issuer's telephone number)

Not Applicable(Former name, former address and former 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 of 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant  was requited to file such reports),  and
(2) has been subject to such filing requirements for the past 90 days.  Yes          No

Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, or a
non-accelerated filer.  See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act.                          
        Large accelerated filer                          
Accelerated filer                     
Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
  Yes         No

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest
practicable date:  On July 31, 2007, 4,836,916 shares of the issuer's common stock, par value $1.00 per share, were
issued and outstanding.

---

# Beach First National Bancshares,
Inc. and Subsidiaries

# INDEX

|                                                                                           | 
|------------------------------------------------------------------------------------------ | 
|PART I - FINANCIAL INFORMATION                                                             | 
|                                                                                           | 
|Item 1. Financial Statements (Unaudited)                                                   | 
|                                                                                           | 
|Condensed Consolidated Balance Sheets - June 30, 2007, June 30, 2006 and December 31, 2006 | 
|                                                                                           | 
|Condensed Consolidated Statements of Income -                                              | 
|Six months ended June 30, 2007 and 2006                                                    | 
|Three months ended June 30, 2007 and 2006                                                  | 
|                                                                                           | 
|Consolidated Statements of Shareholders Equity and Comprehensive Income                  | 
|Six months ended June 30, 2007 and 2006                                                    | 
|                                                                                           | 
|Consolidated Condensed Statements of Cash Flows - Six months ended June 30, 2007 and 2006  | 
|                                                                                           | 
|Notes to Condensed Financial Statements                                                    | 
|                                                                                           | 
|Item 2. Managements Discussion and Analysis and Results of Operation                      | 
|                                                                                           | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                         | 
|                                                                                           | 
|Item 4. Controls and Procedures                                                            | 
|                                                                                           | 
|PART II - OTHER INFORMATION                                                                | 
|                                                                                           | 
|Item 1. Legal Proceedings                                                                  | 
|                                                                                           | 
|Item 1A. Risk Factors                                                                      | 
|                                                                                           | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                        | 
|                                                                                           | 
|Item 3. Defaults Upon Senior Securities                                                    | 
|                                                                                           | 
|Item 4. Submission of Matters to a Vote of Security Holders                                | 
|                                                                                           | 
|Item 5. Other Information                                                                  | 
|                                                                                           | 
|Item 6. Exhibits                                                                           | 

2

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# Item 1.   Financial Statements.

# Beach First National Bancshares, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets

|                                                | June 30, | December 31,
|----------------------------------------------- | -------- | ------------
|
|
|ASSETS                                          |          |             
|Cash and due from banks                         |          |             
|Federal funds sold and short-term investments   |          |             
|Investment securities available for sale        |          |             
|Loans, net                                      |          |             
|Mortgage loans held for sale                    |          |             
|Federal Reserve Bank stock                      |          |             
|Federal Home Loan Bank stock                    |          |             
|Premises and equipment, net                     |          |             
|Cash value of life insurance                    |          |             
|Other assets                                    |          |             
|                                                |          |             
|Total assets                                    |          |             
|                                                |          |             
|LIABILITIES AND SHAREHOLDERS EQUITY            |          |             
|LIABILITIES:                                    |          |             
|Deposits                                        |          |             
|Noninterest bearing deposits                    |          |             
|Interest bearing deposits                       |          |             
|                                                |          |             
|Total deposits                                  |          |             
|Advances from Federal Home Loan Bank            |          |             
|Other borrowings                                |          |             
|Junior subordinated debentures                  |          |             
|Other liabilities                               |          |             
|                                                |          |             
|Total liabilities                               |          |             
|                                                |          |             
|SHAREHOLDERS EQUITY:                           |          |             
|Common stock, $1 par value; 10,000,000 shares   |          |             
|authorized; 4,836,916 issued and outstanding at |          |             
|June 30, 2007, 4,761,762 at June 30, 2006, and  |          |             
|4,768,413 at December 31, 2006                  |          |             
|Paid-in capital                                 |          |             
|Retained earnings                               |          |             
|Accumulated other comprehensive loss            |          |             
|                                                |          |             
|Total shareholders' equity                      |          |             
|                                                |          |             
|Total liabilities and shareholders' equity      |          |             
|                                                |          |             

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

3

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Beach First National
Bancshares, Inc. and SubsidiariesConsolidated Statements of Income(Unaudited)

|                                                     | Six Months Ended | Three Months Ended
|---------------------------------------------------- | ---------------- | ------------------
|
|
|INTEREST INCOME                                      |                  |                   
|Interest and fees on loans                           |                  |                   
|Investment securities                                |                  |                   
|Fed funds sold                                       |                  |                   
|Other                                                |                  |                   
|                                                     |                  |                   
|Total interest income                                |                  |                   
|                                                     |                  |                   
|INTEREST EXPENSE                                     |                  |                   
|Deposits                                             |                  |                   
|Advances from the FHLB and federal funds purchased   |                  |                   
|Junior subordinated debentures                       |                  |                   
|                                                     |                  |                   
|Total interest expense                               |                  |                   
|Net interest income                                  |                  |                   
|                                                     |                  |                   
|PROVISION FOR POSSIBLE LOAN                          |                  |                   
|LOSSES                                               |                  |                   
|                                                     |                  |                   
|Net interest income after provision                  |                  |                   
|for possible loan losses                             |                  |                   
|                                                     |                  |                   
|NONINTEREST INCOME                                   |                  |                   
|Service fees on deposit accounts                     |                  |                   
|Gain on sale of loan                                 |                  |                   
|Gain on sale of fixed asset                          |                  |                   
|Income from cash value life insurance                |                  |                   
|Income from mortgage operations                      |                  |                   
|Other income                                         |                  |                   
|                                                     |                  |                   
|Total noninterest income                             |                  |                   
|                                                     |                  |                   
|NONINTEREST EXPENSES                                 |                  |                   
|Salaries and wages                                   |                  |                   
|Employee benefits                                    |                  |                   
|Supplies and printing                                |                  |                   
|Advertising and public relations                     |                  |                   
|Professional fees                                    |                  |                   
|Depreciation and amortization                        |                  |                   
|Occupancy                                            |                  |                   
|Data processing fees                                 |                  |                   
|Other operating expenses                             |                  |                   
|                                                     |                  |                   
|Total noninterest expenses                           |                  |                   
|                                                     |                  |                   
|Income before income taxes                           |                  |                   
|                                                     |                  |                   
|INCOME TAX EXPENSE                                   |                  |                   
|                                                     |                  |                   
|Net income                                           |                  |                   
|                                                     |                  |                   
|BASIC NET INCOME PER COMMON SHARE                    |                  |                   
|                                                     |                  |                   
|DILUTED NET INCOME PER COMMON SHARE                  |                  |                   
|                                                     |                  |                   
|Weighted average common shares outstanding - basic   |                  |                   
|Weighted average common shares outstanding - diluted |                  |                   

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

4

---

Beach First National
Bancshares, Inc. and Subsidiaries Consolidated Condensed
Statements of Changes in Shareholders Equity and Comprehensive Income(Unaudited)

|                                              |  |  |  |           | Accumulated |  
|--------------------------------------------- |  |  |  | --------- | ----------- | -
|
|
|
|
|BALANCE, DECEMBER 31, 2005                    |  |  |  | 3,169,958 |             | $
|Net income                                    |  |  |  | -         |             |  
|Other comprehensive income, net of taxes:     |  |  |  |           |             |  
|Unrealized loss on investment securities      |  |  |  | -         |             |  
|Plus Reclassification adjustments for gains   |  |  |  |           |             |  
|included in net income                        |  |  |  | -         |             |  
|                                              |  |  |  |           |             |  
|Comprehensive income                          |  |  |  | -         |             |  
|Exercise of stock options                     |  |  |  | 6,924     |             |  
|Stock dividend in the form of a 3 for 2 split |  |  |  | 1,584,880 |             |  
|                                              |  |  |  |           |             |  
|BALANCE, JUNE 30, 2006                        |  |  |  | 4,761,762 |             | $
|                                              |  |  |  |           |             |  

|                                            |  |  |  |           | Accumulated |  
|------------------------------------------- |  |  |  | --------- | ----------- | -
|
|
|
|
|BALANCE, DECEMBER 31, 2006                  |  |  |  | 4,768,413 |             | $
|Net income                                  |  |  |  | -         |             |  
|Other comprehensive income, net of taxes:   |  |  |  |           |             |  
|Unrealized loss on investment securities    |  |  |  | -         |             |  
|Unrealized gain on interest rate swap       |  |  |  | -         |             |  
|Plus Reclassification adjustments for gains |  |  |  |           |             |  
|included in net income                      |  |  |  | -         |             |  
|                                            |  |  |  |           |             |  
|Comprehensive income                        |  |  |  | -         |             |  
|Exercise of stock options                   |  |  |  | 68,503    |             |  
|                                            |  |  |  |           |             |  
|BALANCE, JUNE 30, 2007                      |  |  |  | 4,836,916 |             | $
|                                            |  |  |  |           |             |  

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

5

---

# Beach First National
Bancshares, Inc. and SubsidiariesConsolidated Condensed Statements of Cash Flows

|                                                                      | Six Months Ended
|--------------------------------------------------------------------- | ----------------
|
|
|
|OPERATING ACTIVITIES                                                  |                 
|Net income                                                            |                 
|Adjustments to reconcile net income to net cash provided by (used in) |                 
|operating activities:                                                 |                 
|Proceeds from sale of mortgages held for sale                         |                 
|Disbursements for  mortgages held for sale                            |                 
|Deferred income taxes                                                 |                 
|Provisions for loan losses                                            |                 
|Depreciation and amortization                                         |                 
|Accretion of deferred loan fees                                       |                 
|Discount accretion and premium amortization                           |                 
|(Gain) loss on sale of property and equipment                         |                 
|Increase in other assets                                              |                 
|Increase in other liabilities                                         |                 
|Loss on sale of other real estate owned                               |                 
|                                                                      |                 
|Net cash provided by (used in) operating activities                   |                 
|                                                                      |                 
|INVESTING ACTIVITIES                                                  |                 
|Purchase of investment securities                                     |                 
|Purchase of Federal Home Loan Bank stockb                             |                 
|Purchase of Federal Reserve stock                                     |                 
|Decrease (increase) in Federal funds sold                             |                 
|Increase in loans, net                                                |                 
|Purchase of premises and equipment                                    |                 
|Purchase of life insurance contracts                                  |                 
|                                                                      |                 
|Net cash used in investing activities                                 |                 
|                                                                      |                 
|FINANCING ACTIVITIES                                                  |                 
|Advances from Federal Home Loan Bank                                  |                 
|Net increase in deposits                                              |                 
|Exercise of stock options                                             |                 
|Proceeds from other borrowings                                        |                 
|                                                                      |                 
|Net cash provided by financing activities                             |                 
|                                                                      |                 
|Net increase in cash and cash equivalents                             |                 
|                                                                      |                 
|CASH AND DUE FROM BANKS, BEGINNING OF PERIOD                          |                 
|                                                                      |                 
|CASH AND DUE FROM BANKS, END OF PERIOD                                |                 
|                                                                      |                 
|CASH PAID FOR                                                         |                 
|Income taxes                                                          |                 
|                                                                      |                 
|Interest                                                              |                 
|                                                                      |                 

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

6

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# Beach First National
Bancshares, Inc. Notes to Consolidated Condensed Financial Statements (Unaudited)

# 1.   Basis of Presentation

The
accompanying consolidated condensed financial statements for Beach First National
Bancshares, Inc. (Company) were prepared in accordance with instructions for
Form 10-Q and, therefore, do not include all disclosures necessary for a complete
presentation of financial condition, results of operations, and cash flows in conformity
with generally accepted accounting principles. All adjustments, consisting only of normal
recurring accruals, which are, in the opinion of management, necessary for fair
presentation of the interim consolidated financial statements have been included. The
results of operations for the six month period ended June 30, 2007 are not necessarily
indicative of the results that may be expected for the entire year. These consolidated
financial statements do not include all disclosures required by generally accepted
accounting principles and should be read in conjunction with the Companys audited
consolidated financial statements and related notes for the year ended December 31, 2006.

# 2.   Principles of
Consolidation

The
accompanying consolidated condensed financial statements include the accounts of the
Company and its subsidiaries, Beach First National Bank and BFNM Building, LLC
(LLC) (See Note 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 and transactions have been eliminated in consolidation. In
accordance with current accounting guidance, the financial statements of the trusts have
not been included in the Companys financial statements.

# 3.   Earnings Per Share

The
Company calculates earnings per share in accordance with Statement of Financial Accounting
Standard No. 128, Earnings Per Share (SFAS 128). SFAS 128
specifies the computation, presentation, and disclosure requirements for earnings per
share (EPS) for entities with publicly held common stock or potential common stock such as
options, warrants, convertible securities, or contingent stock agreements if those
securities trade in a public market.

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

# RECONCILIATION OF THE
NUMERATORS AND DENOMINATORS OF THE BASIC AND DILUTED EPS COMPUTATIONS:

|                                            | For the Six Months Ended | For the Year Ended
|------------------------------------------- | ------------------------ | ------------------
|
|Basic earnings per share:                   |                          |                   
|Net income available to common shareholders |                          |                   
|                                            |                          |                   
|Average common shares outstanding - basic   |                          |                   
|                                            |                          |                   
|Basic earnings per share                    |                          |                   
|                                            |                          |                   
|Diluted earnings per share:                 |                          |                   
|Net income available to common shareholders |                          |                   
|                                            |                          |                   
|Average common shares outstanding - basic   |                          |                   
|Incremental shares from assumed conversion  |                          |                   
|of stock options                            |                          |                   
|                                            |                          |                   
|Average common shares outstanding - diluted |                          |                   
|                                            |                          |                   
|Diluted earnings per share                  |                          |                   
|                                            |                          |                   

7

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|                                            | For the Three Months Ended | For the Year Ended
|------------------------------------------- | -------------------------- | ------------------
|
|Basic earnings per share:                   |                            |                   
|Net income available to common shareholders |                            |                   
|                                            |                            |                   
|Average common shares outstanding - basic   |                            |                   
|                                            |                            |                   
|Basic earnings per share                    |                            |                   
|                                            |                            |                   
|Diluted earnings per share:                 |                            |                   
|Net income available to common shareholders |                            |                   
|                                            |                            |                   
|Average common shares outstanding - basic   |                            |                   
|Incremental shares from assumed conversion  |                            |                   
|of stock options                            |                            |                   
|                                            |                            |                   
|Average common shares outstanding - diluted |                            |                   
|                                            |                            |                   
|Diluted earnings per share                  |                            |                   
|                                            |                            |                   

# 4.   Investment in LLC

The
LLC is in partnership with our legal counsel, Nelson Mullins Riley & Scarborough LLP,
for purposes of acquiring a parcel of land and constructing an office building on the
property. The Company owns two-thirds of the LLC and Nelson Mullins Riley &
Scarborough owns the remaining one-third. The building is a three-story, 46,066 square
foot office building located on 3.5 acres at the southwest corner of Robert Grissom
Parkway and 38th Avenue North in Myrtle Beach, South Carolina. The Company moved its main
office to this location in December 2006. Nelson Mullins Riley & Scarborough LLP also
relocated 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 lender with each of the owners being responsible for their
respective interests in the project. The total land and construction project 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 occupies approximately 12,500 square feet of space, it intends to lease the
other 17,500 square feet of its portion to outside tenants. Nelson Mullins Riley &
Scarborough also leases one-third of the building from the LLC. As of June 30, 2007, 4,700
square feet of the 17,500 available have been leased.

Upon
completion of construction, the construction financing note from the third-party lender
was converted to a term loan payable by the LLC to the third-party bank and is secured by
the building. The loan requires 107 installments of principal and interest based on a
fifteen year amortization, with all remaining principal and interest due on June 15, 2015.
The interest rate on the term loan is variable based on one-month LIBOR plus 1.40%. As a
result of the interest rate SWAP discussed below, the LLC has converted this variable rate
to a fixed rate of 6.02%. The outstanding balance on the term loan at June 30, 2007 is
$7.1 million and is shown as other borrowings in the accompanying balance sheet.

# 5.   Interest Rate SWAP
 Derivative Financial Instrument

The
LLC entered into an interest rate swap agreement as a risk management tool to hedge the
interest rate risk associated with the variable rate building loan discussed above. This
swap instrument is a derivative financial instrument designated as a cash flow hedge and
is accounted for in accordance with the provisions of Statement of Financial Accounting
Standard No. 133 (SFAS 133). Under the swap, the LLC pays a fixed rate of
4.62% and receives interest payments that vary based on LIBOR. Through the swap, the LLC
has converted the building loan to a fixed effective rate of 6.02%.

In
accordance with SFAS 133, the LLC has formally documented the relationship between the
building loan and the swap, as well as the risk-management objective and strategy for
undertaking the hedge transaction. In connection with this process, the LLC has determined
that the swap is highly effective as a cash flow hedge and the entire fair value

8

---

of the swap was initially recorded in
other comprehensive income. Under SFAS 133, any material ineffectiveness must be
reclassified to earnings. During the formal documentation process, the LLC also determined
that no hedge ineffectiveness is anticipated because the terms of the swap so closely
match the terms of the building loan.

# Item 2.   Management's Discussion
and Analysis of Financial Condition and Results of Operations.

The
following is our discussion and analysis of certain significant factors that have affected
our financial position and operating 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 conjunction with the financial statements and the related
notes and the other statistical information included in this report.

This
report contains forward-looking statements relating to, without limitation,
future economic performance, plans and objectives of management for future operations, and
projections of revenues and other financial items that are based on the beliefs of
management, as well as assumptions made by and information currently available to
management. The words may, will, anticipate,
should, would, believe, contemplate,
expect, estimate, continue, may, and
intend, as well as other similar words and expressions of the future, are
intended to identify forward-looking statements. Our actual results may differ materially
from the results discussed in the forward-looking statements, and our operating
performance each quarter is subject to various risks and uncertainties including, without
limitation those described in detail in our Annual Report on Form 10-KSB for the year
ended December 31, 2006 under the heading Risk Fact ors with the Securities
and Exchange Commission and the following:

| |  | significant increases in competitive pressure in the banking and financial services industries;
| | - | -----------------------------------------------------------------------------------------------

| |  | changes in the interest rate environment which could reduce anticipated or actual margins;
| | - | ------------------------------------------------------------------------------------------

| |  | changes in political conditions or the legislative or regulatory environment;
| | - | -----------------------------------------------------------------------------

| |  | general economic conditions, either nationally or regionally and especially in our primary service area,
becoming less favorable than expected resulting in, among other things, a deterioration in credit
quality;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | changes occurring in business conditions and inflation;
| | - | -------------------------------------------------------

| |  | changes in management;
| | - | ----------------------

| |  | changes in technology;
| | - | ----------------------

| |  | changes in deposit flows;
| | - | -------------------------

| |  | the level of allowance for loan loss;
| | - | -------------------------------------

| |  | the rate of delinquencies and amounts of charge-offs;
| | - | -----------------------------------------------------

| |  | the rates of loan growth;
| | - | -------------------------

| |  | adverse changes in asset quality and resulting credit risk-related losses and
expenses;
| | - | ---------------------------------------------------------------------------------------

| |  | changes in monetary and tax policies;
| | - | -------------------------------------

| |  | loss of consumer confidence and economic disruptions resulting from terrorist activities;
| | - | -----------------------------------------------------------------------------------------

| |  | changes in the securities markets; and
| | - | --------------------------------------

| |  | other risks and uncertainties detailed from time to time in our filings
with the Securities and Exchange Commission.
| | - | --------------------------------------------------------------------------------------------------------------------

We undertake no obligation to
publicly update or otherwise revise any forward-looking statements, whether as a result of
new information, future events, or otherwise.

# Critical Accounting
Policies

We
have adopted various accounting policies that govern the application of accounting
principles generally accepted in the United States and with general practices within the
banking industry in the preparation of our consolidated financial statements. Our
significant accounting policies are described in the footnotes to our audited consolidated
financial statements as of December 31, 2006 as filed in our 2006 Annual Report on Form
10-K.

Certain
accounting policies involve significant judgments and assumptions by management which have
a material impact on the carrying value of certain assets and liabilities. We consider
such accounting policies to be critical accounting policies. The judgments and assumptions
we use are based on historical experience and other factors, which are believed to be
reasonable under the circumstances. Because of the nature of the judgments and assumptions
we

9

---

make, actual results could differ
from these judgments and estimates. These differences could have a material impact on our
carrying values of assets and liabilities and our results of operations.

We
believe the allowance for loan losses is the critical accounting policy that requires the
most significant judgment and estimates used in preparation of our consolidated financial
statements. Some of the more critical judgments supporting the amount of our allowance for
loan losses include judgments about the credit worthiness of borrowers, the estimated
value of the underlying collateral, the assumptions about cash flow, determination of loss
factors for estimating credit losses, the impact of current events, and conditions, and
other factors impacting the level of probable inherent losses. Under different conditions
or using different assumptions, the actual amount of credit losses incurred by us may be
different from managements estimates provided in our consolidated financial
statements. Refer to the subsection entitled Allowance for Possible Loan
Losses below for a more complete discussion of our processes and methodology for
determining our allowance for loan losses.

# Overview

The
following discussion describes our results of operations for the quarter ended June 30,
2007 as compared to the quarter ended June 30, 2006, as well as results for the six months
ended June 30, 2007 and 2006, and also analyzes our financial condition as of June 30,
2007 as compared to December 31, 2006. Like most community banks, we derive most of our
income from interest we receive on our loans and investments. Our primary source of funds
for making these loans and investments is our deposits, on which we pay interest.
Consequently, one of the key measures of our success is our amount of net interest income,
or the difference between the income on our interest-earning assets, such as loans and
investments, and the expense on our interest-bearing liabilities, such as deposits.
Another key measure is the spread between the yield we earn on these interest-earning
assets and the rate we pay on our interest-bearing liabilities.

Of
course, there are risks inherent in all loans, so we maintain an allowance for loan losses
to absorb probable losses on existing loans that may become uncollectible. We establish
and maintain this allowance by charging a provision for loan losses against our operating
earnings. In the following section, we have included a detailed discussion of this
process.

In
addition to earning interest on our loans and investments, we earn income through fees and
other expenses we charge to our customers. We describe the various components of this
noninterest income, as well as our noninterest expense, in the following discussion.

The
following discussion and analysis also identifies significant factors that have affected
our financial position and operating results during the periods included in the
accompanying financial statements. We encourage you to read this discussion and analysis
in conjunction with the financial statements and the related notes and the other
statistical information also included in this report.

# Results of Operations

Earnings Review

Our
net income was $3.3 million, or $.67 per diluted common share, for the six months ended
June 30, 2007 as compared to net income of $2.6 million, or $.54 per diluted common share,
for the six months ended June 30, 2006. Our net income was $1.7 million, or $.34 per
diluted common share, for the three months ended June 30, 2007 as compared to net income
of $1.4 million, or $.29 per diluted common share, for the same period of 2006. The
increase in net income reflects the banks continued growth, as average earning
assets increased to $521.5 million during the first six months of 2007 from $413.0 million
during the same period of 2006. The return on average assets for the six month period
ended June 30, 2007 was 1.20% compared to 1.22% for the same period 2006. The return on
average equity was 14.12% for the six month period ended June 30, 2007 versus 12.88% 2006.

Net Interest Income

Our
primary source of revenue is net interest income, which represents the difference between
the income on interest-earning assets and expense on interest-bearing liabilities. During
the first six months of 2007, net interest

10

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income increased 22.0% to $11.2
million from $9.2 million for the same period of 2006. For the three months ended June 30,
2007, net interest income increased 18.2% to $5.8 million from $4.9 million during the
comparable period of 2006. The growth in net interest income during the six month period
ended June 30, 2007 resulted from an increase of $5.9 million in interest income,
partially offset by an increase in interest expense of $3.9 million. Our net interest
income is determined by the level of our earning assets and the management of our net
interest margin. The continued growth of our loan portfolio is the primary driver of the
increase in net interest income. Average total loans increased from $348.5 million in the
first six months of 2006 to $442.2 million in the same period in 2007. In addition,
average securities increased to $73.4 million in the first six months of 2007 compared to
$54.3 million for the first six months of 2006.

Net
interest spread, the difference between the rate we earn on interest-earning assets and
the rate we pay on interest-bearing liabilities, was 3.80% in the first six months of 2007
compared to 3.95% during the same period of 2006. The net interest margin was 4.35% for
the six month period ended June 30, 2007 compared to 4.50% for the same period of 2006.
The decline in the net interest spread and the net interest margin are due to the rising
interest rate environment and the increased competition in our markets for deposits.
Despite this decline, we have maintained a solid net interest margin.

Provision for Loan Losses

We
have established an allowance for loan losses through a provision for loan losses charged
as an expense on our statement of income. We review our loan portfolio periodically to
evaluate our outstanding loans and to measure both the performance of the portfolio and
the adequacy of the allowance for loan losses. The provision for loan losses was $722,000
for the first six months of 2007 and $1.2 million for the same period of 2006. The
provision for loan losses was $370,800 for the three months ended June 30, 2007 and
$665,200 for the same period in 2006. The decrease in the provision was the result of
managements assessment of the adequacy of the reserve for possible loan losses given
the size, mix and quality of the current loan portfolio. Please see the discussion below
under Allowance for Possible Loan Losses for a description of the factors we
considered in determining the amount of the provision we expense each period to maintain
this allowance.

Noninterest Income

Noninterest
income increased to $4.5 million for the first six months of 2007 compared to $1.3 million
in the same period of 2006. For the three months ended June 30, 2007, noninterest income
increased to $2.2 million as compared to $961,247 in 2006. This increase in noninterest
income is related to the income from our mortgage operations that we added in June 2006.
With the formation of the companys mortgage operations, all sources of income from
this division are included in income from mortgage operations. The four key components of
the revenue from mortgage operations are loan referral fees, document preparation fees
which includes origination fees, servicing release premiums, and the net gains on the sale
of mortgage loans. The following table sets forth information related to the largest
component of our noninterest income, income from mortgage operations, for the first six
months of 2007 and 2006, as well as, for the three months ended June 30, 2007 and 2006.

|                               | For the six months ended | For the three months ended
|------------------------------ | ------------------------ | --------------------------
|
|
|Loan referral fees             |                          |                           
|Document preparation fees      |                          |                           
|Servicing release premiums     |                          |                           
|Gain on sale of mortgage loans |                          |                           

Changes in federal law regarding the
oversight of mortgage brokers and lenders could increase our costs of operations and
affect our mortgage origination volume which could negatively impact our Noninterest
income in the future. Additional information on the expenses associated with the mortgage
division can be found below in the Noninterest Expense section.

11

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Noninterest Expense

Total
noninterest expense increased 90.3% to $9.9 million for the six months ended June 30, 2007
from $5.2 million for the same period of 2006 and increased 66.5% to $4.9 million for the
three months ended June 30, 2007 from $2.9 million in the same period of 2006.

Salaries
and wages and employee benefits, the largest component of Noninterest expense, increased
$2.2 million to $5.2 million for the six months ended June 30, 2007 compared to the same
period in 2006, and increased $755,662 to $2.4 million for the quarter ended June 30, 2007
compared to the same period in 2006. Of the increase, $1.7 million is directly related to
salary and wages for employees of our mortgage operations and another $304,781 is directly
related to employee benefits for our mortgage operations employees. All other
increases are the result of personnel additions due to the growth of our bank, normal
compensation adjustments, and higher costs associated with group benefits.

We
had 180 full-time equivalent employees at June 30, 2007, an increase of 71 as compared to
the same period in 2006. At June 30, 2007, 95 of the full-time equivalent employees work
within our mortgage operations. As of June 29, 2007, we added 23 employees from our newest
mortgage location in Raleigh, NC. Other staffing increases were primarily due to the
overall growth of the bank.

Advertising
and public relations costs increased $144,269 to $317,052 for the six months ended June
30, 2007 compared to the same period in 2006, and increased $84,178 to $173,446 for the
three months ended June 30, 2007 compared to the same period in 2006. We incurred $27,994
in advertising and public relations costs directly related to our mortgage operations for
the six months ended June 30, 2007. These expenses continue to be a major expense item as
we develop our presence in new markets. Other increases are related primarily to special
promotions, such as newspaper advertisements, to attract deposits in all markets, as well
as contracting with a professional advertising agency. Professional fees increased $3,648
for the six months ended June 30, 2007 compared to the same period in 2006, and decreased
$46,818 for the three months ended June 30, 2007 compared to the same period in 2006.
While there was a decrease for the quarter, as compared to 2006, these fees continue to
increase due to our growth, the regulatory fees associated with such growth, and the
escalating cost of accounting, auditing, and legal services for a public company. Our
expense directly related to Sarbanes-Oxley compliance for the six months ended June 30,
2007 is $49,983. We expect these fees to continue to increase as we formally prepare to
meet the requirements of these comprehensive regulations.

Occupancy
expenses increased $459,656 during the six month period ended June 30, 2007 compared to
the same period in 2006 and by $200,521 for the three months ended June 30, 2007 compared
to the same period in 2006. This increase is related to the addition of the facilities
associated with our mortgage operations, as well as the expense related to the new
corporate headquarters. Of the increase in occupancy expense, $346,433 is directly related
to the mortgage operations. The increase was also the result of increases on lease
payments for most of our branch locations. As we continue to expand, we expect that
occupancy costs will continue to increase.

Data
processing fees increased during the six months ended June 30, 2007 to $353,062 compared
to $246,776 for the same period in 2006. For the three months ended June 30, 2007, data
processing costs totaled $181,605 compared to $129,807 for June 30, 2006. Data processing
costs are primarily related to the volume of loan and deposit accounts and associated
transaction activity. Strong security of data processing and related systems is paramount
to our operations. We expanded the security features of our internet banking product, in
addition to upgrading all security measures for internal and external systems. We believe
our data processing costs are consistent with our expansion.

Other
operating expenses increased 166.5% to $2.3 million during the first six months of 2007
compared to $859,209 for the same period in 2006. Other operating expenses increased
161.7%, or $817,281, for the three months ended June 30, 2007 compared to the same period
in 2006. These increases are primarily the result of increased operating expenses related
to the growth of the company, along with other expenses associated with the expansion of
loans and deposits. The increase in other operating expenses was primarily due to increase
in credit and collection expenses related to the mortgage operations, merchant expenses,
entertainment expenses, furniture and equipment expenses, and higher travel and lodging
expenses.

Specifically,
credit and collection expenses related to mortgage operations increased $800,083 for the
first six months of 2007. Credit and collection expenses related to the mortgage division
includes the following accounts: credit report fees of $46,002, appraisal fees of $25,070,
flood certification fees of $1,990, investor funding fees of $153,120,

12

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document preparation fees of $39,895,
loan referral fees of $31,857, lenders credit fees of $59,286, early payoff fees of
$12,899, and brokers fees of $434,867.

Merchant
expenses increased $237,144 due to the expansion of merchant related activity in the first
six months of 2007. Entertainment expenses, which include business development, increased
$137,313. Of this increase $125,000 is directly related to business development for our
mortgage operations. Furniture and equipment increased $67,579, travel expenses increased
$39,572, software maintenance expenses increased $31,638 and telephone expenses increased
$28,206, collectively totaling 100% of the total increase of $1.4 million.

The
following table presents a comparison of other operating expenses by category containing a
balance over $20,000 as of June 30, 2007.

Other Operating Expenses

|                                            | For the six months ended | For the three months ended June 30
|------------------------------------------- | ------------------------ | ----------------------------------
|
|
|
|Telephone                                   |                          |                                   
|Postage and freight                         |                          |                                   
|Armored Car                                 |                          |                                   
|Credit and collection - mortgage operations |                          |                                   
|Credit and collection - bank                |                          |                                   
|Dues and subscriptions                      |                          |                                   
|Travel                                      |                          |                                   
|Entertainment                               |                          |                                   
|FDIC insurance                              |                          |                                   
|Other insurance                             |                          |                                   
|Debit/ATM                                   |                          |                                   
|Merchant                                    |                          |                                   
|Credit card processing fees                 |                          |                                   
|Fed charges                                 |                          |                                   
|Software maintenance                        |                          |                                   
|Director Supplemental Retirement Plan       |                          |                                   
|NASDAQ                                      |                          |                                   
|Furniture and equipment                     |                          |                                   
|Other Operating Expenses                    |                          |                                   
|                                            |                          |                                   
|Total                                       |                          |                                   
|                                            |                          |                                   

# Balance Sheet Review

General

We
had total assets of $584.3 million at June 30, 2007, an increase of 26.5% from $461.9
million at June 30, 2006 and an increase of 12.3% from $520.2 at December 31, 2006. Total
assets consisted primarily of $451.1 million in net loans, $74.0 million in investments,
$26.1 million in federal funds sold and short-term investments, and $6.6 million in cash
and due from banks. Our liabilities at June 30, 2007 totaled $535.4 million, consisting
primarily of $458.3 million in deposits, $55.0 million in Federal Home Loan Bank (FHLB)
advances, $7.1 million in a note payable, and $10.3 million of junior subordinated
debentures. Our total deposits increased to $458.3 million at June 30, 2007, up 23.6% from
$370.7 million at June 30, 2006, and up 10.1% from $416.4 million at December 31, 2006.
Shareholders equity increased $8.1 million to $48,874,109 at June 30, 2007, as
compared to $40,820,012 at June 30, 2006, and increased $3.4 million from $45,459,579 at
December 31, 2006.

13

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Investment Securities

At
June 30, 2007, investment securities totaled $74.0 million and averaged $73.4 million
during the first six months of 2007. Total investment securities averaged $54.3 million
during the first six months of 2006 and totaled $59.3 million at June 30, 2006. Total
investment securities averaged $60.2 million for the year ended December 31, 2006 and
totaled $71.9 million at December 31, 2006. At June 30, 2007, investment securities
represented 12.7% of total assets compared to 12.8% at June 30, 2006. All investment
securities are classified as available-for-sale and are recorded at fair value. At June
30, 2007, our total investment securities portfolio had a book value of $75.9 million and
a fair market value of $74.0 million for a gross unrealized net loss of $1.9 million. We
primarily invest in U.S. Government Sponsored Enterprises and Federal Agency securities.

At
June 30, 2007 short-term investments totaled $26.1 million, compared to $1.1 million at
June 30, 2006 and $14.0 million at December 31, 2006. These funds are one source of our
banks liquidity and are generally invested in an earning capacity on an overnight or
short-term basis. This increase in short-term investments is primarily due to lower loan
demand during this quarter.

Loans

Since
loans typically provide higher yields than other types of earning assets, a substantial
percentage of our earning assets are invested in our loan portfolio. As of June 30, 2007,
loans represented 82.1% of total earning assets compared to 86.3% at June 30, 2006 and
84.2% at December 31, 2006. At June 30, 2007 net loans (total loans less the allowance for
loan losses) totaled $451.1 million, an increase of $75.7 million from June 30, 2006 and
of $45.7 million from December 31, 2006. Average total loans increased from $348.5
million, with a yield of 8.46%, in the first six months of 2006 to $442.2 million, with a
yield of 9.15%, during the same in 2007. Average total loans were $372.8 million with a
yield of 8.88% at December 31, 2006. The interest rates charged on loans vary with the
degree of risk and the maturity and amount of the loan. Competitive pressures, money
market rates, availability of funds and government regulations also influence interest
rates.

The following table shows the
composition of the loan portfolio by category at June 30, 2007, June 30, 2006, and
December 31, 2006.

# Composition of Loan
Portfolio

|                                   | June 30, 2007 | June 30, 2006 | December 31, 2006
|---------------------------------- | ------------- | ------------- | -----------------
|
|
|
|Commercial                         |               |               | $                
|Real estate - construction         |               |               |                  
|Real estate - mortgage (1)         |               |               |                  
|Consumer                           |               |               |                  
|                                   |               |               |                  
|Loans, gross                       |               |               |                  
|                                   |               |               |                  
|Unearned loan fees and costs, net  |               |               |                  
|                                   |               |               |                  
|Allowance for possible loan losses |               |               |                  
|                                   |               |               |                  
|Loans, net                         |               |               | $                
|                                   |               |               |                  

(1)   Includes mortgage loans held for sale

Mortgage
loans were the principal component of our loan portfolio at June 30, 2007, June 30, 2006
and December 31, 2006, which represented 77.5%, 76.2% and 76.7% of the portfolio,
respectively. In the context of this discussion, a real estate mortgage loan
is defined as any loan, other than loans for construction purposes, secured by real
estate, regardless of the purpose of the loan. We follow the common practice of financial
institutions in our market area of obtaining a security interest in real estate whenever
possible, in addition to any other available collateral. The security interest in the
collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and
tends to increase the

14

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magnitude of the real estate loan
portfolio component. Generally, we limit the loan-to-value ratio to 80%. Because of our
relatively small size and the short period of time our loan portfolio has existed, the
current portfolio mix may not be indicative of the on-going mix. We will attempt to
maintain a relatively diversified loan portfolio to help reduce the risk inherent in
concentrations of collateral.

Allowance for Possible
Loan Losses

We
have established an allowance for loan losses through a provision for loan losses charged
to expense on our statement of income. The allowance for loan losses represents an amount
which we believe will be adequate to absorb probable losses on existing loans that may
become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is
based on a number 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 allocations and specific allocations. For general allocations, the
portfolio is segregated into risk-similar segments for which historical loss ratios are
calculated and adjusted for identified trends or changes in current portfolio
characteristics. Historical loss ratios are calculated by product type for consumer loans
(installment and revolving), mortgage loans, and commercial loans and may be adjusted for
other risk factors. To allow for modeling error, a range of probable loss ratios is then
derived for each segment. The resulting percentages are then applied to the dollar amounts
of the loans in each segment to arrive at each segments range of probable loss
levels. Certain nonperforming loans are individually assessed for impairment under SFAS
No. 114 and assigned specific allocations. Other identified high-risk loans or credit
relationships based on internal risk ratings are also individually assessed and assigned
specific allocations.

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

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

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

At
June 30, 2007, the allowance for possible loan losses was $6.3 million, or 1.38% of
outstanding loans, compared to an allowance for possible loan losses of $5.3 million, or
1.40% of outstanding loans, at June 30, 2006 and an allowance for possible loan losses of
$5.9 million, or 1.43% of outstanding loans, at December 31, 2006. In the first six months
of 2007, we had net charge-offs totaling $178,246. During the same period in 2006, we had
net charge-offs totaling $222,296. For the twelve months ended December 31, 2006, we had
net charge-offs totaling $650,635. We had non-performing loans totaling $1,431,960 at June
30, 2007, $1,695,566 at June 30, 2006, and $1,625,511 at December 31, 2006. While there
can be no assurances, we do not expect significant losses relating to these nonperforming
loans because we believe that the collateral supporting these loans is largely sufficient
to cover the outstanding loan balances.

The
following table sets forth certain information with respect to our allowance for loan
losses and the composition of charge-offs and recoveries for the six months ended June 30,
2007, June 30, 2006, and December 31, 2006.

15

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# Allowance for Loan
Losses

|                                                   | Six months ended June 30, | December 31,
|-------------------------------------------------- | ------------------------- | ------------
|
|
|Average total loans outstanding                    |                           |             
|Total loans outstanding at period end              |                           |             
|Total nonperforming loans                          |                           |             
|                                                   |                           |             
|Beginning balance of allowance                     |                           |             
|                                                   |                           |             
|Loans charged off                                  |                           |             
|Total recoveries                                   |                           |             
|                                                   |                           |             
|Net loans charged off                              |                           |             
|                                                   |                           |             
|Provision for loan losses                          |                           |             
|                                                   |                           |             
|Balance at period end                              |                           |             
|                                                   |                           |             
|Net charge-offs to average total loans             |                           |             
|Allowance as a percent of total loans              |                           |             
|Nonperforming loans as a percentage of total loans |                           |             
|Nonperforming loans as a percentage of allowance   |                           |             

The
following table sets forth the breakdown of the allowance for loan losses by loan category
and the percentage of loans in each category to gross loans as of June 30, 2007. We
believe that the allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of further
losses and does not restrict the use of the allowance to absorb losses in any category.

|As of June 30, 2007            
|-------------------------------
|Commercial                     
|Real estate - construction     
|Real estate - mortgage         
|Consumer                       
|Unallocated                    
|                               
|Total allowance for loan losses
|                               

Nonperforming Assets

We
discontinue accrual of interest on a loan when we conclude it is doubtful that we will be
able to collect interest from the borrower. We reach this conclusion by taking into
account factors such as the borrowers financial condition, economic and business
conditions, and the results of our previous collection efforts. Generally, we will place a
delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. When
we place a loan in nonaccrual status, we reverse all interest which has been accrued on
the loan but remains unpaid and we deduct this interest from earnings as a reduction of
reported interest income. We do not accrue any additional interest on the loan balance
until we conclude the collection of both principal and interest is reasonably certain. At
June 30, 2007, there were no loans accruing interest which were 90 days or more past due
and we had no restructured loans.

Deposits

Total
deposits were $458.3 million and represented 78.4% of total assets at June 30, 2007.
Average total deposits were $433.4 million and average interest-bearing deposits were
$398.8 million for the six months ended June 30, 2007. Average total deposits were $340.2
million and average interest-bearing deposits were $308.8 million in the

16

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same period of 2006. Average total
deposits were $367.1 million and average interest-bearing deposits were $333.6 million at
December 31, 2006.

The
following table sets forth our deposits by category as of June 30, 2007, June 30, 2006,
and December 31, 2006.

# Deposits

|                                   | June 30, 2007 | June 30, 2006 | December 31, 2006
|---------------------------------- | ------------- | ------------- | -----------------
|
|
|
|Demand deposit accounts            |               |               | $                
|Interest bearing checking accounts |               |               |                  
|Money market accounts              |               |               |                  
|Savings accounts                   |               |               |                  
|Time deposits less than $100,000   |               |               |                  
|Time deposits of $100,000 or over  |               |               |                  
|                                   |               |               |                  
|Total deposits                     |               |               | $                
|                                   |               |               |                  

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

Core
deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively
stable funding source for our loan portfolio and other earning assets. Our core deposits
were $341.9 million at June 30, 2007, compared to $274.1 million at June 30, 2006 and
$319.1 million at December 31, 2006. Our brokered deposits were $39.6 million as of June
30, 2007, $29.5 million as of June 30, 2006, and $34.6 million as of December 31, 2006. We
expect a stable base of deposits to be our primary source of funding to meet both our
short-term and long-term liquidity needs. Core deposits as a percentage of total deposits
were approximately 74.6% at June 30, 2007, 73.9% at June 30, 2006, and 76.6% at December
31, 2006. Our loan-to-deposit ratio was 98.4% at June 30, 2007 versus 101.2% at June 30,
2006 and 98.8% at December 31, 2006. The average loan-to-deposit ratio was 100.1% during
the first six months of 2007, 102.4% during the same period of 2006, and 102.0% for the
year ended December 31, 2006.

# Advances from Federal
Home Loan Bank

In
addition to deposits, we obtained funds from the FHLB to help fund our loan growth.
Average borrowings from the FHLB were $43.9 million during the second quarter of 2007 and
totaled $55.0 million at June 30, 2007. The following table reflects the current borrowing
terms.

|FHLB Description    | Balance | Current Rate | Maturity Date
|------------------- | ------- | ------------ | -------------
|Fixed Rate Hybrid   |         |              | $            
|Fixed Rate          |         |              | $            
|Convertible         |         |              |              
|Convertible         |         |              |              
|Convertible         |         |              |              
|Convertible         |         |              |              
|Convertible         |         |              |              
|Prime Based Advance |         |              |              
|                    |         |              |              
|                    |         |              | $            
|                    |         |              |              

17

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# 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 $38,561 at June 30, 2007, $45,946 at June 30, 2006, and $41,067 at December 31,
2006. These costs are included in other assets on our consolidated balance sheet.
Amortization of debt issuance costs from trust preferred debt totaled $2,086 for the six
month period ended June 30, 2007, $2,086 for the six month period ended June 30, 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 8.055% and
7.255% at June 30, 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 regulatory agencies require bank holding companies and
financial institutions to maintain capital at adequate levels based on a percentage of
assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%.
Under the capital adequacy guidelines, regulatory capital is classified into two tiers.
These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2
capital to risk-weighted assets. Tier 1 capital consists of common shareholders
equity, excluding the unrealized gain or loss on securities available for sale, minus
certain intangible assets. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0%
to 100% based on the risks believed to be inherent in the type of asset. Tier 2 capital
consists of Tier 1 capital plus the general reserve for loan losses, subject to certain
limitations. We are also required to maintain capital at a minimum level based on total
average assets, 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
the federal banking agencies. To be considered well-capitalized, we must
maintain total risk-based capital of at least 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-2 stock split effected in the form of a 50%
stock dividend to shareholders of record on December 1, 2006. The dividend was paid on
December 21, 2006. All earnings per share amounts for all periods have been adjusted to
reflect this 3-for-2 split.

At
June 30, 2007, our total shareholders equity was $48.9 million ($49.0 million at the
bank level). At June 30, 2007, our Tier 1 capital ratio was 13.3% (11.5% at the bank
level), our total risk-based capital ratio was 14.7% (12.7% at the bank level), and our
Tier 1 leverage ratio was 11.0% (9.08% at the bank level). The bank was considered
well capitalized and the holding company met or exceeded its applicable
regulatory capital requirements.

18

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# Liquidity Management

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

Our
primary 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 through the
liquidation of temporary investments and the generation of deposits. All of our securities
have been classified as available for sale. Occasionally, we might sell investment
securities in connection with the management of our interest sensitivity gap or to manage
cash availability. We may also utilize our cash and due from banks, security repurchase
agreements, and federal funds sold to meet liquidity requirements as needed. In addition,
we have the ability, on a short-term basis, to purchase federal funds from other financial
institutions. Presently, we have made arrangements with commercial banks for short-term
unsecured advances of up to $21.8 million. We maintain a secured line of credit in the
amount of $10.0 million with our primary correspondent. We also have a line of credit with
the FHLB to borrow up to 80% of our 1 to 4 family loans, resulting in an availability of
funds of $2.4 million at June 30, 2007. The FHLB has approved borrowings up to 15% of the
banks total assets less advances outstanding. The borrowings are available by
pledging additional collateral and purchasing FHLB stock. At June 30, 2007, we had
borrowed $55.0 million on this line. We believe that our existing stable base of core
deposits, our bond portfolio, borrowings from the FHLB, and short-term federal funds lines
will enable us to successfully meet our liquidity needs for the next 12 months.

# Interest Rate Sensitivity

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

We
actively monitor and manage our interest rate risk exposure principally by measuring our
interest sensitivity gap, which is the positive or negative dollar difference
between assets and liabilities that are subject to interest rate repricing within a given
period of time. A gap is considered positive when the amount of interest-rate sensitive
assets exceeds the amount of interest-rate sensitive liabilities, and it is considered
negative when the amount of interest-rate sensitive liabilities exceeds the amount of
interest-rate sensitive assets. We generally would benefit from increasing market interest
rates when we have an asset-sensitive, or a positive, interest rate gap and we would
generally benefit from decreasing market interest rates when we have liability-sensitive,
or a negative, interest rate gap. When measured on a gap basis, we are
liability-sensitive over the cumulative one-year time frame and asset-sensitive after one
year as of June 30, 2007. However, our gap analysis is not a precise indicator of our
interest sensitivity position. The analysis presents only a static view of the timing of
maturities and repricing opportunities, without taking into consideration that changes in
interest rates do not affect all assets and liabilities equally. For example, rates paid
on a substantial portion of core deposits may change contractually within a relatively
short time frame, but we believe those rates are significantly less interest-sensitive
than market-based rates such as those paid on noncore deposits.

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

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# Off Balance Sheet Risk

Through
the operations of our bank, we have made contractual commitments to extend credit in the
ordinary course of our business activities. These commitments are legally binding
agreements to lend money to our customers at predetermined interest rates for a specified
period of time. We evaluate each customers credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by us upon extension of
credit, is based on our credit evaluation of the borrower. Collateral varies but may
include accounts receivable, inventory, property, plant and equipment, commercial and
residential real estate. We manage the credit risk on these commitments by subjecting them
to normal underwriting and risk management processes.

At
June 30, 2007, the bank had issued commitments to extend credit of $39.0 million through
various types of lending arrangements, of which $33.5 million was at variable rates. The
commitments expire over the next 18 months. Past experience indicates that many of these
commitments to extend credit will expire unused. We believe that we have adequate sources
of liquidity to fund commitments that are drawn upon by the borrowers.

In
addition to commitments to extend credit, we also issue standby letters of credit which
are assurances to a third party that they will not suffer a loss if our customer fails to
meet its contractual obligation to the third party. Standby letters of credit totaled
$20.0 million at June 30, 2007. Past experience indicates that many of these standby
letters of credit will expire unused. However, through our various sources of liquidity,
we believe that we will have the necessary resources to meet these obligations should the
need arise.

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

# Impact of Inflation

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

Unlike
most industrial companies, our assets and liabilities are primarily monetary in nature.
Therefore, the effect of changes in interest rates will have a more significant impact on
our performance than will the effect of changing prices and 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 between interest sensitive assets and liabilities in order to protect
against wide rate fluctuations, including those resulting from inflation.

# Recently Issued
Accounting Standards

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

In
September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value Measurements. SFAS No. 157 provides
enhanced guidance for using fair value to measure assets and liabilities. The standard
also requires expanded disclosures about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and the effect of
fair value measurements on earnings. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. We do not expect the adoption of Statement 157 to materially impact
our consolidated financial statements.

In
September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans, which amends SFAS No. 87 and SFAS
No. 106 to require recognition of the overfunded or underfunded status of pension and
other postretirement benefit plans on the balance sheet. Under SFAS No. 158, gains and
losses, prior service costs and credits, and any remaining transition amounts under SFAS
No. 87 and SFAS No. 106

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that have not yet been recognized
through net periodic benefit cost will be recognized in accumulated other comprehensive
income, net of tax effects, until they are amortized as a component of net periodic cost.
The measurement date, the date at which the benefit obligation and plan assets are
measured, is required to be the companys fiscal year end. SFAS No. 158 is effective
for publicly-held companies for fiscal years ending after December 15, 2006, except for
the measurement date provisions, which are effective for fiscal years ending after
December 15, 2008. We do not have a defined benefit pension plan. Therefore, SFAS No. 158
will not impact our consolidated financial statements.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities  Including an amendment of SFAS No. 115". This
statement permits, but does not require, entities to measure many financial instruments at
fair value. The objective is to provide entities with an opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. Entities electing
this option will apply it when the entity first recognizes an eligible instrument and will
report unrealized gains and losses on such instruments in current earnings. This statement
1) applies to all entities, 2) specifies certain election dates, 3) can be applied on an
instrument-by-instrument basis with some exceptions, 4) is irrevocable and 5) applies only
to entire instruments. One exception is demand deposit liabilities which are explicitly
excluded as qualifying for fair value. With respect to SFAS No. 115, available for sale
and held to maturity securities at the effective date are eligible for the fair value
option at that date. If the fair value option is elected for those securities at the
effective date, cumulative unrealized gains and losses at that date shall be included in
the cumulative-effect adjustment and thereafter, such securities will be accounted for as
trading securities. SFAS No. 159 will be effective for us on January 1, 2008. Earlier
adoption is permitted in 2007 if we also elect to apply the provisions of SFAS No. 157. We
did not adopt early SFAS No. 159 and believes that it is unlikely that it will expand its
use of fair value accounting upon the January 1, 2008 effective date.

In
September, 2006, The FASB ratified the consensuses reached by the FASBs Emerging
Issues Task Force (EITF) relating to EITF No. 06-4 Accounting for the
Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements. EITF No. 06-4 addresses employer accounting for endorsement
split-dollar life insurance arrangements that provide a benefit to an employee that
extends to postretirement periods should recognize a liability for future benefits in
accordance with SFAS No. 106, Employers Accounting for Postretirement Benefits
Other Than Pensions, or Accounting Principles Board (APB) Opinion No.
12, Omnibus Opinion-1967". EITF 06-4 is effective for fiscal years beginning
after December 15, 2007. Entities should recognize the effects of applying this Issue
through either (a) a change in accounting principle through a cumulative-effect adjustment
to retained earnings or to other components of equity or net assets in the statement of
financial position as of the beginning of the year of adoption or (b) a change in
accounting principle through retrospective application to all prior periods. Based on the
results of preliminary analysis, we do not believe that EITF No. 06-4 will have a material
impact on our consolidated financial statements.

In
September 2006, the FASB ratified the consensus reached related to EITF No. 06-5,
Accounting for Purchases of Life Insurance  Determining the Amount That Could
Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases
of Life Insurance. EITF No. 06-5 states that a policyholder should consider any
additional amounts included in the contractual terms of the insurance policy other than
the cash surrender value in determining the amount that could be realized under the
insurance contract. EITF No. 06-5 also states that a policyholder should determine the
amount that could be realized under the life insurance contract assuming the surrender of
an individual-life by individual-life policy (or certificate by certificate in a group
policy). EITF No. 06-5 is effective for fiscal years beginning after December 15, 2007.
Although we do not believe the adoption of EITF No. 06-5 will have a material impact on
our consolidated financial statements, management is currently analyzing the impact of
adoption.

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

# Item 3.   Quantitative and
Qualitative Disclosures About Market Risk.

Market
risk is the risk of loss from adverse changes in market prices and rates. Our market risk
arises principally from interest rate risk inherent in our lending, deposit, and borrowing
activities. Management actively monitors and manages its interest rate risk exposure. In
addition to other risks that we manage in the normal course of

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business, such as credit quality and
liquidity, management considers interest rate risk to be a significant market risk that
could potentially have a material effect on our financial condition and results of
operations. The information contained in Item 2 in the section captioned Interest
Rate Sensitivity is incorporated herein by reference. Other types of market risks,
such as foreign currency risk and commodity price risk, do not arise in the normal course
of our business activities.

The
primary objective of asset and liability management is to manage interest rate risk and
achieve reasonable stability in net interest income throughout interest rate cycles. This
is achieved by maintaining the proper balance of rate-sensitive earning assets and
rate-sensitive interest-bearing liabilities. The relationship of rate-sensitive earning
assets to rate-sensitive interest-bearing liabilities is the principal factor in
projecting the effect that fluctuating interest rates will have on future net interest
income. Rate-sensitive assets and liabilities are those that can be repriced to current
market rates within a relatively short time period. Management monitors the rate
sensitivity of earning assets and interest-bearing liabilities over the entire life of
these instruments, but places particular emphasis on the next twelve months. At June 30,
2007, on a cumulative basis through 12 months, rate-sensitive liabilities exceeded
rate-sensitive assets by $47.6 million. This liability-sensitive position is largely
attributable to short-term certificates of deposit, money market accounts and interest
bearing checking accounts, which totaled $415.1 million at June 30, 2007.

# Item 4.   Controls and
Procedures.

As
of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our current
disclosure controls and procedures are effective as of June 30, 2007. There have been no
significant changes in our internal controls over financial reporting during the fiscal
quarter ended June 30, 2007 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.

The
design of any system of controls and procedures is based in part upon certain assumptions
about the likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions, regardless of
how remote.

# PART II

# OTHER INFORMATION

# Item 1.   Legal
Proceedings.

There
are no material legal proceedings to which the company or any of its subsidiaries is a
party or of which any of their property is the subject.

# Item 1A.   Risk Factors.

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

# Item 2.   Unregistered
Sales of Equity Securities and Use of Proceeds.

Not
applicable.

# Item 3.   Defaults Upon
Senior Securities.

Not
applicable.

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

There
was one matter submitted to a vote of security holders during the three months ended June
30, 2007 at our annual meeting of shareholders held on April 18, 2007.

Proposal #1 
Election of Class III Directors

Our
board of directors is divided into three classes with each class to be as nearly equal in
number as possible. The three classes of directors have staggered terms, so that the terms
of only approximately one-third of the board members will expire at each annual meeting of
shareholders. The current Class I directors are Raymond E. Cleary, III, DDS, Joe N.
Jarrett, Jr., MD, Richard E. Lester, and Don J. Smith. The current Class II directors are
Michael Bert Anderson, O. Bartlett Buie, Michael D. Harrington, Rick H. Seagroves, and
Walter E. Standish, III. The current Class III directors are James C. Yahnis, Samuel
Robert Spann, Jr., B. Larkin Spivey, Jr., Leigh Ammons Meese, and E. Thomas Fulmer. The
Class III directors were up for reelection at this years annual meeting held April
18, 2007. Each of the existing Class III directors were re-elected at the annual meeting
for a three-year term expiring at the 2010 annual meeting of shareholders. For Mr. Yahnis,
4,183,929 votes were cast in favor of his reelection as director with 40,620 abstained.
For Mr. Spann, 4,183,929 votes were cast in favor of his reelection as director with
40,620 abstained. For Mr. Spivey, 4,183,251 votes were cast in favor of his reelection as
director with 41,298 abstained. For Ms. Meese, 4,182,651 votes were cast in favor of her
reelection as director with 41,898 abstained. For Mr. Fulmer, 4,183,971 votes were cast in
favor of his reelection as director with 40,578 abstained. There were no votes cast
against any of the five directors. The terms of the Class I directors will expire at the
2008 annual shareholders meeting, and the terms of the Class II directors will expire at
the 2009 annual shareholders meeting.

# Item 5.   Other
Information.

Not
applicable.

# 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 with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

| |  | BEACH FIRST NATIONAL BANCSHARES, INC.
| |  | -------------------------------------

|Date:  August 10, 2007 |  | By:  /s/ Walter E. Standish, III
        Walter E. Standish, III        
President and Chief Executive Officer
|---------------------- |  | --------------------------------------------------------------------------------------------------------------

|Date:  August 10, 2007 |  | By:  /s/ Melissa Downs-High
        Melissa Downs-High       
Interim 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.

25