# Exhibit 13

Annual Report to Shareholders for the
year ended December 31, 2003.

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Exhibit 13

Beach First National
Bancshares, Inc.2003 Annual Report

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(inside front cover)About Beach First
Beach First National Bancshares, Inc., (OTC: BFNB) is the parent of Beach First National Bank, headquartered in Myrtle
Beach, South Carolina. Beach First operates offices in Myrtle Beach, Surfside Beach, North
Myrtle Beach and Hilton Head Island and provides a full range of community banking
services for consumers and businesses, including NetTeller internet banking. Additional
information is available at beachfirst.com.

Selected Financial
Highlights

|                                  | 2003 | 2002 | % Change
|--------------------------------- | ---- | ---- | --------
|Earnings                          |      |      |         
|Net Income                        |      |      | $       
|Net Income per share - basic      |      |      |         
|Net Income per share - diluted    |      |      |         
|Book Value per share              |      |      |         
|Earnings Breakdown (in thousands) |      |     
|Total Interest Income             |      |      | $       
|Total Interest Expense            |      |      |         
|Net Interest Income               |      |      |         
|Total Noninterest Income          |      |      |         
|Total Noninterest Expense         |      |      |         
|Year End Balances (in thousands)  |      |     
|Total Assets                      |      |      | $       
|Loans, net of unearned income     |      |      |         
|Deposits                          |      |      |         
|Shareholders' Equity              |      |      |         
|Selected Ratios                   |      |     
|Return on average assets          |      |      |         
|Return on average equity          |      |      |         
|Average equity to average assets  |      |      |         
|Dividend payout ratio             |      |      |         

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Beach First National Bank
Board of Directors

(photo omitted)

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

Inside the Report

|                                                                                    | 
|----------------------------------------------------------------------------------- | 
|To Our Shareholders and Friends                                                     | 
|Beach First Cares for Our Communities                                               | 
|Management's Discussion and Analysis                                                | 
|Report of Management                                                                | 
|Report of Independent Accountants                                                   | 
|Consolidated Balance Sheets                                                         | 
|Consolidated Statements of Income                                                   | 
|Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income | 
|Consolidated Statements of Cash Flows                                               | 
|Notes                                                                               | 
|Business Development Boards                                                         | 
|Corporate Information                                                               | 
|Staff                                                                               | 
|Directors                                                                           | 

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To Our Shareholders and
Friends

In
2003, Beach First National Bank achieved solid financial results while taking significant
strides to bolster its product line, technology, and branch network.

The
banks success is rooted in its community banking philosophy. Community banking at
Beach First means that service is absolutely dependable, completely attentive, and locally
managed. In other words, people are comfortable doing business with us. This level of
comfort helps us expand relationships with existing customers while making us attractive
to new customers. Our commitment to providing this level of service is strong and
unwavering.

Five Straight Years of
Double Digit Earnings Growth        2003
marked Beach Firsts fifth consecutive year in which earnings grew byat least 20%.
Net income rose to more than $1 million for the first time in the banks history,
increasing 42.7% over the figures reported one year ago to $1,008,931. All areas of the
balance sheet reflected double digit earnings growth as well. Total assets grew 39.4% over
the previous year. Total loans increased 45.3%, while total deposits climbed 38.3% over
figures reported for last year. The bank maintained this high level of performance despite
fierce competition for deposits and loans in all our markets.        The
banks performance earned it a place on the list of South Carolinas 25 fastest
growing companies in 2003. The list is compiled by Elliott Davis LLC in coordination with
the South Carolina State Chamber of Commerce.

A Developing Branch
Network        Growth
in the branch network is key to the banks continued success. In the past eighteen
months, Beach First opened offices in North Myrtle Beach and Hilton Island. The Hilton
Head Island office marked our first expansion outside the Grand Strand, and has been
well-received in its first year of operations. The North Myrtle Beach office continues to
expand on its strong debut, while the Myrtle Beach and Surfside Beach offices are also
performing well.        Last
year, the bank purchased a 2.4 acre parcel of land at the southwest corner ofGrissom
Parkway and 38th Avenue North in Myrtle Beach, with plans to build a new headquarters at
this prime location. I am pleased to report that we expect to break ground later this year
and occupy the new building in 2005.        We
remained poised and confident to grow the branch network as long as the following vital
elements  namely, the right staff and the right location  come together.
Careful attention to these factors has yielded strong results at our existing locations,
and this philosophy of thoughtful, planned growth will chart our course for the years to
come.

New Products and Services         In
addition to the caring, attentive service Beach First provides, customers also desire
technologically-advanced, yet user-friendly services. To meet this demand, we introduced
Internet Banking in 2003. Known as NetTeller, this service won rave reviews from our
customers who are impressed with its ease of use and convenience. Late in the first
quarter 2004, we plan to add a Bill Payer Service component for even more customer
convenience.         Another
way we meet the demand for electronic products is through our Commercial Cash Management
Services, including ACH, Electronic Wire Transfer, Federal Tax Payments, and Real Time
Cash Position. Through the use of these electronic services, the need for paper
transactions is eliminated, saving both the bank and the customer time and money.        
Early in 2004, we added theBusiness Visa Check Card to our  product menu. It brings a new level  of convenience
to small business customers. The card provides an easy way for a business to get cash or pay for supplies, eliminating the need
for cash advances, petty cash, or expense reimbursements.        Small
business is one of the most important markets we serve, and we are pleased to meet their
demand for electronic services.

Mortgage Loan Services        
Mortgage loans are a vital line of business for the bank. Not only does this business contribute to our bottom line, but it
helps us build customer relationships from the point of home purchase. Because of its
importance to the banks success,

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we have allocated resources to ensure
that we have the products and the staffing to effectively promote mortgage loans in all
the markets we serve.

During
2003, we added two mortgage loan originators to our staff. Nicolle Gaineyis based in the
North Myrtle Beach office and Michelle Wilsonworks at our Hilton Head Island office.
Together with Jolene McCune, who is based at the banks Surfside Beach office, they
position the bank well to grow this line of business.

Active, Involved Board of
Directors        Beach
First is fortunate to have a strong board that is firmly committed to the bank and its
goals. The board is active in strategic planning for the bank, working closely with our
executive management to chart the banks course. This level of commitment speaks well
to the talent and expertise that exists on our board.

In
spring 2003, Tom Fulmerwas named a director. Tom has lived in North Myrtle Beach for 20
years and, prior to founding Beachcomber Realty, worked for nearly 15 years as a banker.
We are proud to add his wise counsel and experience to our board.

During
2003, we further strengthened our ties to our communities by formingbusiness development
boards for the North Strand, South Strand, and Hilton Head Island markets. Members perform
a vital role, representing the bank in the community, providing guidance to bank
management, and assisting in business development. These talented men and women are a
valuable asset to Beach First, and we are glad to have them on our team.

Updated Investor
Relations Website        We
recently upgraded the Investor Relations area of our website to provide you with better
access to company news and financial data as well as industry information including market
share data and peer analysis. For more details, visitbeachfirst.com, and click on the
Investor Relations tab.

At Work and In Our
Community        As
a Family Friendly employer, Beach First encourages its employees to grow in
their jobs through additional education and training. Coursework may include classes from
the American Institute of Banking, or other banking schools. In 2003, Marc McDowell, vice
president and regional manager for North Myrtle Beach, completed the Graduate School of
Banking at Louisiana State University. Sandra Gore, customer service representative at
North Myrtle Beach, completed the second year of the three-year South Carolina Bankers
School at the University of South Carolina.        Several
other employees were honored during the year for their efforts in community or
professional organizations. Nancy Russell, our human resource manager, was named Human
Resource Professional of the Year by the Coastal Organization of Human Resources, while
Ann Marion, assistant vice president and manager of our Surfside Beach office, was named
Rotarian of the Year by the Murrells Inlet Rotary Club. Jolene McCune, mortgage banking
officer at the Surfside Beach office, received the Distinguished Service Award from the
Grand Strand Mortgage Lenders Association. We applaud their efforts.         
As you will see in the next pages of this Report, our commitment to the communities we serve has never been stronger. From
providing sponsorship funds for community programming to producing a Childrens Art
Calendar and hosting theSecond Annual Holiday Sand Sculpture Contest, Beach First is
deeply committed to the markets it serves. I encourage you to read the next few pages to
learn more about our involvement in many fine causes and organizations.

A Vibrant Future        Signs
in 2004 seem pointed towards economic recovery. Along with these positive economic
indicators, we are located in some of the fastest growing areas of the state. Together,
this is good news for our community, for our customers and shareholders, and for our bank.
We look forward to a bright future and thank you for your continued investment in Beach
First.

/s/ Walter E. Standish, III
Walter E. Standish, IIIPresident and Chief Executive Officer

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Beach First Cares for Our
Communities

The dictionary defines community as
people living in one locale. In reality, it is much, much more than that. In a
community, people work together for common interests and goals.

Whether its to ensure that a
homebound senior citizen has a hot meal or a domestic abuse victim has shelter, people
will rise to meet the need and a true community is born.

At Beach First, we strive to support
our communities every day. In helping businesses grow and expand or in showing young
families how to save for the future, the bank provides important services, day in and day
out.

But thats just one way Beach
First makes a difference. We provide financial contributions to charitable causes
throughout the year, and our people give generously of their time, their money, and their
creativity, all to help others.

We are grateful to the many
organizations and countless volunteers who work so tirelessly to improve the quality of
life for all of us. Throughout the next few pages, we pay tribute to several of these
volunteer activities. These stories show that life as a community bank is about more than
loans and deposits. Its about being there when you are needed.

Coaching Job a Natural
for Banker

Twenty
years ago, a young boy named Marc McDowell played Dixie Youth Baseball at Heniford Field
in Loris, South Carolina. Under the tutelage of volunteer coaches, he learned the finer
points of hitting, fielding, and game strategy, along with teamwork and sportsmanship,
from people who loved the game.

Today,
the young boy is grown and coaching his own Dixie Youth team at the North Myrtle Beach
Recreation Center. Together with boyhood friend and fellow coach Brent Norris, he imparts
his love and knowledge of the game to his team of youngsters each year.

The
season starts with the formation of teams at the end of March, and practice begins in
earnest in April. The league fields four to six teams each year, with each team playing a
16-game schedule over the course of eight weeks. When combined with practice three times a
week, the coaches and the players alike make a substantial commitment of time to the game.

The
bank supports McDowells efforts by sponsoring a team each year. The players proudly
sport the colors and emblem of the Chicago Cubs  McDowells favorite team
 along with the Beach First name.

Neither
McDowell nor Norris has children on the team  they participate simply because they
love the game. McDowell remembers fun of playing baseball as a 12-year-old and now gets to
relive those years through coaching.

McDowell
said, Its great to get to know the kids on all the teams, and watch their
skills develop as the season progresses. Plus, the families get to know each other and
each game becomes a social occasion for everyone involved. Theres no better way to
spend your spring evenings than in the company of families, playing baseball.



(photo omitted)        Coach
McDowell (back row, left) and the North Myrtle Beach Cubs pose for a photo last season.

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Cellular Angels on Call

Can
an old cell phone have a second life as a guardian angel?

For victims
of domestic abuse in the Hilton Head Island area, it can become that and much more 
a virtual lifeline in an emergency.

Thanks
to Leadership Hilton Head/Bluffton, working in coordination with Citizens Opposed to
Domestic Abuse (CODA), the phones are well on their way to providing that lifeline. Paul
Walter, Beach First vice president and regional manager for the banks Hilton Head
operations, is a member of the Leadership 2004 Class, and serves on the team developing
this project.

He
said, Leadership Hilton Head/Bluffton provides an in-depth view of our community
 from its history and structure to its economic and charitable needs. Our class
chose to assist CODA because domestic abuse is often an overlooked and misunderstood
problem that can be found in families at all socio-economic levels.

Called
Cellular Angels, the program starts by collecting aging cell phones and
sending them to The Wireless Foundation, a Washington, DC-based non-profit group. The
foundation, a leader in philanthropic projects involving wireless technology, reprograms
the phones to speed dial 911 and returns them to CODA and other domestic violence
programs. The phones are then given to survivors of domestic abuse, who are
instructed to keep them in a secret location, away from their abusers, but easy enough to
access when needed.

Some
of the phones may be programmed to allow additional local calls and messages 
providing yet another lifeline to survivors as they rebuild their lives. Many are
looking for housing or employment and can use these cell phones for vital communications.

CODA
executive director Bonnie Lawrance said, Leadership Hilton Head/Bluffton really gave
this project life and momentum. Cellular Angels is a large undertaking requiring a team
effort. As a non-profit organization, our staffing levels are lean, and we needed a lot of
help to get this project moving. Leadership Hilton Head/Bluffton stepped right up,
arranging and staffing collection sites, working with donors, creating permanent
collection locations, and generating publicity for the program. The permanent cell phone
collection boxes that are planned will be an important legacy contributing to the safety
of women and children in our area.

Another
Hilton Head Island group assisting CODA is the Zonta Club of Hilton Head Island. Beach
First mortgage vice president Michelle Wilson is an active member of this womens
service organization. Zonta has assisted CODA by collecting and supplying toiletries,
which are needed when victims of domestic abuse are displaced from their homes, as well
serving as a major contributor to CODAs community-wide educational efforts in years
past.

(photo omitted)
          Paul Walter put the finishing touches on one of the many collection boxes needed
          for the Cellular Angels project. The boxes will be placed in strategic locations
          during 2004.

(photo omitted)
          A reprogrammed cell phone can provide a lifeline for a survivor of abuse.

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Revitalizing a
Citys Core

For
commercial lender Julien Springs, his volunteer role with the Myrtle Beach Downtown
Redevelopment Corporation (DRC) is a natural extension of his work at Beach First.

A
member of the DRCs board of directors since 2001, Springs was instrumental in
creating a low interest loan program for the 11th Avenue Streetscape Project, recruiting
area banks to participate. This project was implemented in 2003 and continues to provide
funds for facade improvements along 11th Avenue North, now known as Mr. Joe White Avenue
as well as Ocean Boulevard. Springs is also involved in other DRC projects now underway.

The
DRCs task is complex  to somehow balance the new attractions and growth the
city has experienced, with an attractive and robust downtown. This core region is defined
as the area from 6th Avenue South to 16th Avenue North and from the Atlantic Ocean to
Kings Highway, Oak Street and Broadway. The goal is to create a contemporary identity for
the downtown based on its unique history and proximity to the ocean. The downtown is also
home to Beach Firsts headquarters at the corner of 16th Avenue North and Oak Street.

The
DRC has made much progress in recent years, completing the Streetscape Project, the ocean
front park where Mr. Joe White Avenue meets Ocean Boulevard, and gateway entrances from
Kings Highway, U.S. 501, and 10th Avenue North, complete with traffic, landscape, and
median improvements.

A
Myrtle Beach native, Springs spent a lot of time as a child in the area he is now helping
to revitalize. He said, A revitalized downtown is good for the businesses and
residents of the area, along with the greater Myrtle Beach community. The DRCs
efforts have improved appearances and helped the business climate in this part of the
city. A successful Myrtle Beach needs all of its components to work together to create a
pleasing entity.

David
Sebok, executive director of the DRC, said, Julien led the charge in setting up the
loan program for the Streetscape Project. Without his leadership, I feel sure that this
project would not have been the success it is. He brings a strong business acumen and
commitment to community to everything he does as a board member.

Its
clear from the progress being made that Springs work for the DRC is the perfect
marriage of his banking skills with his love and care for his hometown.

(photo omitted)
          The 14th Avenue Stormwater Project replaces the on beach pipes currently used
          for stormwater drainage with a large, underground pipe that is more
          environmentally friendly, allowing stormwater to drain far out to sea. From left
          to right are: David Sebok, Julien Springs, Bert Anderson, Tom Neudeck,
          construction manager, and Leigh Meese. Anderson and Meese, both members of Beach
          Firsts board of directors, also serve on the DRC board.

(photo omitted) Jonathan Staton, the owner of Dagwoods Deli (left), stands with Julien
          Springs. The exterior renovations at Dagwoods were part of the Mr. Joe
          White Avenue Streetscape Project.

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A Stitch in Time Helps
the Girl Scouts

When
fledgling Girl Scout Troop #57 from the Popular section of North Myrtle Beach needed new
uniforms, Sandra Gore was there. A talented seamstress and customer service representative
at the banks North Myrtle Beach office, Gore quickly put needle and thread to
fabric, getting the 14 troop members outfitted in time for their first cookie sale in
February 2003. Her timing couldnt have been better because the money raised from the
cookie sales funds the girls charitable activities throughout the year.

Gores
banking background has come in handy, too. Periodically, she is called on to provide
information about various topics, including managing finances, saving money, and working
with a budget. With the real world just a few short years away for Troop 57,
these are very important topics and Gore is glad to help.

Gore
said, I became involved with the Girl Scouts through my friends, Rhonda Bennett and
Sheila Ford, because they needed some help with the new troop they were forming. I was
glad to put both my sewing skills and banking knowledge to good use!"

Bennett
is the troops leader and Ford, its co-leader. Both were Girl Scouts in their youth
and knew first hand the importance of having consistent role models. Bennett said,
Through scouting, the girls learn how to give of themselves to help others, whether
its visiting nursing home residents or fixing gift bags for holiday celebrations. In
Sandra, they see someone who is there when you need her, sharing her talents and her time
to benefit others. Through her positive example, the girls learn lessons that will guide
them throughout their lives.

(photo omitted)
          Sandra Gore, left, fits a uniform for Jasmine Bennett, a member of Troop 57.

(photo omitted)
          Sandra Gore discusses the value of savings and planning with members of Troop
          57.

These four stories show just some of
the ways that Beach First and its employees are involved in community and charitable
endeavors. The bank also produces an annual childrens art calendar to showcase the
talents of students in four schools in our markets, sponsors a Family Holiday Sand
Sculpture Contest along the Grand Strand, and supports the Hargray Summer Concert Series
on Hilton Head Island. And there are numerous other sponsorships and donations throughout
the year along with memberships in service organizations and other groups. The bank will
always be an active and enthusiastic supporter of all the communities it serves.

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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 that are discussed in detail in our filings
with the Securities and Exchange Commission, including, without limitation:

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

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

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

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

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

| | o | changes in technology;
| | - | ----------------------

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

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

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

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

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

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

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

Overview

We
commenced operations on September 23, 1996 and completed our seventh full year of
operations on December 31, 2003. From the outset, we have focused on serving the banking
needs of small businesses and individuals, and we have emphasized our local management and
ownership.

Walt
Standish, our president and chief executive officer, completed his fourth year as
president at December 31, 2003. Under Mr. Standishs leadership, we are continuing to
grow in our service markets. Our total assets have increased to $165.1 million at December
31, 2003, a 39.4% increase since December 31, 2002, and our net income was $1,008,931 for
the year ended December 31, 2003, an increase of $301,660, or 42.7%, over the same period
in 2002. We accomplished our first quarterly profit in the second quarter of 1999, and in
2001 our performance resulted in the first cumulative year of profitability.

We
currently operate from four different banking locations. In addition to the main office in
Myrtle Beach, we have added three additional branches. We opened our Surfside Branch in
June 2001. In November 2002, we opened an office in North Myrtle Beach and in February
2003, we opened an office in Hilton Head Island. All of our branches are full service.

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

|                            | Years Ended December 31, | 
|--------------------------- | ------------------------ | 
|
|Total Revenues (1)          |                          | 
|Net Income                  |                          | 
|Total Assets                |                          | 
|Total Loans                 |                          | 
|Total Deposits              |                          | 
|Retained Earnings (Deficit) |                          | 

(1)    
          Total revenues equals net interest income plus total noninterest income.

Critical accounting
policies

We
have adopted various accounting policies which govern the application of accounting
principles generally accepted in the United States in the preparation of our financial
statements. Our significant accounting policies are described in Note 1 of the notes to
consolidated financial statements.

Certain
accounting policies involve significant judgments and assumptions by management which have
a material impact on the carrying value of certain assets and liabilities. 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 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 a critical accounting policy that requires the
most significant judgments and estimates used in preparation of its consolidated financial
statements. Refer to the section entitled Provision and Allowance for Loan
Losses for a detailed description of our estimation process and methodology related
to the allowance for loan losses.

Analysis of the Fiscal Years Ended
December 31, 2001 and 2002 and 2003

The
following discussion describes our results of operations for 2003 as compared to 2002 and
2002 compared to 2001 and also analyzes our financial condition as of December 31, 2003 as
compared to December 31, 2002. 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.

We
have included a number of tables to assist in our description of these measures. For
example, the Average Balances, Income and Expenses, and Rates table shows the
average balance during 2003 and 2002 of each category of our assets and liabilities, as
well as the yield we earned or the rate we paid with respect to each category. A review of
this table shows that our loans typically provide higher interest yields than do other
types of interest earning assets, which is why we intend to channel a substantial
percentage of our earning assets into our loan portfolio. Similarly, the Analysis of
Changes in Net Interest Income table helps demonstrate the impact of changing
interest rates and changing volume of assets and liabilities during the years shown. We
also track the sensitivity of our various categories of assets and liabilities to changes
in interest rates, and we have included a Interest Sensitivity Analysis Table
to help explain this. Finally, we have included a number of tables that provide detail
about our investment securities, our loans, our deposits and other borrowings.

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 Loans and Allowance for Loan Losses sections we have included
a detailed discussion of this process, as well as several tables describing our allowance
for loan losses and the allocation of this allowance among our various categories of
loans.

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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 Noninterest Income
and Expense section.

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.

Earnings Review

Overview.
          For the year ended December 31, 2003, our net income was $1,008,931, or $.77
          basic net income per common share, as compared to $707,271, or $.54 basic net
          income per common share, for the year ended December 31, 2002, and $459,294, or
          $0.46 basic net income per common share, for the year ended December 31, 2001.
          The improvement in net income in 2003 reflects our growth, with average earning
          assets increasing 51.7% to $133.4 million during 2003 from $88.0 million during
          the same period of 2002. Return on average assets and return on average
          shareholders equity are key measures of earnings performance. Return on
          average assets for 2003 was 0.70% compared to 0.75% in 2002 and 0.62% in 2001.
          Return on average shareholders equity for 2003 was 7.05% verses 5.24% in
          2002 and 3.97% in 2001. Our equity to assets ratio was 9.01% in 2003, 11.67% in
          2002 and 16.23% in 2001.

We
had total assets of $165.1 million at December 31, 2003, an increase of 39.4% from $118.4
million at December 31, 2002. Our total deposits increased to $138.1 million at December
31, 2003, up 38.3% from $99.9 million at December 31, 2002.

Net Interest Income

General.
          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. Our net interest income increased $1.7 million, or
          40.2%, to $6.0 million in 2003 from $4.3 million in 2002. Net interest income
          increased $1.3 million in 2002 from $3.0 million in 2001. The increase in net
          interest income was due primarily to the growth of our bank, as reflected in an
          increase in our average earning assets. Average earning assets increased to
          $133.4 million during 2003, a 51.7% increase from $88.0 million in 2002, which
          was a 26.3% increase from $69.6 million in 2001.

Net
interest spread, the difference between the rate we earn on interest-earning assets and
the rate we pay on interest-bearing liabilities, was 4.12% for the year ended December 31,
2003, compared to 4.13% for the year ended December 31, 2002 and 3.03% for the year ended
December 31, 2001. Our net interest margin, which is net interest income divided by
average interest-earning assets, was 4.51% for the year ended December 31, 2003, 4.88% for
the year ended December 31, 2002, and 4.34% for the year ended December 31, 2001. The
decrease in the net interest margin can be attributed to the decline in interest rates
that began in late November 2002 and continued to historically low levels during 2003.
Even though our average rates on earning assets fell from the 2002 levels, we were able to
mitigate the decline by further reducing our rates paid on our deposits.

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

10

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Average Balances, Income and Expenses, and Rates

|                           | For the year ended | For the year ended | For the year ended |            
|-------------------------- | ------------------ | ------------------ | ------------------ | -----------
|
|
|
|Federal funds sold         |                    |                    |                    |            
|and short term investments |                    |                    | $                  | 4,786,035  
|Investment securities      |                    |                    |                    | 12,187,267 
|Loans (1)                  |                    |                    |                    | 116,469,211
|                           |                    |                    |                    |            
|Total earning assets       |                    |                    | $                  | 133,442,513
|                           |                    |                    |                    |            
|Interest-bearing deposits  |                    |                   
|IBCA                       |                    |                    | $                  | 4,868,675  
|MMA                        |                    |                    |                    | 22,440,206 
|Savings                    |                    |                    |                    | 3,073,608  
|CD's <$100,000             |                    |                    |                    | 38,409,656 
|CD's >$100,000             |                    |                    |                    | 29,885,297 
|IRA                        |                    |                    |                    | 3,793,667  
|                           |                    |                    |                    |            
|Total interest-bearing     |                    |                   
|deposits                   |                    |                    | $                  | 102,471,109
|                           |                    |                    |                    |            
|Other borrowings           |                    |                    |                    | 7,676,230  
|                           |                    |                    |                    |            
|Total interest-            |                    |                   
|bearing liabilities        |                    |                    | $                  | 110,147,339
|                           |                    |                    |                    |            
|Net interest spread        |                    |                    |                    |            
|Net interest income/margin |                    |                    |                    |            
|                           |                    |                    |                    |            

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

11

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

Analysis of Changes in
Net Interest Income

|                             | For the year ended December 31, | For the year ended December 31, |  
|---------------------------- | ------------------------------- | ------------------------------- | -
|
|
|Federal funds sold and short |                                 |                                 |  
|term investments             |                                 |                                 | $
|Investment securities        |                                 |                                 |  
|Loans                        |                                 |                                 |  
|                             |                                 |                                 |  
|Total earning assets         |                                 |                                 |  
|Interest-bearing deposits    |                                 |                                 |  
|Other borrowings             |                                 |                                 |  
|                             |                                 |                                 |  
|Total interest-bearing       |                                 |                                
|liabilities                  |                                 |                                 |  
|                             |                                 |                                 |  
|Net interest income          |                                 |                                 | $
|                             |                                 |                                 |  

(1)    
          Volume-rate changes have been allocated to each category proportionately based on the to the computations.

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.

One
monitoring technique we employ is the measurement of our interest rate sensitivity
gap, which is the difference between the amount of interest-earning assets and
interest-bearing liabilities that mature or may reprice 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 asset-sensitive over
the cumulative one-year time frame as of December 31, 2003. However, 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
non-core 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.

The
following table summarizes the amounts of interest-earning assets and interest-bearing
liabilities outstanding at December 31, 2003 that are expected to mature, prepay, or
reprice in each of the future time periods shown. Except as stated in the following
tables, we determined the amount of assets or liabilities that mature or reprice during a
particular period in

12

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accordance with the contractual terms
of the asset or liability. We included adjustable rate loans in the period in which
interest rates are next scheduled to adjust rather than in the period in which they are
due, and we included fixed rate loans in the periods in which we anticipate they will be
repaid based on scheduled maturities. We included our savings accounts and
interest-bearing demand accounts (interest bearing checking and money market deposit
accounts), which are generally subject to immediate withdrawal, in the Three Months
or Less category, although our historical experience has proven these deposits to be
more stable over the course of a year.

|                                   | Interest Sensitivity Analysis |  |  
|---------------------------------- | ----------------------------- |  | -
|
|
|
|
|Assets                             |                               |  |  
|Earning assets:                    |                               | 
|Federal funds sold and short       |                               | 
|term investments                   |                               |  | $
|Investments, including FHLB & FRB  |                               |  |  
|Total loans (1)                    |                               |  |  
|                                   |                               |  |  
|Total earning assets               |                               |  | $
|                                   |                               |  |  
|Liabilities                        |                               | 
|Interest-bearing liabilities       |                               | 
|Money market and interest checking |                               |  | $
|Regular savings deposits           |                               |  |  
|Time deposits  < $100,000          |                               |  |  
|> $100,000                         |                               |  |  
|Other borrowings                   |                               |  |  
|                                   |                               |  |  
|Total interest-bearing liabilities |                               |  | $
|                                   |                               |  |  
|Period gap                         |                               |  | $
|Cumulative gap                     |                               |  | $
|Ratio of cumulative gap to total   |                               | 
|earning assets                     |                               |  |  

(1)       
          Non-accrual loans in the amount of $366,326 are not included in the above table.

Allowance for Loan Losses

The
adequacy of the allowance is analyzed on a quarterly basis. For purposes of this analysis,
adequacy is defined as a level of reserves sufficient to absorb probable losses inherent
in the portfolio. The methodology employed for this analysis considers historical loan
loss experience, the results of loan reviews, current economic conditions, and other
qualitative and quantitative factors that warrant current consideration in determining an
adequate allowance.

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 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 or conditions may include evaluation of current general economic
and business conditions; geographic, collateral, or other concentrations; system,
procedural, policy, or underwriting changes; experience of lending staff; entry into new
markets or new product offerings; and results from internal and external portfolio
examinations.

13

---

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.

Assessing
the adequacy of the allowance is a process that requires considerable judgment.
Managements methodology and judgments are based on the information currently
available and includes numerous assumptions about current events, which we believe to be
reasonable, but which may or may not be valid. Thus, there can be no assurance that loan
losses in future periods will not exceed the current allowance amount or that future
increases in the allowance will not be required. No assurance can be given that
managements ongoing evaluation of the loan portfolio in light of changing economic
conditions and other relevant circumstances will not require significant future additions
to the allowance, thus adversely affecting the operating results of the Company.
Management believes that the current level of the allowance for loan losses is presently
adequate considering the composition of the loan portfolio, the portfolios loss
experience, delinquency trends, current regional and local economic conditions and other
factors.

The
allowance is also 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. In
addition, such regulatory agencies could require the Company to adjust the allowance based
on information available to them at the time of their examination.

At
December 31, 2003, our allowance for loan losses was $1,760,481, or 1.30% of total
outstanding loans, compared to an allowance for loans losses of $1,275,778, or 1.37% of
outstanding loans, at December 31, 2002, and $851,222, or 1.35% at December 31, 2001.

Provision for loan losses

As
a result of growth in loans receivable, the companys provision for loan losses was
$713,000 for 2003, $539,000 for 2002 and $467,000 for 2001. The allowance for loan losses
as a percentage of total loans was 1.30% at December 31, 2003, 1.37% at 2002 and 1.35% at
2001. Loans delinquent 90 days or more were 0.11% of total loans at December 31, 2003
compared to 0.05% at December 31, 2002 and 0.16% at December 31, 2001. The allowance for
loan losses was 1,187% of loans delinquent more than 90 days at December 31, 2003 and
2,669% at December 31, 2002 compared to 973% for December 31, 2001. Management believes
that the current level of the allowance for loan losses is adequate considering the
composition of the loan portfolio, the portfolios loss experience, delinquency
trends, current regional and local economic conditions and other factors. Also see
Nonperforming Assets and Allowance for Loan Losses.

Non performing 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
December 31, 2003, there were no loans accruing interest which were 90 days or more past
due, and we did not have any restructured loans.

We
had three nonaccruing loans totaling $366,326 at December 31, 2003. One loan in the amount
of $168,148 is a commercial loan secured by a first mortgage, one commercial loan in the
amount of $148,328 secured by an assignment of a lease, and a commercial loan in the
amount of $49,850 secured by a piece of construction equipment. We had one nonaccruing
loan totaling $46,388 at December 31, 2002. Interest income that would have been received
for the year ended December 31, 2003 had nonaccruing loans been current in accordance with
their original terms amounted to $19,720.

We
do not include loans that are current as to principal and interest in our nonperforming
assets categories. However, we will still classify a current loan as a potential problem
loan if we develop serious doubts about the borrowers future performance under the
terms of the loan contract. We consider the level of potential problem loans in our
determination of the adequacy of the allowance for loan losses. At December 31, 2002 and
2001, we did not have any loans we considered to be potential problem loans. At December
31, 2003, we had classified loans totaling $2,061,145 that we have classified substandard
and have made a specific allocation in the allowance for loan losses. 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 years ended December 31, 2003, 2002 and
2001.

14

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Allowance for Loan Losses
(Dollars in Thousands)

|                                                   | December 31,
|-------------------------------------------------- | ------------
|
|Average loans outstanding                          |             
|Loans outstanding at period end                    |             
|                                                   |             
|Total nonperforming loans                          |             
|                                                   |             
|Beginning balance of allowance                     |             
|Loans charged off:                                 |             
|Real Estate                                        |             
|Commercial                                         |             
|Consumer                                           |             
|                                                   |             
|Total loans charged off:                           |             
|Recoveries:                                        |             
|Real Estate                                        |             
|Commercial                                         |             
|Consumer                                           |             
|                                                   |             
|Total recoveries:                                  |             
|                                                   |             
|Net loans charged off                              |             
|Provision for loan losses                          |             
|                                                   |             
|Balance at period end                              |             
|                                                   |             
|Net charge-offs to average loans                   |             
|Allowance as a percent of total loans              |             
|Nonperforming loans as a percentage of total loans |             
|Nonperforming loans as a percentage of allowance   |             
|Ratio of net charge-offs to average total loans    |             
|outstanding during the period                      |             

15

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The
following table sets forth the breakdown of the allowance for loan losses by loan category
and the percentage of loans in each category to total loans for the periods indicated. 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.

|                         |  | Allocation of the Allowance for Loan Losses |   |           | 
|------------------------ |  | ------------------------------------------- | - | --------- | 
|
|
|Commercial               |  |                                             | $ | 400,847   | 
|Real Estate Construction |  |                                             |   | 105,680   | 
|Real Estate Mortgage     |  |                                             |   | 1,162,376 | 
|Consumer                 |  |                                             |   | 91,578    | 
|                         |  |                                             |   |           | 
|Total allowance for      |  |                                            
|loan losses              |  |                                             | $ | 1,760,481 | 
|                         |  |                                             |   |           | 

Noninterest Income and Expense

Noninterest
Income. Noninterest income increased to $986,834 for the year ended December 31, 2003, up
34.9% from $731,624 for the year ended December 31, 2002. Noninterest income increased 92%
from $381,112 in 2001. Service fees on deposit accounts, the largest component of
noninterest income, increased 16.8% to $490,694 in 2003 from $420,128 in 2002. Service fee
income increased $124,504, or 42.1%, in 2002 from $295,624 in 2001. Service fees on
deposit accounts increased due to the growth in the number of deposit accounts and
increased fee-related activities of customers. The net gain on the sale of investment
securities was $134,530 for 2003 and $977 in 2002. The bank purchased bank owned life
insurance in mid-2002 and income from cash value life insurance was $161,544 in 2003
compared to $80,222 in 2002. Other income increased 50.0% to $200,066 in 2003 from
$133,411 in 2002, and increased 56.1% from $85,488 in 2001. Other income increased due to
fees collected in the origination of mortgage loans and the increase in electronic
transactions on debit cards.

Noninterest
Expense. Total noninterest expense increased to $4.7 million for the year ended December
31, 2003 from $3.4 million for 2002, and from $2.4 million for the year ended December 31,
2001. The increase in noninterest expense reflects an increase in most expense categories
as a result of our growth to $165.0 million in total assets at the end of 2003 from $118.4
million at the end of 2002, up from $80.8 million for the year ended December 31, 2001.
Salary and wages expense totaled $2.1 million in 2003, $1.5 million in 2002, and $1.1
million in 2001. Employee benefits were $400,579 in 2003, $275,694 in 2002, and $190,076
in 2001. We had 46 full-time employees at the end of 2003, an increase of 5
from the end of 2002 and an increase of 16 from the end of 2001. Staffing increases are
primarily due to the opening of new branch offices in Surfside Beach, SC during the second
quarter of 2001, in North Myrtle Beach, SC during the fourth quarter of 2002, and in the
Hilton Head Island office during the fourth quarter of 2002. In 2003, we also hired two
mortgage originators, one to serve the North Strand and one to serve in Hilton Head
Island.

Advertising
and public relations expenses continue to be a major expense item as we develop our
presence in North Myrtle Beach and Hilton Head Island. In 2003 advertising and public
relations expense increased $51,061 to $168,138 from $117,077 in 2002 and $81,605 in 2001.
Depreciation and amortization increased to $428,609 from $320,590 in 2002 and $233,449 in
2001. Increases are the primary result of the first full year depreciation and
amortization from our expansion of branch offices since 2001. Occupancy costs for the year
ended December 31, 2003 were $362,202, compared to $239,774 in 2002 and $121,114 in 2001.
These annual increases are the result of branch expansion that occurred during these
periods.

Data
processing fees increased in 2003 to $308,568 from $215,397 in 2002 and $156,422 in 2001.
In October 2001, the bank converted to a new data processing vendor, reducing our account
processing costs; however, additional features and functions were added to provide
efficiency and competitive advantages. In addition, the volume of loan and deposit
accounts and associated transaction activity has increased, thus increasing our data
processing costs.

16

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We
experienced an increase in other operating expenses to $703,317 in 2003, from $483,988 in
2002 and from $344,052 in 2001, principally as a result of an increase in operating
expenses related to the new branch offices opened during these periods, along with other
expenses associated with the expansion of loans and deposits. Specifically, armored car
and courier expenses increased $23,011, travel and entertainment increased $36,141, debit
card and ATM card expenses increased $36,917, totaling $96,069 of the total increase of
$219,329. Expenses related to the bank owned life insurance increased $11,356.

Income
Taxes. Total income tax expense included in the Consolidated Statements of Income was
$589,643 in 2003, $419,220 in 2002 and $75,517 in 2001. Our effective tax rates were 37%,
37% and 14%, respectively. Our effective tax rate was lower in 2001 primarily because of
the valuation of a loss carry forward that resulted in a tax valuation allowance in the
amount of $112,279.

Financial Condition

Loans.
          Loans are our largest component of earning assets and typically provide higher
          yields than our other types of earning assets. At December 31, 2003, loans
          represented 87.3% of average earning assets, representing an increase over the
          86.2% that they represented at the end of 2002. At December 31, 2003, net loans
          (gross loans less the allowance for loan losses) totaled $133.9 million, an
          increase of $41.8 million, or 45.5%, from December 31, 2002. Average gross loans
          increased 53.6% from $75.9 million with a yield of 7.78% in 2002, to $116.7
          million with a yield of 6.81% in 2003. Average gross loans increased from $56.1
          million with a yield of 8.98% in 2001. The decrease in yield on loans during
          these periods is due to the declining interest rate environment. Associated with
          the higher loan yields are the inherent credit and liquidity risks which we
          attempt to control and counterbalance. The interest rates we charge on loans
          vary with the degree of risk and the maturity and amount of the loan.
          Competitive pressures, money market rates, availability of funds, and government
          regulations also influence interest rates.

Mortgage
loans constitute the principal component of our loan portfolio. Mortgage loans represented
66.3% and 61.7% of our portfolio at year end 2003 and 2002, 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. Most of our real estate loans are secured by residential or
commercial property. We follow the common practice of financial institutions in our area
of obtaining a security interest in real estate whenever possible, in addition to any
other available collateral. This collateral is taken to reinforce the likelihood of the
ultimate repayment of the loan and tends to increase the magnitude of the real estate loan
portfolio component. Generally, we limit our loan-to-value ratio to 80%. We attempt to
maintain a relatively diversified loan portfolio to help reduce the risk inherent in
concentrations of collateral.

17

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The following table shows the
composition of our loan portfolio by category at December 31, 2003 and 2002.

|                           | Composition of Loan Portfolio |  |  
|-------------------------- | ----------------------------- |  | -
|
|
|
|Commercial                 |                               |  | $
|Real estate - construction |                               |  |  
|Real estate - mortgage     |                               |  |  
|Consumer                   |                               |  |  
|                           |                               |  |  
|Loans, total               |                               |  |  
|                           |                               |  |  
|Allowance for loan         |                               | 
|losses                     |                               |  |  
|                           |                               |  |  
|Loans, net                 |                               |  | $
|                           |                               |  |  

The
following tables set forth the maturity distribution, classified according to sensitivity
to changes in interest rates, for selected components of our loan portfolio as of December
31, 2003 and 2002. The information in these tables is based on the contractual maturities
of the individual loans, including loans which may be subject to renewal at their
contractual maturity. Renewal of these loans is subject to review and credit approval, as
well as modification of terms upon their maturity. Actual repayments of loans may differ
from maturities reflected above because borrowers may have the right to prepay obligations
with or without prepayment penalties.

Loan Maturity Schedule
and Sensitivity to Changes in Interest Rates

December 31, 2003

|                         |  | After one but within |   |           
|------------------------ |  | -------------------- | - | ----------
|
|Commercial               |  |                      | $ | 14,178,212
|Real estate mortgage     |  |                      |   | 23,892,097
|Real estate construction |  |                      |   | 5,886,960 
|Consumer                 |  |                      |   | 2,157,272 
|                         |  |                      |   |           
|Total                    |  |                      | $ | 46,114,541
|                         |  |                      |   |           
|Fixed Interest Rate      |  |                      | $ | 20,296,258
|Variable Interest Rate   |  |                      |   | 25,818,283
|                         |  |                      |   |           
|Total                    |  |                      | $ | 46,114,541
|                         |  |                      |   |           

Investment
Securities. Investment securities at December 31, 2003 and December 31, 2002 averaged
$12.2 million, representing 9.1% of average earning assets and $7.6 million, representing
8.6% of average earning assets, respectively. This increase is due to a leveraging of the
securities portfolio during 2003. At December 31, 2003, our total portfolio had a book
value of $12.1 million, and a market value of $11.9 million, for an unrealized net loss of
$221,961. This compares to our market value at December 31, 2002 of $7.6 million, and at
December 31, 2001 of $5.7 million.

At
December 31, 2003, short term investments totaled $4.6 million. At December 31, 2002, we
had short-term investments of $5.4 million. At December 31, 2001, we had short-term
investments of $5.7 million. These funds are generally invested in an earning capacity
with maturities of six months or less in federal funds or in U.S. Government Agency and
mortgage backed securities.

18

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Contractual
maturities and yields on our investment securities (all available for sale) at December
31, 2003, 2002, and 2001 are set forth on the following tables based on market values.
Expected maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment penalties.

Investment Securities Maturity Distribution and Yields
December 31, 2003

|                  |  |  | After one year but | After five years but |  |  |      
|----------------- |  |  | ------------------ | -------------------- |  |  | -----
|
|
|U S Govt Agencies |  |  | $                  | 301,262              |  |  | 3.25%
|Mortgage-backed   |  |  |                    | -                    |  |  | -    
|Other             |  |  |                    | -                    |  |  | -    
|                  |  |  |                    |                      |  |  |      
|Total             |  |  | $                  | 301,262              |  |  | 3.25%
|                  |  |  |                    |                      |  |  |      

Funding Sources

Deposits
and Other Interest-Bearing Liabilities. Average total deposits were $121.7 million in
2003, up 55.4% from $78.3 million in 2002. Average interest-bearing deposits were $102.5
million in 2003, up 57.9% from $64.9 million in 2002. These increases were primarily a
result of the continued expansion of the company.

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 $102.3 million at December 31, 2003, an increase of 29.7% compared to $78.9 million
at December 31, 2002. We expect a stable base of deposits to continue 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 74.1% at December 31, 2003 and 79.0%
at December 31, 2002. Our loan-to-deposit ratio was 98.2% at December 31, 2003 versus
93.4% at December 31, 2002. The average loan-to-deposit ratio was 95.7% during 2003, 96.9%
during 2002, and 85.4% during 2001.

The
following tables set forth our deposits by category as of December 31, 2003 and 2002.

Deposits

|                          | December 31, 2003 | December 31, 2002
|------------------------- | ----------------- | -----------------
|
|
|Demand deposit accounts   |                   |                  
|Interest bearing checking |                   |                  
|Money market accounts     |                   |                  
|Savings accounts          |                   |                  
|Time deposits < $100,000  |                   |                  
|Time deposits > $100,000  |                   |                  
|                          |                   |                  
|Total deposits            |                   |                  
|                          |                   |                  

19

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Average Balances and Rates

|                          | December 31, 2003 | December 31, 2002
|------------------------- | ----------------- | -----------------
|
|
|Demand deposit accounts   |                   |                  
|Interest bearing checking |                   |                  
|Money market accounts     |                   |                  
|Savings accounts          |                   |                  
|Time deposits < $100,000  |                   |                  
|Time deposits > $100,000  |                   |                  
|                          |                   |                  
|Total deposits            |                   |                  
|                          |                   |                  

As
of December 31, 2003, time deposits greater than $100,000 that matured within three months
were $13.8 million, those within 3-12 months were $21.3 million. Time deposits greater
than $100,000 that had a maturity greater than 12 months were $5.7 million, with no
maturities greater than five years.

Due
to the seasonal nature of our market areas, deposit growth is strong during the summer
months and loan demand usually reaches its peak during the winter months. Thus, we
historically have a more favorable liquidity position during the summer months. To meet
loan demand and liquidity needs during the winter months, we typically invest significant
amounts of our deposit growth during the summer months in temporary investments and
short-term securities maturing in the winter months. Additionally, the company has access
to other funding sources including federal funds purchased from correspondent banks and a
line of credit with the Federal Home Loan Bank (FHLB).

Borrowings.
          During 2003, we had average short-term borrowings of $7.7 million compared to
          $1.9 million in average short term borrowings for 2002. Total borrowings
          outstanding at December 31, 2003, were $11.5 million and $4.0 million at
          December 31, 2002. Maximum amount outstanding during any month-end period at
          December 31, 2003 was $11.5 million at an average rate of 2.79% and $4.0 million
          at an average rate of 3.69% as of December 31, 2002. These funds were obtained
          from the Federal Home Loan Bank to help fund our loan growth. For more
          information concerning borrowings from the FHLB, refer to Note 8 of the Notes to
          the Consolidated Financial Statements.

Capital Standards and
Regulatory Matters        We
are subject to various regulatory capital requirements administered by our federal bank
regulators. Under these capital guidelines, we must maintain a minimum total risk-based
capital ratio of 8%, with at least 4% being Tier 1 capital. In our case, our Tier 1
capital consists of our common shareholders equity, although Tier 1 capital could
also include other components, such as qualifying perpetual preferred stock and minority
interests in equity accounts of consolidated subsidiaries. In addition, we must maintain a
minimum Tier 1 leverage ratio (Tier 1 capital to total average assets) of at least 4%. 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%. For
further information concerning the Banks and the Companys capital standards,
refer to Note 17 of the Notes to the Consolidated Financial Statements.

Liquidity Management        
Our primary sources of liquidity are deposits, scheduled repayments on our loans, and interest on and maturities of our
investments. 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 $6.8
million. We also are eligible to receive advances from the Federal Home Loan Bank of
Atlanta, subject to its approval. At December 31, 2003, the Bank had the ability to borrow
an additional $2.7

20

---

million from the FHLB secured by a blanket lien on one to four family
first mortgage loans. FHLB has approved borrowings up to 15% of the banks total
assets less advances outstanding. The borrowings are available by pledging collateral and
purchasing additional stock in the FHLB. We believe that our liquidity and ability to
manage assets will be sufficient to meet our cash requirements over the near term.

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. At December 31, 2003, we had issued commitments to extend credit of $15.5
million through various types of commercial lending arrangements, of which $13.2 million
was at variable rates. 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.

The
commitments expire over the next 36 months. Past experience indicates that many of these
commitments to extend credit will expire unused. However, as described in Liquidity
and Asset and Liability Management, we believe that we have adequate sources of
liquidity to fund commitments that may be drawn upon by 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 $3.2
million at December 31, 2003. 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

Unlike
most industrial companies, the assets and liabilities of financial institutions such as
our company and bank are primarily monetary in nature. Therefore, interest rates have a
more significant impact on our performance than do the effects of changes in the general
rate of inflation and changes in prices. In addition, interest rates do not necessarily
move with the same magnitude as the prices of goods and services. As discussed previously,
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.

21

---

Report of Management

The consolidated financial statements
of Beach First National Bancshares, Inc., and other financial information included in this
summary Annual Report were prepared by management responsible for the integrity of the
information presented. The statements have been prepared in conformity with generally
accepted accounting principles appropriate in the circumstances and include amounts that
are based on managements best estimates and judgment.

The Company maintains accounting and
control systems which are believed to provide reasonable assurance that assets are
safeguarded from loss or unauthorized use and produce records adequate for preparation of
financial information. Management recognizes the limits inherent in any system of internal
control as the cost of controls should not exceed the benefits derived. Management
believes the system provides an appropriate balance.

In order to monitor compliance with
its system of controls, the Company employs Tourville and Associates, LLP to perform
quarterly internal audits of controls and compliance with systems and controls. Audit
reports are issued to management and the Audit Committee of the Board of Directors. The
independent accountants receive copies of these reports and the reports are available for
review by regulatory authorities.

The Audit Committee of the Board of
Directors meets as necessary with management, the independent auditors, and the
independent accountants to review audit scopes, audit reports, and fee arrangements of the
independent accountants, in order to evaluate managements performance of its
financial reporting responsibility. Both the independent auditors and accountants have
access to the Audit Committee without any management present in the discussions.
Independent accountants are recommended by the Audit Committee to the Board of Directors
for selection.

Elliott Davis LLC, as independent
certified public accountants, is engaged to provide an objective, independent review as to
managements discharge of its responsibilities relating to the fairness of reported
operating results and financial condition. They have an understanding of the
Companys accounting and financial controls and conduct such tests and related
procedures as they deem appropriate to arrive at an opinion of the fairness of the
financial statements. Their opinion is included as a part of the Companys 2003
Annual Report on Form 10-KSB.

Our management is committed to, and
has always maintained and enforced, a philosophy of high ethical standards in the conduct
of its business. The policies covering conflicts of interest, community affairs, and other
subjects, are uniformly applicable to all officers and employees of our Company.

Beach First National
Bancshares, Inc.Myrtle Beach, South Carolina March 4, 2004

22

---

BEACH FIRST NATIONAL
BANCSHARES, INC.

INDEPENDENT
ACCOUNTANTS REPORT

Board of DirectorsBeach
First National Bancshares, Inc.Myrtle Beach, South Carolina

We have audited the accompanying
consolidated balance sheets of Beach First National Bancshares, Inc. (the Company) and
Subsidiary as of December 31, 2003 and 2002 and the related consolidated statements of
income, changes in shareholders equity and comprehensive income and cash flows for
each of the years in the three period ended December 31, 2003. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based
on our audits.

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

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Beach First National Bancshares, Inc. and Subsidiary at
December 31, 2003 and 2002 and the results of their operations and cash flows for each of
the years in the three year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.

/s/ Elliott Davis, LLCElliott
Davis, LLCColumbia, South CarolinaJanuary 16, 2004

23

---

Beach First National
Bancshares, Inc. and SubsidiaryConsolidated Balance Sheets

|                                                          | December 31,
|--------------------------------------------------------- | ------------
|
|Assets                                                    |             
|Cash and due from banks                                   |             
|Federal funds sold and short term investments             |             
|Investment securities                                     |             
|Loans, net                                                |             
|Federal Reserve Bank stock                                |             
|Federal Home Loan Bank stock                              |             
|Property and equipment, net                               |             
|Cash value of life insurance                              |             
|Other assets                                              |             
|                                                          |             
|Total assets                                              |             
|                                                          |             
|Liabilities and shareholders' equity                      |             
|Liabilities                                               |             
|Deposits                                                  |             
|Non-interesting bearing                                   |             
|Interest bearing                                          |             
|                                                          |             
|Total deposits                                            |             
|                                                          |             
|Advances from Federal Home Loan Bank                      |             
|Other liabilities                                         |             
|                                                          |             
|Total liabilities                                         |             
|Commitments and contingencies - Notes 10 and 13           |             
|Shareholders' equity                                      |             
|Common stock, $1 par value, 10,000,000 shares authorized, |             
|1,323,768 shares issued and outstanding at December       |             
|31, 2003 and 1,318,368 at December 31, 2002               |             
|Paid-in capital                                           |             
|Retained earnings                                         |             
|Accumulated other comprehensive income (loss)             |             
|                                                          |             
|Total shareholders' equity                                |             
|                                                          |             
|Total liabilities and shareholders' equity                |             
|                                                          |             

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

24

---

Beach First National
Bancshares, Inc. and SubsidiaryConsolidated Statements of Income

|                                              | For the years ended December 31 |  |  
|--------------------------------------------- | ------------------------------- |  | -
|
|Interest income                               |                                 |  |  
|Loans and fees on loans                       |                                 |  | $
|Investment securities                         |                                 |  |  
|Federal funds sold and short term investments |                                 |  |  
|                                              |                                 |  |  
|Total interest income                         |                                 |  |  
|Interest expense                              |                                 | 
|Deposits                                      |                                 |  |  
|Borrowings                                    |                                 |  |  
|                                              |                                 |  |  
|Total Interest Expense                        |                                 |  |  
|Net interest income                           |                                 |  |  
|Provision for loan losses                     |                                 |  |  
|                                              |                                 |  |  
|Net interest income after provision for       |                                 | 
|loan losses                                   |                                 |  |  
|                                              |                                 |  |  
|Noninterest income                            |                                 | 
|Service fees on deposit accounts              |                                 |  |  
|Gain on sale of loan                          |                                 |  |  
|Gain on sale of investment securities         |                                 |  |  
|Income from cash value life insurance         |                                 |  |  
|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 number of common             |                                 | 
|Shares outstanding                            |                                 | 
|Basic                                         |                                 |  |  
|                                              |                                 |  |  
|Diluted                                       |                                 |  |  
|                                              |                                 |  |  

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

25

---

Beach First National
Bancshares, Inc. and SubsidiaryConsolidated Statements of Changes in Shareholders' Equity and Comprehensive Income

|                                   |  |  |  |           | Accumulated |   |          
|---------------------------------- |  |  |  | --------- | ----------- | - | ---------
|
|
|
|Balance, December 31, 2000         |  |  |  | 737,368   |             |   | 737,368  
|                                   |  |  |  |           |             |   |          
|Net income                         |  |  |  | -         |             |   | -        
|Other comprehensive income, net of |  | 
|taxes:                             |  | 
|Unrealized gain on investment      |  | 
|securities                         |  |  |  | -         |             |   | -        
|Plus reclassification adjustments  |  | 
|for losses included in net income  |  |  |  | -         |             |   | -        
|                                   |  |  |  |           |             |   |          
|Comprehensive income               |  | 
|                                   |  |  |  | -         |             |   | -        
|Issuance of common stock, less     |  | 
|offering expenses of $258,824      |  |  |  | 581,000   |             |   | 581,000  
|                                   |  |  |  |           |             |   |          
|Balance, December 31, 2001         |  |  |  | 1,318,368 |             |   | 1,318,368
|                                   |  |  |  |           |             |   |          
|Net income                         |  |  |  | -         |             |   | -        
|Other comprehensive income, net of |  | 
|taxes:                             |  |  |  | -         |             |   | -        
|Unrealized gain on investment      |  | 
|securities                         |  |  |  | -         |             |   | -        
|                                   |  |  |  |           |             |   |          
|Comprehensive income               |  | 
|                                   |  |  |  | -         |             |   | -        
|                                   |  |  |  |           |             |   |          
|Balance, December 31, 2002         |  |  |  | 1,318,368 |             |   | 1,318,368
|                                   |  |  |  |           |             |   |          
|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          |  | 
|                                   |  |  |  | 5,400     |             |   | 5,400    
|                                   |  |  |  |           |             |   |          
|Balance, December 31, 2003         |  |  |  | 1,323,768 |             | $ | 1,323,768
|                                   |  |  |  |           |             |   |          

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

26

---

Beach First National
Bancshares, Inc. and SubsidiaryConsolidated Statements of Cash Flows

|                                                         | For the years ended December 31, | 
|-------------------------------------------------------- | -------------------------------- | 
|
|                                                         |                                  | 
|Net income                                               |                                  | 
|Adjustments to reconcile net income to net               |                                  | 
|cash provided by operating activities:                   |                                  | 
|Depreciation and amortization                            |                                  | 
|Accretion of deferred loan fees                          |                                  | 
|Discount accretion and premium amortization              |                                  | 
|Deferred income taxes                                    |                                  | 
|Provision for loan losses                                |                                  | 
|Gain on sale of investment securities                    |                                  | 
|Decrease (increase) in other assets                      |                                  | 
|Increase in other liabilities                            |                                  | 
|                                                         |                                  | 
|Net cash provided by operating activities                |                                  | 
|                                                         |                                  | 
|Investing activities                                     |                                  | 
|Proceeds from sale of investment securities              |                                  | 
|Purchase of investment securities                        |                                  | 
|Purchase of FHLB stock                                   |                                  | 
|Purchase of Federal Reserve stock                        |                                  | 
|Decrease (increase) in Federal funds sold and short term |                                  | 
|investments                                              |                                  | 
|Increase in loans, net                                   |                                  | 
|Proceeds from sale of real estate acquired in            |                                  | 
|settlement of loans                                      |                                  | 
|Purchase of premises and equipment                       |                                  | 
|Purchase of life insurance contracts                     |                                  | 
|                                                         |                                  | 
|Net cash used by investing activities                    |                                  | 
|                                                         |                                  | 
|Financing activities                                     |                                  | 
|Advances from Federal Home Loan Bank                     |                                  | 
|Net increase in deposits                                 |                                  | 
|Exercise of stock options                                |                                  | 
|Issuance of common stock                                 |                                  | 
|                                                         |                                  | 
|Net cash provided by financing activities                |                                  | 
|                                                         |                                  | 
|Net increase in cash                                     |                                  | 
|Cash and cash equivalents at beginning of year           |                                  | 
|                                                         |                                  | 
|Cash and equivalents at end of year                      |                                  | 
|                                                         |                                  | 
|Cash paid for                                            |                                  | 
|Interest                                                 |                                  | 
|                                                         |                                  | 
|Income taxes                                             |                                  | 
|                                                         |                                  | 
|Schedule of noncash investing activity                   |                                  | 
|Real estate acquired in settlement of loans              |                                  | 
|                                                         |                                  | 

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

27

---

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES

Beach First National Bancshares, Inc.
(the Company) is organized under the laws of the State of South Carolina for
the purpose of operating as a bank holding company for Beach First National Bank (the
Bank). The Bank provides full commercial banking services to customers and is
subject to regulation by the Office of the Comptroller of the Currency (OCC) and the
Federal Deposit Insurance Corporation. The Company is subject to regulation by the Federal
Reserve Board.

Basis of presentation - The
consolidated financial statements include the accounts of the Company and the Bank. All
significant intercompany accounts and transactions have been eliminated in consolidation.
The accounting and reporting policies of the Company conform to accounting principles
generally accepted in the United States of America and to general practices in the banking
industry. The Company uses the accrual basis of accounting.

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

Concentrations of credit risk -
The Company, through its subsidiary, makes loans to individuals and businesses in and
around Horry County and Beaufort County for various personal and commercial purposes. The
Company has a diversified loan portfolio and the borrowers ability to repay their
loans is not dependent upon any specific economic sector.

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

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

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

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

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

Other investments - The Bank, as
a member institution, is required to own certain stock investments in the Federal Home
Loan Bank of Atlanta and the Federal Reserve Bank. The stock is generally pledged against
any borrowings from these institutions. No ready market exists for the stocks and they
have no quoted market value. However, redemption of these stocks has historically been at
par value.

28

---

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES - continued

Loans, interest and fee income on
loans - Loans are stated at the principal balance outstanding. Unamortized loan fees
and the allowance for loan losses are deducted from total loans in the balance sheet.
Interest income is recognized over the term of the loan based on the principal amount
outstanding. Points on real estate loans are taken into income to the extent they
represent the direct cost of initiating a loan. The amount in excess of direct costs is
deferred and amortized over the expected life of the loan.

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

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

The Company accounts for impaired
loans in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a
Loan. This standard requires that all lenders value loans at the loans fair
value if it is probable that the lender will be unable to collect all amounts due
according to the terms of the loan agreement. Fair value may be determined based upon the
present value of expected cash flows, market price of the loan, if available, or value of
the underlying collateral. Expected cash flows are required to be discounted at the
loans effective interest rate. SFAS No. 114 was amended by SFAS No. 118 to allow a
lender to use existing methods for recognizing interest income on an impaired loan and by
requiring additional disclosures about how a creditor recognizes interest income on an
impaired loan.

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

A loan is also considered impaired if
its terms are modified in a troubled debt restructuring. For these accruing impaired
loans, cash receipts are typically applied to principal and interest receivable in
accordance with the terms of the restructured loan agreement. Interest income is
recognized on these loans using the accrual method of accounting. As of December 31, 2003
and 2002, the Company had no impaired loans.

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

29

---

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES - continued

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

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

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

Earnings per share- basic is
computed by dividing net income by the weighted average number of common shares
outstanding. Earnings per share  diluted is computed by dividing net income by the
weighted average number of common shares outstanding and dilutive common share equivalents
using the treasury stock method. Dilutive common share equivalents include common shares
issuable upon exercise of outstanding stock options.

|                                            | For the years ended December 31,
|------------------------------------------- | --------------------------------
|
|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                  |                                 
|                                            |                                 

30

---

Stock Based Compensation - The
Company has a stock-based employee compensation plan which is further described in Note
15. The Company accounts for the plan under the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all stock options granted under these
plans had an exercise price equal to the market value of the underlying common stock on
the date of grant. The following table illustrates the effect on net income and net income
per common share as if the Company had applied the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.

|                                            | For the years ended December 31, | 
|------------------------------------------- | -------------------------------- | 
|
|Net income, as reported                     |                                  | 
|Deduct:  Total stock-based employee         |                                  | 
|compensation expense determined             |                                  | 
|under fair value based method               |                                  | 
|for all awards,  net of related tax effects |                                  | 
|                                            |                                  | 
|Pro forma net income                        |                                  | 
|                                            |                                  | 
|Net income per common share                 |                                  | 
|Basic - as reported                         |                                  | 
|                                            |                                  | 
|Basic - pro forma                           |                                  | 
|                                            |                                  | 
|Diluted - as reported                       |                                  | 
|                                            |                                  | 
|Diluted - pro forma                         |                                  | 
|                                            |                                  | 

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

Recently issued accounting
pronouncements

In December 2002, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 148, Accounting for Stock-based Compensation
Transition and Disclosure, an amendment of FASB Statement No. 123, Accounting
for Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123
and APB Opinion No. 28, Interim Financial Reporting, to require
disclosure in the summary of significant accounting policies of the effects of an
entitys accounting policy with respect to stock-based employee compensation on
reported net income and earnings per share in annual and interim financial statements.
While SFAS No. 148 does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the disclosure provisions of SFAS
No. 148 are applicable to all companies with stock-based employee compensation,
regardless of whether they account for that compensation using the fair value method of
SFAS No. 123 or the intrinsic value method of APB Opinion No. 25. The provisions
of SFAS No. 148 are effective for annual financial statements for fiscal years ending
after December 15, 2002, and for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. The Company adopted
this standard effective

31

---

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES -continued

December 31, 2002 and has included
the required disclosures in the footnotes to the financials. The Company has not elected
the fair value treatment of stock-based compensation and the adoption of this standard had
no impact on its financial position.

In April 2003, the FASB issued SFAS
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other contracts and loan
commitments that relate to the origination of mortgage loans held for sale, and for
hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for
contracts entered into or modified after June 30, 2003. The adoption of SFAS
No. 149 did not have a material impact on the financial condition or operating
results of the Company.

In May 2003, the FASB issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances.) Many of those
instruments were previously classified as equity. SFAS No. 150 is generally effective
for financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 did not have a material impact on the financial
condition or operating results of the Company.

In November 2002, the FASB issued
Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN No. 45 requires a company, at the time it issues a guarantee, to
recognize an initial liability for the fair value of obligations assumed under the
guarantee and elaborates on existing disclosure requirements related to guarantees and
warranties. The initial recognition requirements of FIN No. 45 are effective for
guarantees issued or modified after December 31, 2002. The disclosure requirements are
effective for financial statements of periods ending after December 15, 2002. The adoption
of FIN No. 45 did not have a material effect on the Companys financial position or
results of operations.

In January 2003, the FASB issued
FIN No. 46, Consolidation of Variable Interest Entities. FIN No. 46
requires a variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entitys
activities or entitled to receive a majority of the entitys residual returns, or
both. FIN No. 46 also requires disclosures about variable interest entities that a company
is not required to consolidate, but in which it has a significant variable interest. FIN
No. 46 provides guidance for determining whether an entity qualifies as a variable
interest entity by considering, among other considerations, whether the entity lacks
sufficient equity or its equity holders lack adequate decision-making ability. The
consolidation requirements of FIN No. 46 apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements apply to existing
entities in the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was established.
The adoption of FIN No. 46 did not have a material effect on the Companys financial
position or results of operations.

Other accounting standards that have
been issued or proposed by the FASB or other standards-setting bodies that do not require
adoption until a future date are not expected to have a material impact on the
consolidated financial statements upon adoption.

32

---

NOTE 2 
RESTRICTIONS ON CASH AND DUE FROM BANKS

The Bank is required to maintain
average reserve balances, computed by applying prescribed percentages to its various types
of deposits, either at the bank or on deposit with the Federal Reserve Bank. At December
31, 2003 and 2002 these required reserves were met by vault cash.

NOTE 3  INVESTMENT
SECURITIES

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

|                 | December 31, 2003 | 
|---------------- | ----------------- | 
|
|
|Federal agencies |                   | 
|Mortgage-backed  |                   | 
|                 |                   | 
|Total securities |                   | 
|                 |                   | 

|                 | December 31, 2003 | 
|---------------- | ----------------- | 
|Federal agencies |                   | 
|Mortgage-backed  |                   | 
|                 |                   | 
|Total securities |                   | 
|                 |                   | 

The amortized costs and fair values
of investment securities at December 31, 2003, by contractual maturity, are shown in the
following chart. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage-backed securities are presented as a separate line since
pay downs are expected before contractual maturity dates.

|                                      | Amortized cost | Fair value
|------------------------------------- | -------------- | ----------
|
|
|Due in one year or less               |                |           
|Due after one year through five years |                |           
|Due after five through ten years      |                |           
|                                      |                |           
|Sub-total                             |                |           
|Mortgage-backed                       |                |           
|                                      |                |           
|Total securities                      |                |           
|                                      |                |           

The following table shows gross
unrealized losses and fair value, aggregated by investment category, and length of time
that individual securities have been in a continuous unrealized loss position, at December
31, 2003.

|                           | Less than 12 months | 12 months or More | Total |           
|-------------------------- | ------------------- | ----------------- | ----- | ----------
|
|
|Federal Agencies           |                     |                   | $     | 977,969   
|Mortgage backed securities |                     |                   |       | 9,199,699 
|                           |                     |                   |       |           
|Total                      |                     |                   | $     | 10,177,668
|                           |                     |                   |       |           

There were no securities with
continuous unrealized losses for more than twelve months at December 31, 2003.

33

---

The amortized cost and fair value of
securities pledged as collateral for public funds and other purposes as of December 31,
2003 and 2002 were $ 9,032,389 and $8,925,491 and $7,725,779 and $7,237,244, respectively.

For the years ended December 31,
2003, 2002 and 2001, proceeds from sales of securities available for sale amounted to
$8,021,325, $4,319,905, and $2,358,113, respectively. Gross realized gains amounted to
$135,252, $977, and $0, respectively. There were no gross realized losses during these
periods.

NOTE 4 - LOANS

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

|                           | December 31, | 
|-------------------------- | ------------ | 
|
|Commercial                 |              | 
|Real estate - construction |              | 
|Real estate - mortgage     |              | 
|Consumer                   |              | 
|                           |              | 
|                           |              | 
|                           |              | 
|Less:                      |              | 
|Allowance for loan losses  |              | 
|Deferred loan fees         |              | 
|                           |              | 
|                           |              | 
|                           |              | 
|Loans, net                 |              | 
|                           |              | 

At December 31, 2003 and 2002
nonaccrual loans were $ 366,326 and $46,388, respectively. Foregone interest income on
nonaccrual loans in 2003, 2002, and 2001 was an insignificant amount.

NOTE 5 - ALLOWANCE
FOR LOAN LOSSES

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

Activity within the allowance for
loan losses account follows:

|                                       | For the years ended December 31, |  |  
|-------------------------------------- | -------------------------------- |  | -
|
|Balance, beginning of year             |                                  |  | $
|Recoveries of loans previously charged |                                  | 
|against the allowance                  |                                  |  |  
|Provision for loan losses              |                                  |  |  
|Loans charged against the allowance    |                                  |  |  
|                                       |                                  |  |  
|Balance, end of year                   |                                  |  | $
|                                       |                                  |  |  

34

---

NOTE 6  PROPERTY
AND EQUIPMENT

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

|                             | December 31, | 
|---------------------------- | ------------ | 
|
|Land                         |              | 
|Buildings and improvements   |              | 
|Furniture and equipment      |              | 
|Software                     |              | 
|Construction in progress     |              | 
|                             |              | 
|                             |              | 
|Accumulated depreciation     |              | 
|                             |              | 
|Total property and equipment |              | 
|                             |              | 

Depreciation expense for the years
ended December 31, 2003, 2002, and 2001 amounted to $ 428,609, $320,590, and $233,449,
respectively. Depreciation is charged to operations over the estimated useful lives of the
assets. The estimated useful lives and methods of depreciation for the principal items
follow:

|                           |  | 
|-------------------------- |  | 
|Type of Asset              |  | 
|Software                   |  | 
|Furniture and equipment    |  | 
|Buildings and improvements |  | 

The Bank has entered into
non-cancelable operating leases related to land and buildings. At December 31, 2003,
future minimum payments under non-cancelable operating leases with initial or remaining
terms of less than one year or more are as follows:

| |           
| | ----------
| | 2004      
| | 2005      
| | 2006      
| | 2007      
| | 2008      
| | Thereafter
| |           
| |           
| |           

Total rental expense amounted to
$205,412, $118,617 and $36,462 for the years ended December 31, 2003, 2002, and 2001.

The bank leases land for the Surfside
Beach branch location. The operating lease was originated on June 1, 2001 with an initial
term of 20 years. The lease is renewal at the companys option for two additional
periods of five years each. The lease term requires monthly payments of $5,534. Monthly
payments increase each year for the first ten years, then increase on the anniversary date
of years eleven and sixteen.

The bank also leases land for the
North Myrtle Beach branch location. The operating lease was originated on November 1, 2002
with an initial term of 20 years. The lease is renewable at the companys option for
four successive periods of five years each. The lease term requires monthly payments of
$5,416. Monthly payments increase on the anniversary of years eleven and sixteen.

35

---

The bank also leases an office
building for the Hilton Head Island branch location. The operating lease was originated on
March 1, 2003 with an initial term of 10 years. The lease term requires monthly payments
of $4,500. Monthly payments increase on the anniversary date every two years.

The bank also leases an office
building for the operational areas of the bank. The operating lease was originated on July
1, 2002 for a two year period. The lease is renewable at the banks option. The lease
requires monthly payments of $2,250.

NOTE 7 - DEPOSITS

The following is a detail of the
deposit accounts:

|                                   | December 31, | 
|---------------------------------- | ------------ | 
|
|Non-interest bearing               |              | 
|Interest bearing:                  |              | 
|Interest bearing checking accounts |              | 
|Money market accounts              |              | 
|Savings                            |              | 
|Time, less than $100,000           |              | 
|Time, $100,000 and over            |              | 
|                                   |              | 
|Total deposits                     |              | 
|                                   |              | 

Interest expense on time deposits
greater than $100,000 was $776,857 in 2003, $603,427 in 2002, and $689,842 in 2001.

At December 31, 2003 the scheduled
maturities of certificates of deposit are as follows:

| |     
| | ----
| | 2004
| | 2005
| | 2006
| | 2007
| | 2008
| |     
| |     
| |     

NOTE 8  ADVANCES
FROM FEDERAL HOME LOAN BANK

The Bank had advances outstanding of
$11.5 million at December 31, 2003 and $4.0 million at December 31, 2002, respectively. At
December 31, 2003, all advances were collateralized by one to four family residential
mortgage loans, U. S. agency securities and FHLB stock. Additional borrowings are
available by pledging additional collateral and purchasing additional stock in the FHLB.

|                 |  |  |  
|---------------- |  |  | -
|FHLB Description |  |  |  
|CIP/EDP          |  |  | $
|CIP/EDP          |  |  |  
|Convertible      |  |  |  
|                 |  |  |  
|                 |  |  | $
|                 |  |  |  

36

---

NOTE 9 - UNUSED
LINES OF CREDIT

At December 31, 2003, the Bank had
$6,800,000 of lines of credit to purchase federal funds from unrelated banks. These lines
of credit are available on a one to fourteen day basis for general corporate purposes of
the Bank. All of the lenders have reserved the right to withdraw these lines at their
option.

At December 31, 2003, the Bank had
the ability to borrow an additional $2.7 million from the FHLB secured by a blanket lien
on one to four family first mortgage loans. FHLB has approved borrowings up to 15% of the
banks total assets less advances outstanding. The borrowings are available by
pledging collateral and purchasing additional stock in the FHLB.

NOTE 10 -
COMMITMENTS AND CONTINGENCIES

The Company is party to litigation
and claims arising in the normal course of business. As of December 31, 2003, there
is no litigation pending.

Refer to Note 13 concerning financial
instruments with off balance sheet risk.

NOTE 11 - INCOME
TAXES

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

|                                | 2003 | 2002 | 2001
|------------------------------- | ---- | ---- | ----
|Income taxes currently payable  |      |      |     
|Federal                         |      |      | $   
|State                           |      |      |     
|                                |      |      |     
|                                |      |      |     
|                                |      |      |     
|Tax consequences of differences |      |     
|Allowance for loan losses       |      |      |     
|Depreciation                    |      |      |     
|Loan origination fees           |      |      |     
|Deferred compensation           |      |      |     
|Other                           |      |      |     
|Valuation allowance adjustment  |      |      |     
|                                |      |      |     
|                                |      |      |     
|                                |      |      |     
|Provision                       |      |      | $   
|                                |      |      |     

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

|                                                | Deferred tax asset (liability) | 
|----------------------------------------------- | ------------------------------ | 
|
|Allowance for loan losses                       |                                | 
|Unrealized (gain) loss on investment securities |                                | 
|Depreciation                                    |                                | 
|Loan origination fees                           |                                | 
|Deferred compensation                           |                                | 
|Other                                           |                                | 
|                                                |                                | 
|Net deferred tax asset                          |                                | 
|                                                |                                | 

37

---

The net deferred tax asset is
reported in other assets in the balance sheets at December 31, 2003 and 2002. The
recognition of a net deferred tax asset is dependent upon a more likely than
not expectation of the realization of the deferred tax asset, based upon the
analysis of the available evidence. A valuation allowance is required to sufficiently
reduce the deferred tax asset to the amount that is expected to be realized through future
realization of profits on a more likely than not basis. The analysis of
available evidence is performed on an ongoing basis utilizing the more likely than
not criteria to determine the amount, if any, of the deferred tax asset to be
realized. Adjustments to the valuation allowance are made accordingly. There can be no
assurance that the Company will recognize additional portions of the deferred tax asset in
future periods or that additional valuation allowances may not be recorded in the future
periods.

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

|                              | 2003 | 2002 | 2001
|----------------------------- | ---- | ---- | ----
|
|Tax expense at statutory rate |      |      | $   
|Increase (decrease) in taxes  |      |     
|Resulting from:               |      |     
|State bank tax (net of        |      |     
|federal benefit)              |      |      |     
|Valuation allowance           |      |      |     
|Other                         |      |      |     
|                              |      |      |     
|Tax provision                 |      |      | $   
|                              |      |      |     

NOTE 12  RELATED
PARTY TRANSACTIONS

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

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

|                           | For the years ended December 31, |  |  
|-------------------------- | -------------------------------- |  | -
|
|Balance, beginning of year |                                  |  | $
|New loans                  |                                  |  |  
|Less loan payments         |                                  |  |  
|                           |                                  |  |  
|Balance, end of year       |                                  |  | $
|                           |                                  |  |  

Deposits by directors, including
their affiliates and executive officers, at December 31, 2003 and 2002 approximated
$11,053,909 and $10,407,910, respectively.

NOTE 13  FINANCIAL
INSTRUMENTS WITH OFF BALANCE SHEET RISK

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

38

---

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

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

Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any material
condition established in the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require the payment of a fee. At December 31, 2003,
unfunded commitments to extend credit were $15,543,821 of which $2,347,698 was at fixed
rates and $13,196,123 was at variable rates. The Company evaluates each customers
credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on managements credit
evaluation of the borrower. Collateral varies but may include accounts receivable,
inventory, property, plant and equipment, commercial and residential real estate.

At December 31, 2003, there was a
$3,217,821 commitment under a letter of credit. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan facilities to
customers. Collateral varies but may include accounts receivable, inventory, equipment,
marketable securities and property. Since most of the letters of credit are expected to
expire without being drawn upon, they do not necessarily represent future cash
requirements.

NOTE 14 - EMPLOYEE
BENEFIT PLAN

The Company sponsors the Beach First
National Bank Profit Sharing and 401(k) Plan for the benefit of all eligible employees.
The Company contributes to the Plan annually upon approval by the Board of Directors.
Contributions made to the Plan in 2003, 2002, and 2001, amounted to $65,543, $51,416, and
$33,125, respectively.

Supplemental benefits have been
approved by the Board of Directors for the directors and certain executive officers of
Beach First National Bank. These benefits are not qualified under the Internal Revenue
Code and they are not funded. However, certain funding is provided informally and
indirectly by life insurance policies. The cash surrender value of the life insurance
policies are recorded as a separate line item in the accompanying balances sheets at
$3,076,570 and $2,922,190 at December 31, 2003 and 2002, respectively. Income earned on
these policies is reflected as a separate line item in the consolidated statement of
income. The Company recorded expense related to these benefits of $76,650 in 2003, $42,434
in 2002 and $0 in 2001.

NOTE 15 - STOCK
OPTION PLANS

The Company sponsors a qualified
stock option plan for the benefit of the directors, officers and employees. The Board may
grant up to 180,000 incentive stock options at an option price per share not less than the
fair market value on the date of grant. The directors were granted 3,000 options each that
vested immediately. All other options granted to officers and employees vest immediately
or up to five years and expire 10 years from the grant date.

The fair value of the option grant is
estimated on the date of grant using the Black-Scholes option pricing model. For December
31, 2003, the risk free interest rate used ranged from 3.94% to 4.21%, the expected option
life was 10 years and the assumed dividend rate was zero. For December 31, 2002 and 2001,
the risk free interest rate used was 3.99% and 4.5%, the expected option life was 6 to 10
years and the assumed dividend rate was zero.

39

---

A summary of the status of the plan
as of December 31, 2003, 2002 and 2001 and changes during the years ending on those dates
is presented below:

|                       | 2003 | 2002 | 2001
|---------------------- | ---- | ---- | ----
|
|
|
|
|Outstanding at         |      |      |     
|beginning of year      |      |      |     
|Granted                |      |      |     
|Exercised              |      |      |     
|Forfeited or expired   |      |      |     
|                       |      |      |     
|Outstanding at end     |      |     
|of year                |      |      |     
|                       |      |      |     
|Options exercisable at |      |     
|year-end               |      |      |     
|                       |      |      |     
|Shares available for   |      |     
|grant                  |      |      |     
|                       |      |      |     

NOTE 16 - DIVIDENDS

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

NOTE 17- REGULATORY
MATTERS

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

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

Quantitative measures established by
regulation to ensure capital adequacy require the Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets,
and of Tier 1 capital to average assets. Management believes, as of December 31, 2003,
that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2003, the most
recent notification of the Office of the Comptroller of the Currency categorized the Bank
as well capitalized under the regulatory framework for prompt corrective action. There are
no conditions or events since that notification that management believes have changed the
institutions category.

40

---

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

|                                         |  |  |   |        | To be well capitalized
|---------------------------------------- |  |  | - | ------ | ----------------------
|
|
|
|
|
|As of December 31, 2003                  |  |  |   |        |                       
|Total Capital (to risk weighted assets)  |  |  | $ | 13,681 |                       
|Tier 1 Capital (to risk weighted assets) |  |  |   | 12,015 |                       
|Tier 1 Capital (to average assets)       |  |  |   | 12,015 |                       
|                                         |  | 
|As of December 31, 2002                  |  | 
|Total Capital (to risk weighted assets)  |  |  | $ | 12,234 |                       
|Tier 1 Capital (to risk weighted assets) |  |  |   | 11,010 |                       
|Tier 1 Capital (to average assets)       |  |  |   | 11,010 |                       

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

|                                         |  |  |   |        | To be well capitalized
|---------------------------------------- |  |  | - | ------ | ----------------------
|
|
|
|
|
|As of December 31, 2003                  |  |  |   |        |                       
|Total Capital (to risk weighted assets)  |  |  | $ | 14,881 |                       
|Tier 1 Capital (to risk weighted assets) |  |  |   | 13,214 |                       
|Tier 1 Capital (to average assets)       |  |  |   | 13,214 |                       

NOTE 18  FAIR VALUE
OF FINANCIAL INSTRUMENTS

SFAS No. 107, Disclosures about
Fair Value of Financial Instruments requires disclosure of fair value information,
whether or not recognized in the balance sheets, when it is practical to estimate the fair
value. SFAS No. 107 defines a financial instrument as cash, evidence of an ownership
interest in an entity or contractual obligations which require the exchange of cash or
other financial instruments.

Certain items are specifically
excluded from the disclosure requirements, including the Companys common stock,
premises and equipment and other assets and liabilities.

Fair value approximates carrying
value for the following financial instruments due to the short-term nature of the
instrument: cash and due from banks, federal funds sold and short term investments, demand
deposit accounts, and interest-bearing accounts with no fixed maturity date.

41

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Securities are valued using quoted
market prices. Fair value for the Companys off-balance sheet financial instruments
is based on the discounted present value of the estimated future cash flows.

Fair value for fixed rate loans
maturing after one year is based on the discounted present value of the estimated future
cash flows. Discount rates used in these computations approximate the rates currently
offered for similar loans of comparable terms and credit quality.

Fair value for Certificate of deposit
accounts are valued by discounting at rates currently available on similar account types.

Fair value for advances from the FHLB are
based on discounted cash flows using the Companys current incremental borrowing
rate.

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

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

|                                     | December 31, |  |  
|------------------------------------ | ------------ |  | -
|
|
|
|Financial Assets:                    |              |  |  
|Cash and due from banks              |              |  | $
|Federal funds sold and short term    |              | 
|investments                          |              |  |  
|Investment securities                |              |  |  
|Loans, net                           |              |  |  
|Federal Reserve Bank stock           |              |  |  
|Federal Home Bank Loan Bank stock    |              |  |  
|Financial Liabilities:               |              | 
|Deposits                             |              |  |  
|Advances from Federal Home Loan Bank |              |  |  

Financial Instruments with
Off-Balance Sheet Risks:

|                             | Notional | Fair | Notional | Fair      
|---------------------------- | -------- | ---- | -------- | ----------
|
|Commitments to extend credit |          |      |          | 15,543,821
|Standby letters of credit    |          |      |          | 3,217,821 

42

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NOTE 19 - PARENT COMPANY
FINANCIAL INFORMATION

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

Condensed Balance Sheets

|                                           | December 31, | 
|------------------------------------------ | ------------ | 
|
|Assets                                     |              | 
|Cash                                       |              | 
|Due from Bank subsidiary                   |              | 
|Investment in Bank subsidiary              |              | 
|Securities available for sale              |              | 
|Land                                       |              | 
|Other assets                               |              | 
|                                           |              | 
|Total assets                               |              | 
|                                           |              | 
|Liabilities and Shareholders' Equity       |              | 
|Accounts payable                           |              | 
|Shareholders' equity                       |              | 
|                                           |              | 
|Total liabilities and shareholders' equity |              | 
|                                           |              | 

Condensed Statements of
Income

|                                           | For the years ended December 31 |  |  
|------------------------------------------ | ------------------------------- |  | -
|
|                                           |                                 |  | $
|                                           |                                 |  |  
|                                           |                                 | 
|Expenses                                   |                                 | 
|Amortization                               |                                 |  |  
|Other expenses                             |                                 |  |  
|                                           |                                 |  |  
|Total expenses                             |                                 |  |  
|                                           |                                 |  |  
|Income before equity in undistributed      |                                 | 
|net income of Bank subsidiary              |                                 |  |  
|Equity in undistributed net income of Bank |                                 | 
|subsidiary                                 |                                 |  |  
|                                           |                                 |  |  
|Net income                                 |                                 |  | $
|                                           |                                 |  |  

43

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Condensed Statements of Cash Flows

|                                                     | For the years ended December 31, |  |  
|---------------------------------------------------- | -------------------------------- |  | -
|
|Operating activities                                 |                                  |  |  
|Net income                                           |                                  |  | $
|                                                     |                                  |  |  
|Adjustments to reconcile net income to net cash      |                                  | 
|provided by (used in) operating activities:          |                                  | 
|Equity in undistributed net income of                |                                  | 
|the bank subsidiary                                  |                                  |  |  
|Amortization                                         |                                  |  |  
|Decrease (increase) in due from Bank                 |                                  |  |  
|(Increase) decrease in other assets                  |                                  |  |  
|Increase (decrease) in accounts payable              |                                  |  |  
|                                                     |                                  |  |  
|Net cash provided by (used for) operating activities |                                  |  |  
|                                                     |                                  |  |  
|Investing activities                                 |                                  | 
|Additional investment in bank                        |                                  |  |  
|Proceeds from sale of securities available for sale  |                                  |  |  
|Purchase of land                                     |                                  |  |  
|                                                     |                                  |  |  
|Net cash provided (used for) investing activities    |                                  |  |  
|                                                     |                                  |  |  
|Financing activities                                 |                                  | 
|Proceeds from issuance of stock                      |                                  |  |  
|Proceeds from exercise of stock options              |                                  |  |  
|                                                     |                                  |  |  
|Net cash provided by financing activities            |                                  |  |  
|                                                     |                                  |  |  
|Net increase (decrease) in cash and cash equivalents |                                  |  |  
|                                                     |                                  | 
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR         |                                  |  |  
|                                                     |                                  |  |  
|CASH AND CASH EQUIVALENTS, END OF YEAR               |                                  |  | $
|                                                     |                                  |  |  

44

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Business Development
Boards North Strand BoardStanding from left to right are:  Joey Todd, Mike Campbell, Roger Roy, Mickey Thompson, and Linda
Hope Taylor.

South Strand BoardSeated from left to right are:  Helen Smith, Fred Parsons, and Laura Hoy. Standing from left to right are:
Matt Scalise, Brian Brady, and Tim Connor.

Hilton Head Island Board 
Standing from left to right are: Dennis Sexton, Bill Harris, Bill Bedor, Jennifer Harden Green, Jeff Wilson,
Richard Dugan, and Chris Corkern.

Corporate Information

Annual Meeting of
Shareholders        The
Annual Meeting of Shareholders of Beach First National Bancshares, Inc. will be held at
the Myrtle Beach Convention Center, 2101 Oak Street, Myrtle Beach, South Carolina on
Wednesday, April 21, 2004. The meeting will take place in Ballroom C, beginning at 2 p.m.

Form 10-KSB
        Copies of the Companys Annual Report on Form 10-KSB for the fiscal year ended December 31,
2003, as filed with the Securities and Exchange Commission, will be furnished at no charge
to shareholders upon written request to Richard N. Burch, Senior Vice President and Chief
Financial Officer at the Corporate office address or via e-mail (dburch@beachfirst.com).

Offices

|Corporate Office             |  |  | Surfside Beach               |  | 
|---------------------------- |  |  | ---------------------------- |  | 
|1550 Oak Street              |  |  | 3064 Dick Pond Road          |  | 
|Myrtle Beach, SC 29577       |  |  | Surfside Beach, SC 29588     |  | 
|843.626.2265                 |  |  | 843.294.6000                 |  | 
|843.916.7818 (fax)           |  |  | 843. 294.6002 (fax)          |  | 
|North Myrtle Beach           |  |  | Hilton Head Island           |  | 
|701 Highway 17 North         |  |  | 430 William Hilton Parkway   |  | 
|North Myrtle Beach, SC 29582 |  |  | Hilton Head Island, SC 29926 |  | 
|843.663.2265                 |  |  | 843.663.2265                 |  | 
|843.663.2250 (fax)           |  |  | 843.663.2250                 |  | 
|(logo) beachfirst.com        |  | 

Stock Information

The
Companys stock trades under the symbol BFNB on the Over-the-Counter
Bulletin Board. As of March 5, 2004, the Company had approximately 1,496 shareholders and
1,340,768 shares of common stock outstanding. This does not reflect the number of persons
or entities who hold stock in nominee or street name. The companys stock
is available for trade through your local broker or most retail stockbrokers. For
information contact:

|                         | 
|------------------------ | 
|
|Scott & Stringfellow     | 
|Hill Thompson            | 
|Monroe Securities        | 
|Trident Securities       | 
|Webush Morgan Securities | 

45

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The table below reflects the high and
low bid stock prices as quoted on the OTC Bulletin Board during the periods indicated. The
quotations reflect inter-dealer prices without retail mark-up, mark-down, or commissions,
and may not represent actual transactions.

|               | High Bid | Low Bid
|-------------- | -------- | -------
|
|Year end 2003: |          |        
|First Quarter  |          |        
|Second Quarter |          |        
|Third Quarter  |          |        
|Fourth Quarter |          |        
|Year end 2002: |          |        
|First Quarter  |          |        
|Second Quarter |          |        
|Third Quarter  |          |        
|Fourth Quarter |          |        

To date, we have not paid cash
dividends on our common stock and currently have no plans to do so. Our ability to pay
cash dividends is dependent upon receiving cash dividends from our bank. Federal banking
regulations restrict the amount of cash dividends that can be paid to our company from the
bank.

Forward Looking Statement        This
report may contain certain forward-looking statements within the meaning of
Section 27A of the Securities Exchange Act of 1934, as amended, which represent Beach
First National Bancshares, Inc. (the Company) expectations or beliefs concerning future
events. Such forward-looking statements are about matters that are inherently subject to
risks and uncertainties. Factors that could influence the matters discussed in certain
forward-looking statements include the timing and amount of revenues that may be
recognized by the Company, continuation of current revenue and expense trends (including
trends affecting charge-offs and provisions for loan losses), unforeseen changes in the
Companys markets, legal and regulatory changes, and general changes in the economy
(particularly in the markets served by the Company). Because of the risks and
uncertainties inherent in forward looking statements, readers are cautioned not to place
undue reliance on them, whether included in this report or made elsewhere from time to
time by the Company or on its behalf. Except as may be required by applicable law or
regulation, the Company assumes no obligation to update any forward looking statements.

46

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|                             |  | 
|---------------------------- |  | 
|
|Staff                        |  | 
|                             |  | 
|Executive Officers           |  | 
|Walter E. Standish, III      |  | 
|President                    |  | 
|Chief Executive Officer      |  | 
|                             |  | 
|Richard N. Burch             |  | 
|Senior Vice President        |  | 
|Chief Financial Officer      |  | 
|                             |  | 
|M. Katharine Huntley (Katie) |  | 
|Executive Vice President     |  | 
|Chief Credit Officer         |  | 
|Julien E. Springs            |  | 
|Senior Vice President        |  | 
|Business Development Officer |  | 
|                             |  | 
|Departments                  |  | 
|                             |  | 
|Accounting                   |  | 
|Joey Hardwick                |  | 
|Accounting Manager           |  | 
|Kathy Doane                  |  | 
|                             |  | 
|Human Resources              |  | 
|Nancy R. Russell             |  | 
|Manager                      |  | 
|                             |  | 
|Loan Operations              |  | 
|Linda S. Dickinson           |  | 
|Vice President               |  | 
|Loan Administrator           |  | 
|                             |  | 
|Sheila H. Riley              |  | 
|Jennie W. Shaw               |  | 
|                             |  | 
|                             |  | 
|                             |  | 
|                             |  | 
|                             |  | 
|                             |  | 
|                             |  | 

(logo omitted) South Carolina
Family Friendly Workplace Award Winner

Equal Opportunity
Employer StatementIt is the policy of Beach First National Bancshares, Inc. and its subsidiary bank, Beach First National Bank, to extend
equal opportunity to all qualified employees and applicants for employment without regard
to race, color, sex, age, physical, or mental disability, national origin, status as a
disabled veteran or Vietnam veteran, citizenship, or any other characteristics protected
by applicable law, in all phases of employment. This includes, but is not limited to
recruitment, hiring, placement, upgrading and promotion, transfer, layoff, recall,
termination, selection for bank-sponsored training, rates of pay, and other forms of
compensation, benefits, use of all facilities, and participation in bank-sponsored
activities. All of these privileges, terms, and conditions of employment will be
administered so as to further the principles of equal opportunity.

47

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|                                        |  | 
|--------------------------------------- |  | 
|
|(Inside Back Cover)                     |  | 
|                                        |  | 
|Board of Directors                      |  | 
|Michael Bert Anderson                   |  | 
|Managing Owner                          |  | 
|Patricia Resorts                        |  | 
|Bart Buie                               |  | 
|Certified Public Accountant             |  | 
|Bartlett Buie, CPA, P.A                 |  | 
|Raymond E. Cleary, III, DDS             |  | 
|Chairman of the Board                   |  | 
|Beach First National Bancshares, Inc.   |  | 
|Dentist                                 |  | 
|Glenn's Bay Dentists at Surfside        |  | 
|E. Thomas Fulmer                        |  | 
|Owner                                   |  | 
|Beachcomber Realty                      |  | 
|Michael D. Harrington                   |  | 
|General Contractor                      |  | 
|Harrington Construction Company, Inc.   |  | 
|Joe N. Jarrett, Jr., MD                 |  | 
|Orthopaedic Surgeon                     |  | 
|Strand Orthopaedic                      |  | 
|Richard E. Lester                       |  | 
|Attorney                                |  | 
|Van Osdell, Lester, Howe, & Jordan, P.A |  | 
|Leigh Ammons Meese                      |  | 
|President and Corporate Secretary       |  | 
|Sea Mist Resort and Family Kingdom      |  | 
|Amusement Park                          |  | 
|Rick H. Seagroves                       |  | 
|Owner                                   |  | 
|Inland Foods Corporation                |  | 
|Southeast Restaurant Corporation        |  | 
|Don Smith                               |  | 
|President                               |  | 
|Coldwell Banker Chicora Real Estate     |  | 
|                                        |  | 
|Samuel R. Spann, Jr                     |  | 
|President                               |  | 
|Spann Roofing and Sheet Metal, Inc.     |  | 

48

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(Photos Omitted)

49