# Exhibit 13

Annual Report to Shareholders for the
year ended December 31, 2006.

---

Exhibit 13

Beach First National
Bancshares, Inc. 2006 Annual Report A Milestone Year

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

Beach First National Bank
Board of Directors(photo)

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

About Beach First

Beach First National Bancshares, Inc.
is the parent company of Beach First National Bank, headquartered in Myrtle Beach, South
Carolina. Beach First was organized in 1996 to meet the financial needs of consumers and
small-to-mid-sized businesses, and today serves the Grand Strand and Hilton Head Island
markets, with six banking offices. The banks recently-formed mortgage lending
division serves customers in the Carolinas and the mid-Atlantic states. The companys
stock trades on the NASDAQ Global Market® under the symbol BFNB and its website is
beachfirst.com.

Inside
the Report

|                                        | 
|--------------------------------------- | 
|To Our Shareholders and Friends         | 
|Beach First. Going New Places           | 
|A Decade of Putting the Community First | 
|Management's Discussion and Analysis    | 
|Report of Management                    | 
|Report of Independent Registered        | 
|Public Accounting Firm                  | 
|Consolidated Balance Sheets             | 
|Consolidated Statements of Income       | 
|Consolidated Statements of Changes in   | 
|Shareholders Equity and Comprehensive  | 
|Income (Loss)                           | 
|Consolidated Statements of Cash Flows   | 
|Notes                                   | 
|Corporate Information                   | 
|Officers                                | 
|Directors                               | 
|Locations                               | 

Headquarters3751 Grissom
Parkway, Suite 100Myrtle Beach, SC 29577 843.626.2265843.916.7818 (Fax)

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

Selected Financial
Highlights

|                                  | 2006 | 2005 | % Change
|--------------------------------- | ---- | ---- | --------
|
|Earnings (in thousands)           |      |      |         
|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                   |      |      |         
|Allowance for loan loss to total  |      |      |         
|loans                             |      |      |         
|Return on average assets          |      |      |         
|Return on average equity          |      |      |         
|Average equity to average assets  |      |      |         

Graphs

Total Assets ($ millions)Net
Income ($ millions)Total Loans ($ millions)Total Deposits ($ millions)

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# To Our Shareholders and
Friends

Beach First marked another year of
record financial performance in 2006, fueled by a favorable net interest margin, robust
economies in the markets we serve, and our unwavering commitment to provide superior
community bank service. During 2006, we created a mortgage lending division to expand this
line of business, developed new marketing and branding strategies for the bank, and moved
into our new headquarters at Grissom Parkway in Myrtle Beach.

It is a pleasure to review our
progress and our plans for the future in this Report.

# Earnings Continue Upward
Trend, Growing 84%

Beach First completed its seventh
consecutive year of double digit earnings growth in 2006, as earnings increased 84% to
$6.2 million. Total assets grew 31% and ended the year at $520 million. Total loans grew
to $411 million, and total deposits climbed to $416 million. Loan demand remains strong in
both the Myrtle Beach and Hilton Head markets, making the ability to attract and keep core
deposits vitally important in the months ahead.

The net interest margin improved
slightly at year-end to 4.62%, contributing to our performance. For 2006, the bank
achieved a Return on Average Assets of 1.33% and a Return on Average Shareholders
equity of 14.53%. These two benchmarks of bank performance remain strong.

# Shareholder News

In October, our board of directors
declared a 3 for 2 stock split in the form of a 50% stock dividend. On December 21,
approximately 1.5 million additional shares were distributed to existing shareholders,
bringing the total number of shares outstanding to more than 4,769,000.

To sign up for e-mail notification of
news and events, please visit the Investor Relations section of our website,
beachfirst.com.

# Positioning for Future
Growth

The bank expanded its mortgage
capabilities in June 2006, creating a mortgage lending division with production offices
located in South Carolina, North Carolina, Maryland, and Virginia, staffed by more than 50
originators. This action enables the bank to more rapidly grow this line of business,
under the umbrella of the Beach First brand.

(photo)

In early December 2006, we relocated
our main office from its original Oak Street site to our new headquarters at Grissom
Parkway in Myrtle Beach. This environmentally friendly building has been constructed in
accordance with the LEED (Leadership in Energy and Environmental Design) green building
rating system. Thanks to the hard work of our employees and contractors, the transition to
Beach First Center went smoothly. Our new location has been very well received by both our
customers and the community at large. Beach First has a full service branch on the first
floor and its executive offices on the second floor. Our partners in the building project,
the Nelson, Mullins, Riley and Scarborough Law Firm, occupy the entire third floor.
Additional tenants, including a restaurant, are preparing to move to Beach First Center
this spring.

The development of Beach First Center
expanded our presence in our home town of Myrtle Beach and provided the opportunity to
further build our banks brand as a local community bank. Our new creative firm, LHWH
Advertising and PR, in coordination with our in house marketing department, developed the
campaign based on the theme Banking should always be this easy. This phrase
echoes the banking experience the customer expects. We are very excited about this
expanded marketing effort, which will introduce new customers to the Beach First brand of
community banking. Additional campaign details appear later in this Report.

# Expanded Product Menu

The competition for deposit market
share continues to be intense throughout our markets. To help enhance deposit growth, we
made several additions to our product menu, all of which encourage new customers to bank
with us. We added a Free Small Business Checking account that requires no minimum balance
and no monthly maintenance fee. For personal customers, we also introduced a new
Guaranteed checking account which ensures availability of the customers direct
deposit when needed, and provides cash back on Visa® check card purchases. The cash
back

2

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

feature was also added to our
existing Beach First Class and Senior Advantage checking accounts. These enhancements are
designed to ensure that we remain competitive in the markets we serve.

We added two new security features to
our NetTeller Internet Banking program. The Watermark program ensures that the customer
has reached the legitimate NetTeller site, and Multi-Factor Authentication watches for
uncharacteristic or unusual behavior in a customers online banking activity. More
details about these important security programs can be found on our website,
beachfirst.com.

In 2006, we brought both our credit
card and merchant services programs in-house to be managed by our electronic banking
department. The addition of these programs rounds out our product menu, enabling us to be
truly full service, while enhancing fee income. We offer three Visa® credit cards
a Classic card and personal and business Platinum cards with an optional rewards
program. The merchant services program assists our business customers who accept credit
and debit cards as a method of payment.

Our goal is to provide any product
offered by much larger banks, but with a level of commitment and local service that is
unsurpassed.

(photo)

# Commitment to Our
Communities

At Beach First, our philosophy
directs that we participate enthusiastically in special community programs and events. We
are proud of our involvement in activities that are important to the communities we serve.
In 2006, we sponsored the Pawleys Island Festival of Music and Art, the Arts Center of
Coastal Carolina in Hilton Head Island, and the Franklin G. Burroughs-Simeon B. Chapin Art
Museum in Myrtle Beach. Now in its seventh year, our Childrens Art Calendar remains
one of our most anticipated community projects. Calendars were produced in both our Grand
Strand and Hilton Head Island markets in 2006, with more than 1,400 local public school
children participating. By setting an example as a good corporate citizen, we are sending
a message that we respect and appreciate the communities we serve. Whether it is choosing
to build the first green bank building in South Carolina, our support of the
arts, or our involvement with the United Way, our customers can feel good about doing
business with us.

# The Future

I hope you are pleased with the
progress the company continues to make. Although 2006 was another successful year for
Beach First, there is always more work to be done. We appreciate your investment in the
company, and will continue working hard to protect your interest. I hope to see you at our
2007 Annual Meeting of Shareholders, to take place Wednesday, April 18, at 2 p.m. at the
Myrtle Beach Convention Center.

/s/ Walter E. Standish, III

Walter E. Standish, IIIPresident
andChief Executive Officer

3

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Beach First. Going New
Places.

Its been an exciting year at
Beach First National Bank. Ten years of service to the community have culminated in a new
headquarters with room to grow, expansion into an important new line of business, and
increased market share along the Grand Strand and Hilton Head Island. Its a success
story that we want to share.

# Beach First Center.

(photo)

Since its founding 10 years ago,
Beach First National Bank has built a strong reputation as a first class provider of
community bank service. At Beach First, this means that our customers receive attentive,
personal care along with access to a product menu that includes the latest in technology.
What makes us unique is our energy, our engagement in our communities, and our attention
to detail.

When Beach First partnered with the
Nelson Mullins law firm and Graham Group Architecture to plan for Beach First Center, we
revisited the architecture of the past in a tribute to the Myrtle Beach community we call
home. The result was a carefully crafted plan with construction in accordance with the
LEED (Leadership in Energy and Environmental Design) green building rating system. This
created a healthier, cleaner work environment, while protecting our precious natural
resources through the use of approved building supplies and procedures during the
construction.

We take these extra steps in all we
do.

# Branding Key to Future
Growth.

During 2006, we initiated a
relationship with an award-winning marketing firm, LHWH Advertising and PR. A first focus
was to create a new positioning statement to capture and project a fresh brand personality
for Beach First. Through discussion with management, the ease of banking with Beach First
was singled out as a key differentiating attribute. This led to the formulation of the
statement: Banking should always be this easy, a tagline intended to echo what
a Beach First customer might say.

A media mix of print, television, and
radio has been put in place for 2007 to continue building the Beach First brand. A new
radio jingle, a new television spot and a number of complementary print campaigns are all
in place and ready to roll out. Crafted to highlight Beach Firsts unique style of
community banking, the marketing campaign is designed to increase awareness and market
share for Beach First.

(photos)

# Further Expansion into
Mortgage Banking.

During 2006, the bank expanded its
mortgage banking capabilities by developing a mortgage lending division to grow this line
of business.

Led by H. David Stacy, a career
mortgage banker with 25 years of experience in the industry, the new division has more
than 50 originators located in South and North Carolina, Virginia, and Maryland. Over the
years, the bank has had several originators working in both the Grand Strand and Hilton
Island markets, but this expansion marks a serious commitment to service the mortgage
market.

The addition of mortgage muscle is
concentrated primarily in the Carolinas and the mid-Atlantic states, especially Virginia.
Of particular interest due to its rapid growth and development is the area outside of
Washington D.C.  the communities of Burke, Vienna, Chantilly, and Fredericksburg in
northern Virginia. We are also committed to becoming one of the top mortgage lenders along
the Grand Strand and the South Carolina coast. By adding emphasis on mortgage lending, we
have diversified the customer base into additional products and services.

Our mortgage services are marketed
primarily one-on-one via the relationships developed with realtors and existing customers,
now with the strength of the Beach First brand behind the services provided. Its
well-known that Beach First originators have the technology at their fingertips to provide
answers quickly and accurately, a key to developing strong customer and realtor
relationships for future referrals. Again, its another way that Beach First makes
banking easy for its customers.

(photo)

4

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

A Decade of Putting the
Community First.

Beach First has always been committed
to building and deepening relationships with our customers. From providing innovative,
accessible and reliable products, to being as responsive as possible to their financial
needs, superior client service is the hallmark of our success. Here is a sampling of the
customers we serve and their feelings about the bank theyve come to know and trust.

Cal and Mary NavisHilton Head Island/Wexford

Cal and Mary Navis moved to Hilton
Head Island almost ten years ago and decided to buy a business that would support them,
their two daughters and their families. When we first bought Billy Wood Appliance,
we went with a local bank that was getting into business accounts, recalls Mary.
In fact, we were their first business account. But we soon discovered that they
werent a business bank. They simply couldnt handle our needs. So we went with
one of the larger, more established banks.   I went by one day to cash a
check at this particular bank  and had to show three forms of identification,
says Mary. They also had to call to get authorization for me to cash the check. Now,
at the time, we had a substantial money market account with the bank. It was at that
moment that I realized it was time to look for a new bank.   Beach First
was just down the street from us, says Cal. And we had met Paul Walter [Beach
First Hilton Head Island Regional Manager] when he came in to buy appliances. After
meeting with them, we felt that they were right for us  that they knew what
businesses like ours needed. And it has been a great relationship since then. We were so
pleased with the way they get business done, we even decided to buy some of their
stock.   The people you meet there represent the quality of banking
service you get at Beach First, says Mary. The personal attention we received
at our first meeting with Paul has been our experience with everyone at the bank ever
since.

# (photo)

Gary and Heidi VukovMyrtle Beach

Gary and Heidi Vukov are most
appreciative of their relationship with Beach First. Its simply a great bank
with a wonderful, caring staff, says Heidi, owner of Croissants Bakery &
Café in Myrtle Beach. I know that whenever I need their help, I can count on
them.

Gary, a local doctor of
gastroenterology, has banked with Beach First since it was established, and also feels
very comfortable communicating at any time with anyone at Beach First. A few months
back, someone misused Heidis debit card out in California, recalls Gary.
It was all handled very well by the staff at Beach First. But if we ever had any
concerns like that, wed both feel okay picking up the phone and speaking with a vice
president like Julien Springs  or even the president of the bank, Walt Standish.
Its that level of familiarity and confidence that you value in a bank like Beach
First.

(photo)Bruce BishopHilton Head Island

Convenience was a big factor in Bruce
Bishops original decision to bank with Beach First. His PC & L Agency, a general
multi-lines insurance agency, has offices throughout the state, with its main office near
the Pineland branch of the bank on Hilton Head Island.

As
it turned out, I really liked the people at Beach First from the start, says Bruce.
My company has grown considerably over the past 25 years, with annual sales now
between $15 and $20 million. But I still have a small company mentality. Its very
important for me to like the people I do business with. So my relationship with Beach
First has gone beyond just banking to more of a real friendship with the people
there.

In
my business, there are two people that keep me going  my accountant and my
banker, says Bruce. My accountant is someone Ive known and trusted for
years. And as long as Beach First is in business, I wont ever need another bank in
the Lowcountry.

5

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# photo

Allen FoxworthSurfside
Beach  (photo)

A builder and real estate developer
in the South Grand Strand area since 1980, Allen Foxworth is currently engaged in one of
his biggest projects to date. Foxworth Construction, Inc. has already started work on
Silver Creek in Socastee, which will feature 165 town homes and around 50,000 square feet
of commercial/retail space.

Beach First is handling the
construction and development loans for us, says Allen. And I couldnt be
happier working with them and people like [Beach First South Strand Regional Manager]
Kendall Buckner. They understand my needs, and can make a decision locally. Their board is
local  and their policies reflect the local economy. In other words, theyre
much more in tune with whats going on here.   For me, the
relationship with Beach First is a personal one built on trust. They know me, and I know
what they can do, so its much easier to get my loans through. Ive found them
to be much more willing to work with me than some of the larger banks.

Jeff, Jimmy, and Amy
MartiniNorth Myrtle Beach

Jeff Martini and his dad, Jimmy, have
operated Martinis Casual Dining in North Myrtle Beach for more than seven years. And
Jeffs wife, Amy, has owned Me & Mommy, a childrens clothing store, for
nearly that long. All three have had relationships with other banks in the area, but none
quite like Beach First.

Its all about the people
and relationships weve built there, says Jeff. I got to know Marc
McDowell [Beach First North Strand Regional Manager] really well when he came into our
restaurant. I had approached other banks about getting some help with a couple of small
things, but they couldnt help. Marc stepped up for me, and the rest is history. We
paid off those first loans and, later, Beach First financed this shopping center where
Amys shop is located. Everything is making money and we continue to grow! Ive
probably referred at least 15 personal friends and businesses to them over the past three
years because I truly believe theyre a better bank.   It
wasnt easy at first for me to switch to Beach First, says Amy. I had to
see what theyd really do for me before I moved my business there. But Im
convinced now that it was the right decision. You dont realize how dissatisfied you
are with the bank youre doing business with until you get to know Beach First.
  Its hometown banking, pure and simple, says Jeff. Whoever
you are, whatever it takes, Beach First takes the time to accommodate you and your
needs.

Charles O. Nation, II
Litchfield

Beach First is a great bank for
people who need to responsibly borrow money, says Charles Nation, II, an attorney in
Georgetown whose practice specializes in residential and commercial real estate
transactions, development and litigation. Theyre business-friendly, and are
less conservative than most other banks without taking risks. They make every effort
to know their customers, and tell you fairly quickly whether or not they can do the
deal.

There is no straightjacket
on the relationship  or any holdups in getting the transaction completed at Beach
First, says Charles. There are people in each office, like Pat Tyler [Beach
First Branch Manager] at Litchfield, who get back to you with an answer right away.
When it comes to a zero to sixty way of doing business, they outperform any
other bank.

(photo)

6

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# 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 primary 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, including without limitation the letter to shareholders and other information
above, contains forward-looking statements relating to, without limitation the
letter, 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:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

# Overview

Beach
First National Bancshares, Inc. (the Company) is the parent company of Beach
First National Bank, (the Bank), a wholly owned subsidiary and Beach First
National Trust (the Trust), Beach First National Trust II (the Trust
II) both of which are non-consolidated subsidiaries. The Company also owns 66% of
BFNM Building, LLC, which is a limited liability corporation formed solely for the
construction of a corporate office building that houses the main office for the Bank. The
trusts were established exclusively for the issuance of junior subordinated debt which was
used to capitalize the Bank. The Companys primary business activities are conducted
by the Bank. We commenced operations on September 23, 1996 and completed our tenth full
year of operations on December 31, 2006. 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.

The
Banks primary market areas are located along the coastal regions of South Carolina
and predominately center on the Metro regions of Myrtle Beach and Hilton Head Island,
South Carolina. We currently operate primarily from six banking locations. In addition to
the main office in Myrtle Beach, we have added five branches. We opened our Surfside
branch in June 2001. In November 2002, we opened an branch in North Myrtle Beach, and in
February 2003 we opened a branch in Hilton Head Island. In 2004, we opened a branch in the
Litchfield/Pawleys Island area of the Grand Strand and in January 2005 we opened our
second branch on the south end of Hilton Head Island. All of our branches are full
service.

7

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

In
June 2006, we added a mortgage division and we operate from seven loan production offices
in South Carolina, North Carolina, Maryland, and Virginia. The South Carolina office also
includes the operations office and it is located in Little River, South Carolina. The
North Carolina office is located in Gastonia and the Maryland office is located in
Frederick. There are four offices in Virginia. They include two locations in Burke, one
office in Fredericksburg and Chantilly. We added another loan production office in Vienna,
Virginia in January 2007.

On
June 14, 2005, we closed the sale of 1,150,000 shares of our common stock at $18.75 per
share in a firm commitment underwritten offering solely managed by Sandler ONeill
& Partners, L.P. We received net proceeds from the offering of approximately $20
million after deducting underwriting discounts and expenses. We plan to use the net
proceeds for general corporate purposes, which include, among other things, providing
additional capital to our bank to support our asset growth.

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

|At and for the Years Ended December 31, |  |  |  
|--------------------------------------- |  |  | -
|
|Net Income                              |  |  | $
|Total Assets                            |  |  | $
|Total Loans (1)                         |  |  | $
|Total Deposits                          |  |  | $
|Total Capital                           |  |  | $

(1)       
          Includes mortgage loans held for sale

The
following discussion describes our results of operations for 2006 as compared to 2005 and
2005 compared to 2004 and also analyzes our financial condition as of December 31, 2006 as
compared to December 31, 2005. 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 and advances from Federal Home Loan
Bank (FHLB), 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 and advances from FHLB. 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 2006, 2005, and 2004 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.

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.

8

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

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

# Analysis of the Fiscal
Years Ended December 31, 2004 and 2005 and 2006

# Earnings Review

Overview.For the year ended December 31, 2006, our net income was $6.2 million, or
          $1.27 diluted net income per common share, as compared to $3.4 million, or $0.83
          diluted net income per common share, for the year ended December 31, 2005, and
          $1.4 million, or $0.46 diluted net income per common share, for the year ended
          December 31, 2004. All per share data for all periods has been adjusted to
          reflect the 3-for-2 stock split effected in the form of a 50% stock dividend
          that was declared in 2006. The improvement in net income in 2006 reflects our
          growth, with average earning assets increasing 48.5% to $443.0 million during
          2006 from $298.5 million during the same period of 2005. Return on average
          assets and return on average shareholders equity are key measures of
          earnings performance. Return on average assets for 2006 was 1.33% compared to
          1.08% in 2005 and 0.70% in 2004. Return on average shareholders equity for
          2006 was 14.53% verses 11.37% in 2005 and 9.10% in 2004. Our equity to assets
          ratio was 8.74% in 2006, 9.85% in 2005 and 6.82% in 2004.

We
had total assets of $520.2 million at December 31, 2006, an increase of 30.9% from $397.4
million at December 31, 2005. Our total deposits increased to $416.4 million at December
31, 2006, up 34.0% from $310.8 million at December 31, 2005.

# 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 $6.7 million, or
          49.0%, to $20.5 million in 2006 from $13.7 million in 2005. Net interest income
          increased $5.5 million in 2005 from $8.3 million in 2004. Our level of net
          interest income is determined by the level of our earning assets and the
          management of our net interest margin. The continued growth of our loan
          portfolio is the primary driver of the increase in net interest income. Average
          total loans increased from $251.3 million in 2005 to $372.8 million in 2006. In
          addition, average securities increased to $60.2 million in 2006 compared to
          $42.6 million in 2005.

Net
interest spread, the difference between the rate we earn on interest-earning assets and
the rate we pay on interest-bearing liabilities, was 4.06% for the year ended December 31,
2006, compared to 4.13% for the year ended December 31, 2005 and 3.96% for the year ended
December 31, 2004. Our net interest margin, which is net interest income divided by
average interest-earning assets, was 4.62% for the year ended December 31, 2006, 4.60% for
the year ended December 31, 2005, and 4.30% for the year ended December 31, 2004.

9

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

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.

|                 | Average Balances,
Income and Expenses, and Rates | 
|---------------- | ------------------------------------------------ | 
|
|
|
|
|Federal funds    |                                                  | 
|sold, short term |                                                  | 
|investments and  |                                                  | 
|trust preferred  |                                                  | 
|securities       |                                                  | 
|                 |                                                  | 
|Investment       |                                                  | 
|securities       |                                                  | 
|                 |                                                  | 
|Loans (1)        |                                                  | 
|                 |                                                  | 
|Total earning    |                                                  | 
|assets           |                                                  | 
|                 |                                                  | 
|Cash & Due from  |                                                  | 
|Banks            |                                                  | 
|                 |                                                  | 
|Other Assets     |                                                  | 
|                 |                                                  | 
|Total Assets     |                                                  | 
|                 |                                                  | 
|Interest-bearing |                                                  | 
|deposits         |                                                  | 
|IBCA             |                                                  | 
|MMA              |                                                  | 
|Savings          |                                                  | 
|CD's <$100,000   |                                                  | 
|CD's >$100,000   |                                                  | 
|                 |                                                  | 
|IRA              |                                                  | 
|                 |                                                  | 
|Total interest-  |                                                  | 
|bearing          |                                                  | 
|deposits         |                                                  | 
|                 |                                                  | 
|Other borrowings |                                                  | 
|                 |                                                  | 
|Total interest-  |                                                  | 
|bearing          |                                                  | 
|liabilities      |                                                  | 
|                 |                                                  | 
|Demand           |                                                  | 
|Deposits         |                                                  | 
|Other            |                                                  | 
|Liabilities      |                                                  | 
|                 |                                                  | 
|Total            |                                                  | 
|Liabilities      |                                                  | 
|                 |                                                  | 
|Equity           |                                                  | 
|Capital          |                                                  | 
|                 |                                                  | 
|Total            |                                                  | 
|Liabilities and  |                                                  | 
|Equity           |                                                  | 
|                 |                                                  | 
|Net interest     |                                                  | 
|spread           |                                                  | 
|Net interest     |                                                  | 
|income/margin    |                                                  | 
|                 |                                                  | 

10

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

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

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 years ended December 31,
|--------------------------------------------- | --------------------------------
|
|
|Federal funds sold and short term investments |                                 
|and trust preferred securities                |                                 
|                                              |                                 
|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 percentage of the total change.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------

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.

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, 2006 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 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.

11

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Interest Sensitivity
Analysis

# December 31, 2006

|                                   |  | After three but | After one but |             |  
|---------------------------------- |  | --------------- | ------------- | ----------- | -
|
|
|Assets                             |  |                 |               |             |  
|Earning assets:                    |  |                 |               |             |  
|Federal funds sold and short term  |  |                 |               |             |  
|Investments                        |  |                 | $             | 14,010,667  |  
|Investments, including FHLB        |  |                 |               |             |  
|& FRB                              |  |                 |               | 830,068     |  
|Gross loans (1)                    |  |                 |               | 249,554,421 |  
|                                   |  |                 |               |             |  
|Total earning assets               |  |                 | $             | 264,395,156 |  
|                                   |  |                 |               |             |  
|Liabilities                        |  |                 |               |             |  
|Interest-bearing liabilities       |  |                 |               |             |  
|Money market and interest          |  |                 |               |             |  
|checking                           |  |                 |               | 124,393,701 |  
|Regular savings deposits           |  |                 |               | 3,303,763   |  
|Time deposits < $100,000           |  |                 |               | 22,284,998  |  
|> $100,000                         |  |                 |               | 22,677,704  |  
|FHLB Advances                      |  |                 |               | -           |  
|Other borrowings                   |  |                 |               | -           |  
|Junior Subordinated Debentures     |  |                 |               | -           |  
|                                   |  |                 |               |             |  
|Total interest-bearing liabilities |  |                 | $             | 172,660,166 |  
|                                   |  |                 |               |             |  
|Period gap                         |  |                 | $             | 91,734,990  |  
|Cumulative gap                     |  |                 | $             | 91,734,990  |  
|Ratio of cumulative gap to         |  |                 |               |             |  
|total earning assets               |  |                 |               | 18.50       | %

(1)  
          Non-accrual loans in the amount of $1.6 million are not included in the above
          table. Mortgage loans held for sale are included.

# Allowance for Possible
Loan Losses

We
have established an allowance for loan losses through a provision for loan losses charged
to expense on our statement of income. The allowance for loan losses represents an amount
which we believe will be adequate to absorb probable losses on existing loans that may
become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is
based on a number of assumptions about future events, which we believe to be reasonable,
but which may or may not prove to be accurate. The evaluation of the allowance is
segregated into general allocations and specific allocations. For general allocations, the
portfolio is segregated into risk-similar segments for which historical loss ratios are
calculated and adjusted for identified trends or changes in current portfolio
characteristics. Historical loss ratios are calculated by product type for consumer loans
(installment and revolving), mortgage loans, and commercial loans and may be adjusted for
other risk factors. To allow for modeling error, a range of probable loss ratios is then
derived for each segment. The resulting percentages are then applied to the dollar amounts
of the loans in each segment to arrive at each segments range of probable loss
levels. Certain nonperforming loans are individually assessed for impairment under SFAS
No. 114 and assigned specific allocations. Other identified high-risk loans or credit
relationships based on internal risk ratings are also individually assessed and assigned
specific allocations.

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

Periodically,
we adjust the amount of the allowance based on changing circumstances. We charge
recognized losses to the allowance and add subsequent recoveries back to the allowance for
loan losses. There can

12

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

be no assurance that charge-offs of
loans in future periods will not exceed the allowance for loan losses as estimated at any
point in time or that provisions for loan losses will not be significant to a particular
accounting period.

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

At
December 31, 2006, the allowance for possible loan losses was $5.9 million, or 1.43% of
outstanding total loans, compared to an allowance for possible loan losses of $4.3
million, or 1.40% of outstanding total loans, at December 31, 2005. This increase is due
to growth in the loan portfolio and needs based on ongoing evaluations of credits.

# Provision for loan losses

We
have established an allowance for loan losses through a provision for loan losses charged
as an expense on our statement of income. We review our loan portfolio periodically to
evaluate our outstanding loans and to measure both the performance of the portfolio and
the adequacy of the allowance for loan losses. The provision for loan losses was $2.2
million for 2006, $2.2 million for 2005, $1.3 million for 2004. The steady balance of the
provision from 2006 to 2005 was the result of managements assessment of the adequacy
of the reserve for possible loan losses given the size, mix and quality of the current
loan portfolio. Please see the discussion under Allowance for Possible Loan
Losses for a description of the factors we considered in determining the amount of
the provision we expense each period to maintain this allowance.

# Nonperforming Assets

We
discontinue accrual of interest on a loan when we conclude it is doubtful that we will be
able to collect interest from the borrower. We reach this conclusion by taking into
account factors such as the borrowers financial condition, economic and business
conditions, and the results of our previous collection efforts. Generally, we will place a
delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. When
we place a loan in nonaccrual status, we reverse all interest which has been accrued on
the loan but remains unpaid and we deduct this interest from earnings as a reduction of
reported interest income. We do not accrue any additional interest on the loan balance
until we conclude the collection of both principal and interest is reasonably certain. At
December 31, 2006, there were no loans accruing interest which were 90 days or more past
due and we had no restructured loans.

Nonperforming Assets
(Dollars in Thousands)

|                           | At December 31,
|-------------------------- | ---------------
|
|Commercial                 |                
|Real estate - construction |                
|Real estate - mortgage     |                
|Consumer                   |                
|                           |                
|Total                      |                
|                           |                

|Accruing loans which are contractually past due 90 days or more |  |  |  
|--------------------------------------------------------------- |  |  | -
|
|Commercial                                                      |  |  |  
|Real estate - construction                                      |  |  |  
|Real estate - mortgage                                          |  |  |  
|Consumer                                                        |  |  |  
|                                                                |  |  |  
|Total                                                           |  |  | $
|                                                                |  |  |  
|Total nonperforming loans                                       |  |  | $
|                                                                |  |  |  
|Other Real Estate Owned                                         |  |  |  
|Total Nonperforming Assets                                      |  |  | $
|                                                                |  |  |  
|Total nonaccrual loans to total                                 |  |  |  
|loans                                                           |  |  |  
|Total nonaccrual loans to total                                 |  |  |  
|assets                                                          |  |  |  
|Total nonperforming assets to                                   |  |  |  
|total assets                                                    |  |  |  

13

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

We
had 9 nonaccrual loans totaling approximately $1.6 million at December 31, 2006. Three of
the nonaccrual loans were real estate commercial loans. One in the amount of $655,310
secured by a first real estate mortgage, one in the amount of $278,021 secured primarily
by a first real estate mortgage, and one in the amount of $4,842 secured by a second
mortgage on real estate. We had two real estate mortgage loans; one in the amount of
$610,877 secured by a first mortgage. The second loan in the amount of $50,000 is secured
by a second real estate mortgage. We had three consumer loans all secured by vehicles; one
loan in the amount of $11,410, one loan in the amount of $9,238, and the third consumer
loan in the amount of $4,519. We had one commercial loan in the amount of $293 secured by
a boat. At December 31, 2005 we had seven nonaccrual loans totaling $1.1 million. One loan
in the amount of $85,356 is a commercial loan secured primarily by a SBA guaranty. There
are two real estate construction loans. One in the amount of $132,128 secured by a second
real estate mortgage and one in the amount of $60,461 secured by a first mortgage on real
estate. We had two real estate mortgage loans; one is in the amount of $759,821 primarily
secured by a first mortgage. The second loan in the amount of $34,749 is secured by a
first real estate mortgage. We had two consumer loans; one loan in the amount of $23,314
secured by two mobile homes, and the second consumer loan in the amount $15,435 secured by
a vehicle. We had three nonaccrual loans totaling $76,826 at December 31, 2004. One loan
in the amount of $34,750 is a commercial loan secured by a first mortgage, one commercial
loan in the amount of $35,235 secured by a first mortgage and a commercial loan in the
amount of $6,841 secured by a vehicle. Interest income that would have been received for
the years ended December 31, 2006 and 2005 had nonaccrual loans been current in accordance
with their original terms amounted to $145,626 and $148,196 respectively. We had real
estate acquired through foreclosure totaling $15,000 at December 31, 2006 and $62,967 at
December 31, 2005. We did not have any real estate acquired through foreclosure during the
periods ended December 31, 2004 through 2002.

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, 2006, we
had classified loans totaling $3.0 million (substandard $3.0 million and special mention
$11,410), that we have made a specific allocation in the allowance for loan losses.
Substandard assets consist primarily of thirty-four loans with the largest amount to any
one borrower being $655,310. The special mention loans consist of one loan to one borrower
in the amount of $11,410. At December 31, 2005, we had classified loans totaling $3.3
million, with $3.3 million classified substandard and $423,600 classified special mention.
At December 31, 2004, we had classified loans totaling $6.0 million, with $3.9 million
classified substandard and $2.1 million classified special mention. 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, 2006 to
December 31, 2002.

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

Allowance for Loan
Losses (Dollars in Thousands)

|                                            | At December 31,
|------------------------------------------- | ---------------
|
|Average total loans outstanding             |                
|Total loans outstanding at period end       |                
|                                            |                
|Total nonperforming loans                   |                
|                                            |                
|Above includes mortgage loans held for sale |                
|                                            |                
|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 allowance                     |                
|Ratio of net charge-offs to                 |                
|average total loans outstanding             |                
|during the period                           |                

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

|                | December 31,
|--------------- | ------------
|
|Commercial      |             
|Real Estate     |             
|Construction    |             
|Real Estate     |             
|Mortgage        |             
|Consumer        |             
|Unallocated     |             
|                |             
|Total allowance |             
|for loan losses |             

Noninterest Income and Expense

Noninterest Income.
Noninterest income increased to $4.0 million for the year ended December 31, 2006, up
257.0% from $1.1 million for the year ended December 31, 2005. Noninterest income
increased 7.8% from $1.0 million in 2004 to $1.1 million in 2005. This increase in
noninterest income is related to the income from our mortgage division operations that we
added in June of 2006. Income from mortgage operations for 2005 represents referral fees
on mortgage loans where the bank was acting as an agent for a third party originator. With
the

15

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

formation of the companys
mortgage division during the second quarter of 2006, all sources of income from this
division are included in income from mortgage operations. The four components of the
revenue are loan referral fees, document preparation fees for both retail and wholesale
loans which includes origination fees, servicing release premiums for both retail and
wholesale loans, and the net gains on the sale of mortgage loans. The respective amounts
for the year ended December 31, 2006 are $321,393, $537,490, $679,817, and $597,550. With
these amounts included, mortgage operations income increased to $2.1 million at December
31, 2006 as compared to $249,757 at December 31, 2005 and $134,865 in 2004. Additional
information on the expenses associated with the mortgage division can be found within the
noninterest expense section.

Other
income increased 420.6% to $1.1 million in 2006 from $217,947 in 2005, and increased 30.1%
from $167,544 in 2004. This increase was primarily due to a one-time gain of $581,711 on
the sale of the banks main office in June 2006. Of the increase, $188,637 was
related to the launch of merchant credit card processing and the issuance of credit cards
in the banks name. Prior to this issuance, the bank offered credit cards through a
third party. Merchant income was $164,230 at December 31, 2006 as compared to $17,806 at
December 31, 2005 and credit card income was $43,619 at December 31, 2006 as compared to
$1,405 at December 31, 2005. Debit card income is also included in other income and
increased $45,639 to $118,846 at December 31, 2006.

We
recorded a net gain on the sale of a loan in the amount of $60,392 in 2006 as compared to
$14,610 in 2005. We recorded a net gain of $1,007 on the sale of investment securities for
2006 compared to a net loss of $3,935 for 2005. We recorded a net gain on the sale of
investment securities of $37,395 in 2004.

Service
fees on deposit accounts decreased 6.4% to $514,286 in 2006 from $549,689 in 2005. Service
fees on deposit accounts increased $13,612, or 2.5%, in 2005 from $536,077 in 2004. The
decreases were due to increases in the analysis earnings rate credited to commercial
demand accounts that offset service fees charged and increased usage of electronic
services by personal checking customers. The Bank purchased bank owned life insurance in
mid-2002 and income from cash value life insurance was $143,717 in 2006, $89,809 in 2005
and $161,544 in 2004. Income from cash value life insurance in 2006 increased in relation
to 2005, but 2005 was lower due to an accrual adjustment.

Noninterest Expense.
Noninterest expense totaled $12.6 million for the year ended December 31, 2006 up from
$7.5 million for 2005 and $5.7 million for the year ended December 31, 2004. As a
percentage of total assets, our total noninterest expenses decreased from 2.35% in 2004 to
1.90% in 2005, and increased to 2.42% in 2006. While our total assets have grown 46.6%
over 2004, 64.1% over 2005, and 30.9% over 2006, we have been able to manage our expenses
while accommodating our growth. The increase in noninterest expense reflects an increase
in most expense categories as a result of our growth to $520.2 million in total assets at
the end of 2006 from $397.4 million at the end of 2005, and $242.1 million for the end of
2004. The increase also includes one time expenses of $260,000 in start up costs
associated with the mortgage division, including $60,000 in legal expenses, $40,000 for
consulting fees, $100,000 for an employee contract, and $40,100 loss on the purchase of
assets.

Salary
and wages expense increased by $2.6 million to $6.0 million for the year ended December
31, 2006. It also increased by $815,470 to $3.4 million in 2005 and $481,518 to $2.6
million in 2004. Employee benefits were $1.1 million in 2006, $675,496 in 2005 and
$501,347 in 2004. Generally, increases in personnel costs were due to normal compensation
adjustments, higher costs associated with group insurance coverage and certain incentive
awards. These increases also include a $200,000 midyear adjustment to the salary incentive
expense accrual related to the addition of nine employees in relationship and support
positions, and a $100,000 employee contract commitment related to the startup of the
mortgage division. Of the increase, $1.3 million was directly related to salary and wages
for the mortgage division. Another $218,065 was directly related to employee benefits for
the mortgage division employees. All other increases were the result of personnel
additions, normal compensation adjustments, and higher costs associated with group
benefits.

We
had 119 full-time equivalent employees at the end of 2006, an increase of 53 from the end
of 2005 and an increase of 63 from the end of 2004. Staffing increases in 2006 were
primarily due to the addition of the mortgage division. In 2005, we added staff for a
second location in Hilton Head Island, which opened on January 3, 2005 and in 2004, we
added staff for the new branch office in the Litchfield/Pawleys Island area of South
Carolina.

Advertising
and public relations expenses continue to be a major expense item as we develop our
presence in the new markets. In 2006 advertising and public relations expense increased
$91,547 to $387,056 from $295,509 in 2005 and $239,256 in 2004. This increase was due
primarily to contracting with professional advertising agency

16

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

to develop and promote new branding,
as well as, opening of the new corporate headquarters. This increase was also related to
special promotions, such as newspaper advertisements, to attract deposits in all markets.

Professional
fees decreased $15,503 to $311,627 for 2006 compared to $327,130 in 2005 and increased
$136,992 in 2005 compared to $190,138 in 2004. The decrease in fees for 2006 as compared
to 2005 was directly related to expenses for Sarbanes Oxley compliance requirements. In
2005, approximately $90,000 was expenses for professional fees related to Sarbanes Oxley.
In 2006, we expensed minimal dollars for compliance with Sarbanes Oxley due to the
postponement of the dates by which we must include in our annual reports a report by
management on the companys internal control over financial reporting and a related
auditors report. We expect our expense for Sarbanes Oxley to increase in 2007. Other
increases in fees were related to our growth and the start up of the mortgage division in
June 2006. Start up costs for the mortgage division included $60,000 in legal fees and
$40,000 in consulting fees. The cost of accounting, auditing and legal services for a
public company is expected to continue to increase as we grow.

Occupancy
costs for the year ended December 31, 2006, were $1,102,406, compared to $724,313 in 2005
and $476,736 in 2004. Of these increases, $81,516 was related to lease payments for our
original main office as we awaited the completion of the new corporate headquarters, and
$184,884 was directly related to the mortgage operations. This increase was also the
result of increases on lease payments for most locations. As we continue to expand, we
expect that occupancy costs will increase.

Data
processing fees increased in 2006 to $547,747 from $455,646 in 2005 and $343,275 in 2004.
Data processing costs are primarily related to the volume of loan and deposit accounts and
associated transaction activity; however, we added additional security measures in 2006,
such as multi-factor authentication for our NetTeller internet banking module and expanded
our fraud detection abilities to provide our customers with added safety and maintain
compliance with our regulators. We believe our data processing costs are consistent with
our expectations.

We
experienced a 133.6% increase in other operating expenses in 2006 to $2.5 million, from
$1.05 million in 2005 and from $838,945 in 2004. These increases were primarily the result
of the addition of the mortgage division, the opening of our new corporate headquarters
and the other expenses associated with the expansion of loans and deposits. Specifically,
credit and collection expenses increased $379,044, furniture and equipment increased
$263,064, merchant expenses increased $167,866, travel expenses increased $75,293,
foreclosed/repossession expense increased $67,447, credit card processing fees increased
$63,043, funding for the director deferred compensation plan increased $59,276, loss on
sale of securities increased $58,283, and entertainment expenses increased $55,197,
collectively totaling $1.2 million, or 89% of the total increase of $1.4 million for the
year ended December 31, 2006.

Credit
and collection expense increased $379,044 in 2006. Of this amount, $207,505 is related to
the increase in brokers fees and lenders credit expenses associated with the mortgage
division. Furniture and equipment expenses increased $263,064 in 2006, and $180,751 of the
increase in 2006 is related to equipment upgrades for security surveillance equipment and
audio/visual equipment for our new corporate headquarters. The remaining portion of the
increase is related to upgrades for the ATMs, costs associated with moving the computer
center from the current main office to the temporary operations center, equipment upgrades
to the HVAC system at the operations center, along with normal equipment maintenance.
Merchant credit card processing expenses increased $167,866 in 2006 and our credit card
issuance processing fees increased $63,043 in 2006. These increases are related to the
launch of the merchant processing and credit card issuance services in 2006. Travel
increased $75,293 in 2006 and entertainment expenses increased $55,197 in 2006. Of the
$55,197 increase in entertainment expense, $45,000 is related to the establishment of an
account at the Waccamaw Community Foundation. $40,000 of the increase in
foreclosed/repossession expense is related to the write down of OREO. Director deferred
compensation plan expense increased $59,276 in 2006. The increase is related to a
modification to provide an increased level of benefits. Losses on the sale of securities
increased $58,283 in 2006, and is related to a restructuring of a small portion of the
portfolio. Dues and subscriptions increased $34,243 during 2006. The increases in dues and
subscriptions were related to the launch of merchant processing and credit card services,
and the formation of the audit and compliance staff, as well as, the mortgage division.

In
summary, these increases were primarily the result of increased operating expenses related
to the growth of the company, the formation of the mortgage division, the launch of the
merchant credit card processing and credit card issuance, along with other expenses
associated with the expansion of loans and deposits. We expect our operating expenses to
increase as we continue to grow our company.

17

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

Income
Taxes.Total income tax expense included in the Consolidated Statements of Income was
$3.5 million in 2006, $1.8 million in 2005 and $845,060 in 2004. Our effective tax rates
were 36% for 2006, 34% in 2005 and 37% for 2004.

# 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, 2006, loans
          represented 84.1% of average earning assets, representing a small decrease from
          the 84.2% that they represented at the end of 2005. At December 31, 2006, net
          loans (gross loans less the allowance for loan losses and deferred loan fees)
          totaled $405.3 million, an increase of $97.9 million, or 31.8%, from December
          31, 2005. Average gross loans increased 48.3% from $251.3 million with a yield
          of 7.54% in 2005 to $372.8 million with a yield of 8.88% in 2006. Average gross
          loans increased from $159.3 million with a yield of 6.54% in 2004. The increase
          in yield on loans was due to the increasing interest rate environment in 2005
          and 2006. Variable rate loans make up approximately 60% of our loan portfolio
          compared to 40% in fixed rates. The interest rates charged on loans vary with
          the degree of risk and the maturity and amount of the loan. Competitive
          pressures, money market rates, availability of funds and government regulations
          also influence interest rates

Mortgage
loans constitute the principal component of our loan portfolio. Mortgage loans represented
76.7%, 75.8%, and 70.4% of our portfolio at year end 2006, 2005 and 2004, respectively. In
the context of this discussion, a real estate mortgage loan is defined as any
loan, other than loans for construction purposes, secured by real estate, regardless of
the purpose of the loan. We follow the common practice of financial institutions in our
market area of obtaining a security interest in real estate whenever possible, in addition
to any other available collateral. The 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 the 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.

The
following table shows the composition of our loan portfolio by category at December 31,
for the years indicated.

Composition of Loan Portfolio
(Dollars in Thousands)

|                           | December 31,
|-------------------------- | ------------
|
|
|
|
|Commercial                 |             
|Real estate - construction |             
|Real estate - mortgage (1) |             
|Consumer                   |             
|Loans, gross               |             
|Deferred loan fees         |             
|Allowance for loan losses  |             
|                           |             
|Loans, net                 |             
|                           |             

(1)    
          Includes mortgage loans held for sale.

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, 2006. The information in this table 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.

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Loan Maturity Schedule
and Sensitivity to Changes in Interest Rates(Includes mortgage
loans held for sale)

# December 31, 2006

|                         |  | After one but |   |            
|------------------------ |  | ------------- | - | -----------
|
|Commercial               |  |               | $ | 32,738,842 
|Real estate mortgage     |  |               |   | 227,735,034
|Real estate construction |  |               |   | 43,893,476 
|Consumer                 |  |               |   | 2,890,033  
|                         |  |               |   |            
|Total                    |  |               | $ | 307,257,385
|                         |  |               |   |            
|Fixed Interest Rate      |  |               | $ | 65,431,063 
|Variable Interest Rate   |  |               |   | 241,826,322
|                         |  |               |   |            
|Total                    |  |               | $ | 307,257,385
|                         |  |               |   |            

Investment
Securities.Investment securities at December 31, 2006 averaged $60.2 million and at
December 31, 2005 averaged $42.6 million, representing 13.6% of average earning assets in
2006 and 14.3% in 2005. At December 31, 2006, our total portfolio had a book value of
$69.5 million, and a market value of $68.5 million, for an unrealized net loss of
$1,020,007. This compares to our market value of $44.0 million at December 31, 2005, and
$36.2 million at December 31, 2004.

# Investment Securities

|                                 | December 31,
|-------------------------------- | ------------
|
|Government Sponsored Enterprises |             
|Federal Agencies                 |             
|Other                            |             
|Total investment securities      |             
|                                 |             
|Other                            |             
|Total Investments                |             
|                                 |             

At
December 31, 2006, short term investments totaled $14.0 million. At December 31, 2005, we
had short-term investments of $25.5 million. At December 31, 2004 we had short-term
investments of $463,069. These funds are generally invested in an earning capacity with
maturities of six months or less in federal funds.

Contractual
maturities and yields on our investment securities (all available for sale) at December
31, 2006 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 are
generally invested in government sponsored enterprises and mortgage backed securities with
an average life of six years or less.

# Investment Securities
Maturity Distribution and YieldsDecember 31, 2006

|                     |  | After one year | After five years |  
|-------------------- |  | -------------- | ---------------- | -
|
|
|Government Sponsored |  |                |                  |  
|Enterprises          |  |                | $                | -
|Federal Agencies     |  |                |                  | -
|Other                |  |                |                  | -
|                     |  |                |                  |  
|Total                |  |                | $                | -
|                     |  |                |                  |  

Funding
Sources

Deposits
and Other Interest-Bearing Liabilities.Average total deposits were $367.0 million in
2006, up 48.0% from $248.0 million in 2005. Average interest-bearing deposits were $331.6
million in 2006, up 53.9% from $216.8 million in 2005. These increases were primarily a
result of the continued expansion of the Company. Deposit growth was attributable to
internal growth and the generation of new deposit accounts due primarily to special
promotions and increased advertising. Interest bearing checking accounts increased
primarily due to a change mandated in 2005 by the South Carolina Bar Association requiring
that all lawyer trust accounts be interest bearing. This created a shift from demand
deposit accounts to interest bearing checking accounts.

19

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

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 $319.1 million at December 31, 2006, an increase of 40.3% compared to $227.5 million
at December 31, 2005. 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 76.6% at December 31, 2006 and 73.2%
at December 31, 2005. Our loan-to-deposit ratio was 97.4% at December 31, 2006 versus
98.8% at December 31, 2005. The average loan-to-deposit ratio was 101.6% during 2006 and
100.0% during 2005.

The
following table sets forth our deposits by category as of December 31, of each respective
year.

# Deposits by CategoryDecember
31,

|                     | 2006 | 2005 | 2004 | 2003         | 2002
|-------------------- | ---- | ---- | ---- | ------------ | ----
|
|
|
|Non interest bearing |      |      |      |              |     
|demand               |      |      |      | $ 37,194,469 |     
|Interest bearing     |      |      |      |              |     
|demand               |      |      |      | 21,336,836   |     
|Money market         |      |      |      |              |     
|accounts             |      |      |      | 103,056,865  |     
|Savings              |      |      |      |              |     
|accounts             |      |      |      | 3,303,763    |     
|Time deposits <      |      |      |      |              |     
|$100,000             |      |      |      | 154,191,755  |     
|Time deposits >      |      |      |      |              |     
|$100,000             |      |      |      | 97,273,441   |     
|                     |      |      |      |              |     
|Total deposits       |      |      |      | $416,357,129 |     
|                     |      |      |      |              |     

The
following table sets forth our deposits by category with the average balance and the
average rate paid for each category. All of our deposits are domestic.

Average
balances and rates(Dollars in thousands)

|                        | 2006 | 2005 | 2004 | 2003    | 2002
|----------------------- | ---- | ---- | ---- | ------- | ----
|Non interest bearing    |      |      |      |         |     
|demand                  |      |      | $    | 33,422  |     
|Interest bearing demand |      |      |      | 21,515  |     
|Money market accounts   |      |      |      | 85,981  |     
|Savings accounts        |      |      |      | 3,266   |     
|Time deposits           |      |      | $    | 222,869 |     
|                        |      |      |      |         |     
|Total                   |      |      | $    | 367,053 |     
|                        |      |      |      |         |     

As
of December 31, 2006, time deposits greater than $100,000 that matured within three months
were $22.7 million, those over 3 months through 6 months were $43.2 million, those over 6
months through 12 months were $27.9 million and time deposits greater than $100,000 that
had a maturity greater than 12 months were $3.5 million.

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 offer rate specials
on deposits. Our deposit growth during the summer months is invested in temporary
investments and short-term securities. 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) in addition to a seasonal line of credit
with the Federal Reserve Discount Window.

Borrowings.  
          Total borrowings outstanding at December 31, 2006 were $44.7 million, at
          December 31, 2005 were $35.5 million and at December 31, 2004 were $16.5
          million. During 2006, we had average short-term borrowings of $34.7 million
          compared to $23.8 million in 2005 and $16.8 million in 2004. The maximum
          short-term borrowings outstanding during any month-end period at December 31,
          2006 was $37.5 million with an average

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

rate of 4.47%, at December 31, 2005
was $35.5 million at an average rate of 4.21% and at December 31, 2004 was $21.5 million
with an average rate of 2.36%. These funds were obtained from the Federal Home Loan Bank
to help fund our loan growth. During 2006, we had average long-term borrowings of $5.3
million compared to $125,334 at December 31, 2005 and none at December 31, 2004. At
December 31, 2006, our long term borrowings were $7.2 million. This represents the amount
of the line of credit obtained by BFNM Building, LLC to fund the construction of our new
corporate headquarters. For more information concerning borrowings, refer to Notes 8 and 9
of the Notes to the Consolidated Financial Statements.

# Junior subordinated debt.

During
2006, we had average junior subordinated debt of $10.3 million compared to $9.5 million in
2005. Total junior subordinated debt outstanding was $10.3 million at December 31, 2006
and at December 31, 2005. The maximum amount outstanding during any month-end period at
December 31, 2006 was $10.3 million with an average rate of 7.49%. At December 31, 2005,
the maximum outstanding during any month-end period was $10.3 million with an average rate
of 5.60%.

The
trust preferred securities accrue and pay distributions annually at a rate per annum equal
to the three month LIBOR plus 270 and 190 basis points, respectively, which was 8.07%and 7.26% at December 31, 2006. The distribution rate payable on these securities is
cumulative and payable quarterly in arrears. We have the right, subject to events of
default, to defer payments of interest on the trust preferred securities for a period not
to exceed 20 consecutive quarterly periods, provided that no extension period may extend
beyond the maturity dates of May 27, 2034 and March 30, 2035, respectively. We have no
current intention to exercise our right to defer payments of interest on the trust
preferred securities. We have the right to redeem the trust preferred securities, in whole
or in part, on or after May 27, 2009 and March 30, 2010, respectively. We may also redeem
the trust preferred securities prior to such dates upon occurrence of specified conditions
and the payment of a redemption premium.

Debt
issuance costs, net of accumulated amortization, from the junior subordinated debentures
totaled $41,067 at December 31, 2006, $45,740 at December 31, 2005 and $23,333 at December
31, 2004. These costs are included in other assets on the Consolidated Balance Sheets.
Amortization of debt issuance costs from trust preferred debt totaled $4,588 at December
31, 2006, $3,962 at December 31, 2005 and $1,667 at December 31, 2004, and is reported in
noninterest expenses on the Consolidated Statements of Income.

# Capital Standards and
Regulatory Matters

The
Federal Reserve Board and bank regulatory agencies require bank holding companies and
financial institutions to maintain capital at adequate levels based on a percentage of
assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%.
Under the capital adequacy guidelines, regulatory capital is classified into two tiers.
These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2
capital to risk-weighted assets. Tier 1 capital consists of common shareholders
equity, excluding the unrealized gain or loss on securities available for sale, minus
certain intangible assets. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0%
to 100% based on the risks believed to be inherent in the type of asset. Tier 2 capital
consists of Tier 1 capital plus the general reserve for loan losses, subject to certain
limitations. We are also required to maintain capital at a minimum level based on total
average assets, which is known as the Tier 1 leverage ratio. At both the holding company
and bank level, we are subject to various regulatory capital requirements administered by
the federal banking agencies. To be considered well-capitalized, we must
maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a
leverage ratio of at least 5%.

On
June 14, 2005, we closed the sale of 1,150,000 shares of our common stock at $18.75 per
share in a firm commitment underwritten offering solely managed by Sandler ONeill
& Partners, L.P. We received net proceeds from the offering of approximately $20
million after deducting underwriting discounts and expenses. We plan to use the net
proceeds for general corporate purposes, which include, among other things, providing
additional capital to our Bank to support our asset growth.

At
December 31, 2006, our total shareholders equity was $45.5 million ($45.8 million at
the bank level). At December 31, 2006, our Tier 1 capital ratio was 13.8% (11.7% at the
bank level), our total risk-based capital ratio was 15.2% (13.1% at the bank level), and
our Tier 1 leverage ratio was 12.2% (10.0% at the bank level). The Bank was considered
well-capitalized and the holding company met or exceeded its applicable
regulatory capital requirements

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Liquidity Management

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

Our
primary sources of liquidity are deposits, scheduled repayments on our loans, and interest
on and maturities of our investments. We plan to meet our future cash needs through the
liquidation of temporary investments and the generation of deposits. All of our securities
have been classified as available for sale. Occasionally, we might sell investment
securities in connection with the management of our interest sensitivity gap or to manage
cash availability. We may also utilize our cash and due from banks, security repurchase
agreements, and federal funds sold to meet liquidity requirements as needed. In addition,
we have the ability, on a short-term basis, to purchase federal funds from other financial
institutions. Presently, we have made arrangements with commercial banks for short-term
unsecured advances of up to $21.4 million. We maintain a secured line of credit in the
amount of $10.0 million with out primary correspondent. We also have a line of credit with
the FHLB to borrow up to 80% of our 1 to 4 family loans, resulting in an availability of
funds of $12.6 million at December 31, 2006. The FHLB has approved borrowings up to 15% of
the Banks total assets less advances outstanding. The borrowings are available by
pledging additional collateral and purchasing FHLB stock. At December 31, 2006, we had
borrowed $37.5 million on this line. We believe that our existing stable base of core
deposits, our bond portfolio, borrowings from the FHLB, and short-term federal funds lines
will enable us to successfully meet our liquidity needs for the next 12 months.

# Interest Rate Sensitivity

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

We
actively monitor and manage our interest rate risk exposure principally by measuring our
interest sensitivity gap, which is the positive or negative dollar difference
between assets and liabilities that are subject to interest rate repricing within a given
period of time. A gap is considered positive when the amount of interest-rate sensitive
assets exceeds the amount of interest-rate sensitive liabilities, and it is considered
negative when the amount of interest-rate sensitive liabilities exceeds the amount of
interest-rate sensitive assets. We generally would benefit from increasing market interest
rates when we have an asset-sensitive, or a positive, interest rate gap and we would
generally benefit from decreasing market interest rates when we have liability-sensitive,
or a negative, interest rate gap. When measured on a gap basis, we are
liability-sensitive over the cumulative one-year time frame and asset-sensitive after one
year as of December 31, 2006. However, our gap analysis is not a precise indicator of our
interest sensitivity position. The analysis presents only a static view of the timing of
maturities and repricing opportunities, without taking into consideration that changes in
interest rates do not affect all assets and liabilities equally. For example, rates paid
on a substantial portion of core deposits may change contractually within a relatively
short time frame, but we believe those rates are significantly less interest-sensitive
than market-based rates such as those paid on 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.

22

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Off-Balance Sheet Risk

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

At
December 31, 2006, the Bank had issued commitments to extend credit of $28.2 million
through various types of lending arrangements, of which $26.2 million was at variable
rates. The commitments expire over the next 18 months. Past experience indicates that many
of these commitments to extend credit will expire unused. We believe that we have adequate
sources of liquidity to fund commitments that are drawn upon by the borrowers.

In
addition to commitments to extend credit, we also issue standby letters of credit which
are assurances to a third party that they will not suffer a loss if our customer fails to
meet its contractual obligation to the third party. Standby letters of credit totaled
$22.8 million at December 31, 2006. Past experience indicates that many of these standby
letters of credit will expire unused. However, through our various sources of liquidity,
we believe that we will have the necessary resources to meet these obligations should the
need arise.

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

# Impact of Inflation

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

Unlike
most industrial companies, 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.

23

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# 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 has contracted with third party audit service
providers to perform internal audits of controls and compliance with systems and controls.
Audit reports are issued to 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 third party internal auditor, 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 third party internal auditor and independent
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 2006
Annual Report on Form 10-K.

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 22, 2007

24

---

# Report of Independent
Registered Public Accounting Firm

Board of Directors 
Beach 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
Subsidiaries as of December 31, 2006 and 2005 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 year period ended December 31, 2006. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 Subsidiaries
at December 31, 2006 and 2005 and the results of their operations and cash flows for each
of the years in the three year period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of America.

/s/ Elliott Davis, LLC
Elliott Davis, LLCColumbia, South Carolina March 13, 2007

25

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Consolidated Balance
Sheets

|                                                             | December 31,
|------------------------------------------------------------ | ------------
|
|Assets                                                       |             
|Cash and due from banks                                      |             
|Federal funds sold and short term investments                |             
|Investment securities                                        |             
|Loans, net                                                   |             
|Mortgage Loans Held for Sale                                 |             
|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 borrowings                                             |             
|Junior subordinated debentures                               |             
|Other liabilities                                            |             
|                                                             |             
|Total liabilities                                            |             
|                                                             |             
|Commitments and contingencies - Notes 11, 12 and 15          |             
|                                                             |             
|Shareholders equity                                         |             
|Common stock, $1 par value, 10,000,000 shares authorized,    |             
|4,768,413 shares issued and outstanding at December 31, 2006 |             
|and 3,169,958 at December 31, 2005                           |             
|Paid-in capital                                              |             
|Retained earnings                                            |             
|Accumulated other comprehensive loss                         |             
|                                                             |             
|Total shareholders' equity                                   |             
|                                                             |             
|Total liabilities and shareholders equity                   |             
|                                                             |             

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

26

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Consolidated
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       |                                 
|Other                                               |                                 
|Total interest income                               |                                 
|                                                    |                                 
|Interest expense                                    |                                 
|Deposits                                            |                                 
|Advances from FHLB and federal funds purchased      |                                 
|Junior subordinated debentures                      |                                 
|                                                    |                                 
|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 loans                               |                                 
|Gain(loss) on sale of investment securities         |                                 
|Income from cash value life insurance               |                                 
|Income from mortgage operations                     |                                 
|Other income                                        |                                 
|                                                    |                                 
|Total noninterest income                            |                                 
|                                                    |                                 
|Noninterest expenses                                |                                 
|Salaries and wages                                  |                                 
|Employee benefits                                   |                                 
|Supplies and printing                               |                                 
|Advertising and public relations                    |                                 
|Professional fees                                   |                                 
|Depreciation and amortization                       |                                 
|Occupancy                                           |                                 
|Data processing fees                                |                                 
|Other operating expenses                            |                                 
|                                                    |                                 
|Total noninterest expenses                          |                                 
|                                                    |                                 
|Income before income taxes                          |                                 
|                                                    |                                 
|Income tax expense                                  |                                 
|                                                    |                                 
|Net income                                          |                                 
|                                                    |                                 
|Basic net income per common share                   |                                 
|                                                    |                                 
|Diluted net income per common share                 |                                 
|                                                    |                                 
|Weighted average common shares outstanding:         |                                 
|Basic                                               |                                 
|                                                    |                                 
|Diluted                                             |                                 
|                                                    |                                 

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

27

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Consolidated
Statements of Changes in Shareholders Equity and Comprehensive Income (Loss)
For the years ended December 31, 2006, 2005 and 2004

|                           |  |  |  |           | Accumulated |  
|-------------------------- |  |  |  | --------- | ----------- | -
|
|
|
|Balance,                   |  |  |  |           |             |  
|December 31, 2003          |  |  |  | 1,323,768 |             | $
|Net income                 |  |  |  | -         |             |  
|Other comprehensive,       |  |  |  |           |             |  
|income, net of taxes:      |  |  |  |           |             |  
|Unrealized gain on         |  |  |  |           |             |  
|investment securities      |  |  |  | -         |             |  
|Plus reclassification      |  |  |  |           |             |  
|adjustments for            |  |  |  |           |             |  
|gains included in          |  |  |  |           |             |  
|net income                 |  |  |  | -         |             |  
|                           |  |  |  |           |             |  
|Comprehensive loss         |  |  |  | -         |             |  
|Exercise of stock options  |  |  |  | 18,750    |             |  
|3-for-2 stock split        |  |  |  | 670,990   |             |  
|                           |  |  |  |           |             |  
|Balance, December 31, 2004 |  |  |  | 2,013,508 |             |  
|Net income                 |  |  |  | -         |             |  
|Other comprehensive,       |  |  |  | 11        |             |  
|income, net of taxes:      |  |  |  |           |             |  
|Unrealized loss on         |  |  |  |           |             |  
|investment securities      |  |  |  | -         |             |  
|Plus reclassification      |  |  |  |           |             |  
|adjustments for            |  |  |  |           |             |  
|gains included in          |  |  |  |           |             |  
|net income                 |  |  |  | -         |             |  
|                           |  |  |  |           |             |  
|Comprehensive income       |  |  |  | -         |             |  
|Exercise of stock options  |  |  |  | 6,450     |             |  
|Issuance of common stock   |  |  |  | 1,150,000 |             |  
|                           |  |  |  |           |             |  
|Balance, December 31, 2005 |  |  |  | 3,169,958 |             |  
|Net income                 |  |  |  | -         |             |  
|Other comprehensive,       |  |  |  |           |             |  
|income, net of taxes:      |  |  |  |           |             |  
|Unrealized gain on         |  |  |  |           |             |  
|investment securities      |  |  |  | -         |             |  
|Plus reclassification      |  |  |  |           |             |  
|adjustments for            |  |  |  |           |             |  
|losses included in         |  |  |  |           |             |  
|net income                 |  |  |  | -         |             |  
|                           |  |  |  |           |             |  
|Comprehensive income       |  |  |  | -         |             |  
|Exercise of stock options  |  |  |  | 13,575    |             |  
|Issuance of common stock   |  |  |  |           |             |  
|3-for-2 stock split        |  |  |  | 1,584,880 |             |  
|                           |  |  |  |           |             |  
|Balance, December 31, 2006 |  |  |  | 4,768,413 |             | $
|                           |  |  |  |           |             |  

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

28

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Consolidated
Statements of Cash Flows

|                                                        | For the years ended December 31,
|------------------------------------------------------- | --------------------------------
|
|Operating activities                                    |                                 
|Net income                                              |                                 
|Adjustments to reconcile net income to net              |                                 
|cash provided by operating activities:                  |                                 
|Depreciation and amortization                           |                                 
|Proceeds from sale of mortgages held for sale           |                                 
|Disbursements for mortgages held for sale               |                                 
|Accretion of deferred loan fees                         |                                 
|Discount accretion and premium amortization             |                                 
|Deferred income taxes                                   |                                 
|Provision for loan losses                               |                                 
|Loss(gain) on sale of property and equipment            |                                 
|Loss (gain) on sale of investment securities            |                                 
|Investment in Beach First National Trusts               |                                 
|Increase in other assets                                |                                 
|Increase in other liabilities                           |                                 
|Loss on sale of other real estate owned                 |                                 
|                                                        |                                 
|Net cash provided by operating activities               |                                 
|                                                        |                                 
|Investing activities                                    |                                 
|Proceeds from paydowns of investment securities         |                                 
|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                                  |                                 
|Purchase of life insurance contracts                    |                                 
|Purchase of property and equipment                      |                                 
|Proceeds from sale of property and equipment            |                                 
|Proceeds from sale of other real estate owned           |                                 
|                                                        |                                 
|Net cash used by investing activities                   |                                 
|                                                        |                                 
|Financing activities                                    |                                 
|Advances from Federal Home Loan Bank                    |                                 
|Net increase in deposits                                |                                 
|Advances from junior subordinated debentures            |                                 
|Proceeds from exercise of stock options                 |                                 
|Cash paid in lieu of fractional shares                  |                                 
|Proceeds from stock issuance, net                       |                                 
|Proceeds from other borrowings                          |                                 
|Repayments of other borrowings                          |                                 
|                                                        |                                 
|Net cash provided by financing activities               |                                 
|                                                        |                                 
|Net (decrease) increase in cash                         |                                 
|                                                        |                                 
|Cash and cash equivalents at beginning of year          |                                 
|                                                        |                                 
|Cash and cash equivalents at end of year                |                                 
|                                                        |                                 
|Cash paid for                                           |                                 
|Interest                                                |                                 
|                                                        |                                 
|Income taxes                                            |                                 
|                                                        |                                 

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

29

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

# 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), Beach First National Trust (the Trust), Beach
First National Trust II (the Trust II), and BFNM, LLC (the LLC).
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.
The Trust and the Trust II are special purpose subsidiaries organized for the sole purpose
of issuing trust preferred securities.

In 2005, the Company formed a limited
liability corporation with Nelson Mullins Riley & Scarborough, LLP (Nelson Mullins)
known as BFNM, LLC. The purpose of the LLC was to construct and own an office building in
Myrtle Beach, South Carolina. The building was completed in 2006. The Company owns
two-thirds of the LLC and Nelson Mullins owns one-third.

Basis of presentation
The consolidated financial statements include the accounts of the Company, the
Bank, and the LLC. 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. In accordance with current accounting guidance, the
Trust and Trust II have not been consolidated in these financial statements. 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  Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of loans, investment securities,
federal funds sold and amounts due from banks.

The Company originates consumer,
commercial business, commercial real estate, residential mortgage loans and land
acquisition and land development loans for personal and business purposes. These loans are
primarily originated in the markets we serve. These markets are centered in the Myrtle
Beach area and Hilton Head, S. C. but include the geographical area from Little River,
South Carolina to Pawleys Island, S. C. and Hilton Head and Bluffton in Beaufort County,
S. C. The mortgage division originates mortgages in several states and these loans are
sold to investors.

The Companys loan portfolio is
not centered in loans to any single borrower or a relatively small number of borrowers.
Additionally, management is not aware of any concentrations of loans to groups of
borrowers or industries that would be similarly affected by economic conditions except for
loans for the acquisition of land and loans for the development of land and for commercial
real estate loans. The acquisition of land and loans for the development of land
concentration totaled $120.1 million at December 31, 2006 representing 264.2% of total
capital and 29.6% of net loans. At December 31, 2005 the concentration totaled $93.6
million representing 239.2% of total capital and 30.4% of net loans. This concentration
declined as a percentage of loans in 2006, as compared to 2005. Investment in second
homes, relocation of retirees to our markets and the steady growth of population to
support the service industries (i.e., heating and cooling, plumbing, janitorial services,
pest control, medical, etc.) have contributed to this concentration. The commercial real
estate loan concentration totaled $116.7 million at December 31, 2006, representing 256.7%
of total capital and 28.8% of net loans. At December 31, 2005 the concentration totaled
$90.8 million, representing 233.0% of total capital and 29.5% of net loans. This
concentration declined as a percentage of loans in 2006, as compared to 2005. There is a
diversified portfolio mix of these loans. The loans are primarily centered in small
business owner occupied buildings, retail shops, office buildings, medical offices,
warehouses, service businesses, churches, restaurants, convenience stores and tourist
related businesses.

30

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

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

These loans could be negatively
impacted by changes in economic conditions, declining market values, slower absorption of
the projects and interest rate increases. The Company has not experienced any significant
losses in these areas. Management continues to implement procedures to monitor these
concentrations and has considered these concentrations in its allowance for loan
loss analysis.

In addition to monitoring potential
concentrations of loans to particular borrowers or groups of borrowers, industries and
geographic regions, management monitors exposure to credit risk from concentrations of
lending products and practices. These loans include those that subject borrowers to
substantial payment increases (e.g. principal deferral periods, loans with initial
interest-only periods, etc), and loans with high loan-to-value ratios. Management tries to
use its best judgment when evaluating risk and the effect and impact these factors may
have on the banks loan portfolio. These factors may include national and local economic
conditions, concentrations of credit types of loans that carry a higher degree of risk,
terms of loans both long-term and interest only repayment schedules, supervisory
loan-to-value limits, unsecured loan concentrations, nature and mix of the loan portfolio,
vacancy rates, collateral types, insurance volatility, real estate markets, entry into new
products and other factors that may be assigned from time to time.

Additionally, there are industry
practices that could subject the Company to increased credit risk should economic
conditions change over the course of a loans life. For example, the Company makes
variable rate loans and fixed rate principal-amortizing loans with maturities prior to the
loan being fully paid (i.e. balloon payment loans). These loans are underwritten and
monitored to manage the associated risks. Therefore, management believes that these
particular practices do not subject the Company to unusual credit risk.

The Companys investment
portfolio consists principally of obligations of the United States and its agencies or its
corporations. In the opinion of management, there is no concentration of credit risk in
its investment portfolio. The Company places its deposits and correspondent accounts with
and sells its federal funds to high quality institutions. Management believes credit risk
associated with correspondent accounts is not significant.

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. SFAS 115 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.

31

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

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.

Fees 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 judgment 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 probable losses in the
loan portfolio; however, managements judgment 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.

Residential Mortgage Loans
Held-for-Sale  The Companys residential mortgage lending
activities for sale in the secondary market are comprised of accepting residential
mortgage loan applications, qualifying borrowers to standards established by investors
under pre-existing commitments. Funded residential mortgages held temporarily for sale to
investors are recorded at the lower of cost or market value. Application and origination
fees collected by the Company are recognized as income upon sale to the investor.

The Company issues rate lock
commitments to borrowers based on prices quoted by secondary market investors. When rates
are locked with borrowers, a sales commitment is immediately entered (on a best efforts
basis) at a specified price with a secondary market investor. Accordingly, any potential
liabilities associated with rate lock commitments are offset by sales commitments to
investors.

32

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

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

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.

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. All share amounts have
been adjusted for the 3-for-2 stock splits recorded in 2004 and 2006. 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                  |                                 
|                                            |                                 

33

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

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

Stock Based
Compensation  The Company has a stock-based employee compensation
plan which is further described in Note 17. For the years ended December 31, 2005 and
2004, the Company utilized the intrinsic value method under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (as amended)(APB 25). Under the intrinsic value method prescribed by APB 25, no
compensation costs were recognized for the Companys stock options because the option
exercise price in its plans equals the market price on the date of the grant.

Effective January 1, 2006, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 123
(revised 2004), Share-Based Payment (SFAS No. 123(R)). SFAS No.
123(R), which requires that the fair value of share-based payments to employees, including
stock options, be recognized as compensation expense in the statement of income.

In December 2005, the Company elected
to fully vest all outstanding options effective immediately. As a result, there is no
compensation cost attributable to periods after 2005 for options granted in 2005 or
earlier, because there is no requisite service period over which the options must be
earned. In addition, no options were granted during the year ended December 31, 2006 and,
therefore, no cost to recognize in the financial statements.

The following table illustrates the
effect on net income and net income per common share as if the Company had applied fair
value recognition provisions to stock-based employee compensation in 2006, 2005 and 2004.

|                                            | 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                                     |                                 
|Amount of stock-based employee compensation |                                 
|included in net income as reported          |                                 
|Pro forma net income                        |                                 
|                                            |                                 
|Net income per common share                 |                                 
|Basic - as reported                         |                                 
|                                            |                                 
|Basic - pro forma                           |                                 
|                                            |                                 
|Diluted - as reported                       |                                 
|                                            |                                 
|Diluted - pro forma                         |                                 
|                                            |                                 

34

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

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

As previously mentioned, on December
14, 2005, the Board of Directors approved accelerating the vesting of 117,000 unvested
stock options. The accelerated vesting was effective as of December 14, 2005. All of the
other terms and conditions applicable to the outstanding stock options remained unchanged.

The decision to accelerate vesting of
these options avoided recognition of pre-tax compensation expense by the Company upon the
adoption of SFAS 123(R) in 2006. In the Companys view, the future avoidance of
compensation expense will outweigh the incentive and retention value associated with the
stock options. The future pre-tax compensation expense avoided is expected to be
approximately $137,000 in 2007. The Company believes that the acceleration of vesting
stock options meets the criteria for variable accounting under FIN No. 44. Based upon past
experience, the Company believes the grantees of these stock options will remain as a
director or employee of the Company.

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
PronouncementsThe following is a summary of recent authoritative pronouncements
the Company:

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

In March 2006, the FASB issued SFAS
No. 156, Accounting for Servicing of Financial Assetsan amendment of FASB
Statement No. 140. This Statement amends FASB No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with
respect to the accounting for separately recognized servicing assets and servicing
liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset by entering
into a servicing contract; requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if practicable; permits an
entity to choose its subsequent measurement methods for each class of separately
recognized servicing assets and servicing liabilities; at its initial adoption, permits a
one-time reclassification of available-for-sale securities to trading securities by
entities with recognized servicing rights, without calling into question the treatment of
other available-for-sale securities under Statement 115, provided that the
available-for-sale securities are identified in some manner as offsetting the
entitys exposure to changes in fair value of servicing assets or servicing
liabilities that a servicer elects to subsequently measure at fair value; and requires
separate presentation of servicing assets and servicing liabilities subsequently measured
at fair value in the statement of financial position and additional disclosures for all
separately recognized servicing assets and servicing liabilities. An entity should adopt
SFAS No. 156 as of the beginning of its first fiscal year that begins after September 15,
2006. The Company does not believe the adoption of SFAS No. 156 will have a material
impact on its financial position, results of operations and cash flows.

In July 2006, the FASB issued FASB
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attributable for the financial statement recognition and measurement of a tax

35

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

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

# Recently Issued
Accounting Pronouncements  continued

position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48
is effective for fiscal years beginning after December 15, 2006. The Company is currently
analyzing the effects of FIN 48 on its financial position, results of operations or cash
flows.

In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. This standard does not
require any new fair value measurements, but rather eliminates inconsistencies found in
various prior pronouncements. SFAS 157 is effective for the Company on January 1, 2008 and
is not expected to have a significant impact on the Companys financial statements.

In September 2006, the FASB issued
SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans (SFAS 158), which amends SFAS 87 and SFAS 106 to
require recognition of the overfunded or underfunded status of pension and other
postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior
service costs and credits, and any remaining transition amounts under SFAS 87 and SFAS 106
that have not yet been recognized through net periodic benefit cost will be recognized in
accumulated other comprehensive income, net of tax effects, until they are amortized as a
component of net periodic cost. The measurement date  the date at which the benefit
obligation and plan assets are measured  is required to be the companys fiscal
year end. SFAS 158 is effective for publicly-held companies for fiscal years ending after
December 15, 2006, except for the measurement date provisions, which are effective for
fiscal years ending after December 15, 2008. The Company does not have a defined benefit
pension plan. Therefore, SFAS 158 will not impact the Companys financial conditions
or results of operations.

In September, 2006, The FASB ratified
the consensuses reached by the FASBs Emerging Issues Task Force (EITF)
relating to EITF 06-4 Accounting for the Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4
addresses employer accounting for endorsement split-dollar life insurance arrangements
that provide a benefit to an employee that extends to postretirement periods should
recognize a liability for future benefits in accordance with SFAS No. 106,
Employers Accounting for Postretirement Benefits Other Than Pensions,or Accounting Principles Board (APB) Opinion No. 12, Omnibus
Opinion1967".EITF 06-4 is effective for fiscal years beginning after
December 15, 2007. Entities should recognize the effects of applying this Issue through
either (a) a change in accounting principle through a cumulative-effect adjustment to
retained earnings or to other components of equity or net assets in the statement of
financial position as of the beginning of the year of adoption or (b) a change in
accounting principle through retrospective application to all prior periods. The Company
is currently analyzing the effect of adoption of EITF 06-4 on its financial position,
results of operations and cash flows.

In September 2006, the FASB ratified
the consensus reached related to EITF 06-5, Accounting for Purchases of Life
InsuranceDetermining the Amount That Could Be Realized in Accordance with FASB
Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance.  EITF
06-5 states that a policyholder should consider any additional amounts included in the
contractual terms of the insurance policy other than the cash surrender value in
determining the amount that could be realized under the insurance contract.  EITF
06-5 also states that a policyholder should determine the amount that could be realized
under the life insurance contract assuming the surrender of an individual-life by
individual-life policy (or certificate by certificate in a group policy). EITF 06-5 is
effective for fiscal years beginning after December 15, 2006.  The Company is
currently analyzing the effect of adoption of EITF 06-5 on its financial position, results
of operations and cash flows.

In September 2006, the SEC issued
Staff Accounting Bulleting No. 108 (SAB 108). SAB 108 provides interpretive
guidance on how the effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a potential current year misstatement. Prior to SAB
108, Companies might evaluate the materiality of financial statement misstatements using
either the income statement or balance sheet approach, with the income statement approach
focusing on new misstatements added in the current year, and the balance sheet approach
focusing on the cumulative amount of misstatement present in a companys balance
sheet. Misstatements

36

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

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

Recently Issued
Accounting Pronouncements  continued

that would be material under one
approach could be viewed as immaterial under another approach, and not be corrected. SAB
108 now requires that companies view financial statement misstatements as material if they
are material according to either the income statement or balance sheet approach. The
Company has implemented SAB 108 and determined that it has no impact on the reported
results of operations or financial conditions as reported herein.

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.

# 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, 2006 and 2005 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, 2006
|-------------------------------- | -----------------
|
|
|
|Government Sponsored Enterprises |                  
|Federal Agencies                 |                  
|Corporate                        |                  
|                                 |                  
|Total securities                 |                  
|                                 |                  

|                                 | December 31, 2006
|-------------------------------- | -----------------
|
|
|
|Government Sponsored Enterprises |                  
|Federal Agencies                 |                  
|                                 |                  
|Total securities                 |                  
|                                 |                  

The amortized costs and fair values
of investment securities at December 31, 2006, 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. Federal agency securities are presented as a separate line since pay
downs are expected before contractual maturity dates.

|                                      | Amortized cost | Fair value
|------------------------------------- | -------------- | ----------
|
|Due after one year through five years |                |           
|Due after five through ten years      |                |           
|Due after ten years                   |                |           
|                                      |                |           
|Sub-total                             |                |           
|Federal Agencies                      |                |           
|                                      |                |           
|Total securities                      |                |           
|                                      |                |           

37

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

NOTE 3  INVESTMENT
SECURITIES  continued

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, 2006.

|                     | Less than 12 months | 12 months or More | Total
|-------------------- | ------------------- | ----------------- | -----
|
|
|
|Government Sponsored |                     |                   |      
|Enterprises          |                     |                   | $    
|Federal Agencies     |                     |                   |      
|                     |                     |                   |      
|Total                |                     |                   | $    
|                     |                     |                   |      

Securities classified as
available-for-sale are recorded at fair market value. Approximately 93.6% of the
unrealized losses, or forty individual securities, consisted of securities in a continuous
loss position for twelve months or more. The Company has the ability and intent to hold
these securities until such time as the value recovers or the securities mature. The
Company believes, based on industry analyst reports and credit ratings, that the
deterioration in value is attributable to changes in market interest rates and is not in
the credit quality of the issuer and therefore, these losses are not considered
other-than-temporary.

The amortized cost and fair value of
securities pledged as collateral for public funds and other purposes as of December 31,
2006 and 2005 were $40,097,490 and $38,837,711 and $37,740,753 and $38,741,006,
respectively.

For the years ended December 31,
2006, 2005 and 2004, proceeds from sales of securities available for sale amounted to
$4,473,361, $6,148,824, and $5,034,461, respectively. Gross realized gains (losses)
amounted to $1,007, $(3,935), and $37,395, respectively.

# 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                 |             
|                           |             

Impaired loans which consisted
entirely of nonaccrual loans totaled $1,624,511 and $1,111,264 at December 31, 2006 and
2005, respectively, which had the effect of reducing net income $145,626 in 2006 and
$148,196 in 2005.

38

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

# 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                   |                                 
|                                       |                                 

# 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 |             
|                             |             

The majority of the construction in
process relates to the construction of the BFNM, LLC building (see Note 9). Depreciation
expense for the years ended December 31, 2006, 2005, and 2004 amounted to $518,551,
$539,406, and $446,158, 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              | Life in Years | Depreciation Method
|-------------------------- | ------------- | -------------------
|
|Software                   |               |                    
|Furniture and equipment    |               |                    
|Buildings and improvements |               |                    

The Bank has entered into
non-cancelable operating leases related to land and buildings. At December 31, 2006,
future minimum payments under non-cancelable operating leases with initial or remaining
terms of one year or more are as follows:

| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 

39

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

The Bank has entered into six
separate lease agreements for its banking locations and seven lease agreements for its
mortgage production locations. These lease agreements have various initial lease terms and
expire on various dates through 2022. The lease agreements generally provide that the Bank
is responsible for ongoing repairs and maintenance, insurance and real estate taxes. The
leases also provide for renewal options and certain scheduled increases in monthly lease
payments. Total rental expense amounted to $775,232, $508,250 and $293,098 for the years
ended December 31, 2006, 2005, and 2004, respectively.

Other income for the year ended
December 31, 2006 includes a gain on the sale of a branch location of $583,011.

# 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                     |             
|                                   |             

At December 31, 2006 and 2005,
$34,644,000 and $23,748,000 of time deposits less than $100,000 consisted of brokered
deposits. Interest expense on time deposits greater than $100,000 was $4,446,592 in 2006,
$1,880,101 in 2005, and $866,990 in 2004.

At December 31, 2006 the scheduled
maturities of time deposits are as follows:

| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 

# NOTE 8  ADVANCES
FROM FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan
Bank (FHLB) at December 31 are summarized below:

|                    | Current |  |  |      |  
|------------------- | ------- |  |  | ---- | -
|
|Convertible         |         |  |  | 3.87 | %
|Convertible         |         |  |  | 4.51 | %
|Convertible         |         |  |  | 3.44 | %
|Convertible         |         |  |  | 3.68 | %
|Convertible         |         |  |  | 4.06 | %
|Fixed Rate Hybrid   |         |  |  | 4.76 | %
|Fixed Rate Credit   |         |  |  | 2.25 | %
|Prime Based Advance |         |  |  | 5.41 | %
|                    |         |  |  |      |  
|                    |         |  |  |      |  
|                    |         |  |  |      |  

The advances were collateralized by one
to four family residential mortgage loans, government sponsored enterprises and FHLB
stock. Additional borrowings are available by pledging additional collateral and
purchasing additional stock in the FHLB.

40

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

# NOTE 9  OTHER
BORROWINGS

In June 2005, the LLC obtained a loan
from a bank for the construction of a building that serves as the Companys corporate
office. The loan allowed for total available proceeds of $7,235,000 to be advanced as
construction is completed. The loan requires monthly payments of accrued interest during
the twelve-month construction period equal to LIBOR plus 1.40%, followed by 107
installments of principal and interest based on a fifteen year amortization, with all
remaining principal and interest due on June 15, 2015. The outstanding balance on the loan
at December 31, 2006 was $7,209,820.

# NOTE 10  JUNIOR
SUBORDINATED DEBENTURES

On May 27, 2004, and March 30, 2005,
Beach First National Trusts (the Trust) and (Trust II),
non-consolidated subsidiaries of the Company, issued and sold floating rate capital
securities of the trusts, which are reported on the Consolidated Balance Sheets as junior
subordinated debentures. Each issuance generated proceeds of $5.0 million. The Trusts
loaned these proceeds to the Company to use for general corporate purposes, primarily to
provide capital to the Bank. The debentures qualify as Tier 1 capital under Federal
Reserve Board guidelines.

During 2006, the average junior
subordinated debt was $10.3 million compared to $9.5 million in 2005. Total junior
subordinated debt outstanding at December 31, 2006 and 2005 was $10.3 million and $10.3
million, respectively. The maximum amount outstanding during any month-end period in 2006
was $10.3 million with an average rate of 7.49%. The maximum amount outstanding during any
month-end period in 2005 was $10.3 million with an average rate of 5.60%.

The trust preferred securities accrue
and pay distributions annually at a rate per annum equal to the three month LIBOR plus 270
and 190 basis points, respectively, which was 8.07%and 7.26% at December 31,
2006.  The distribution rate payable on these securities is cumulative and payable
quarterly in arrears.  We have the right, subject to events of default, to defer
payments of interest on the trust preferred securities for a period not to exceed 20
consecutive quarterly periods, provided that no extension period may extend beyond the
maturity dates of May 27, 2034 and March 30, 2035, respectively.  We have no current
intention to exercise our right to defer payments of interest on the trust preferred
securities.  We have the right to redeem the trust preferred securities, in whole or
in part, on or after May 27, 2009 and March 30, 2010, respectively.  We may also
redeem the trust preferred securities prior to such dates upon occurrence of specified
conditions and the payment of a redemption premium.

Debt issuance costs, net of
accumulated amortization, from the junior subordinated debentures totaled $41,067 and
$45,740 at December 31, 2006 and 2005, respectively, and are included in other assets on
our Consolidated Balance Sheets.  Amortization of debt issuance costs from trust
preferred debt totaled $ 4,588, $3,962, and $1,667 for the years ended December 31, 2006,
2005 and 2004, respectively, and is reported in noninterest expense on the Consolidated
Statements of Income.

# NOTE 11  UNUSED
LINES OF CREDIT

At December 31, 2006, the Bank had
$16,400,000 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, 2006, the Bank had
the ability to borrow an additional $12.6 million from the FHLB secured by a blanket lien
on one to four family first mortgage loans. In addition, U.S. government agency securities
with a book value of $7,356,742 and a market value of $7,092,114, respectively, are
pledged to secure the borrowing. 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.

41

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

# NOTE 12 
COMMITMENTS AND CONTINGENCIES

The Company is party to litigation
and claims arising in the normal course of business. As of December 31, 2006, there
is no litigation pending.

Refer to Note 15 concerning financial
instruments with off balance sheet risk.

# NOTE 13  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:

|                               | 2006 | 2005 | 2004
|------------------------------ | ---- | ---- | ----
|Income taxes currently payable |      |      |     
|Federal                        |      |      | $   
|State                          |      |      |     
|                               |      |      |     
|                               |      |      |     
|                               |      |      |     
|Deferred taxes                 |      |      |     
|Allowance for loan losses      |      |      |     
|Depreciation                   |      |      |     
|Loan origination fees          |      |      |     
|Deferred compensation          |      |      |     
|Other                          |      |      |     
|                               |      |      |     
|                               |      |      |     
|                               |      |      |     
|Income tax expense             |      |      | $   
|                               |      |      |     

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

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

The net deferred tax asset is
reported in other assets in the Consolidated Balance Sheets at December 31, 2006 and 2005.
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.

42

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

NOTE 13  INCOME
TAXES  continued

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:

|                              | 2006 | 2005 | 2004
|----------------------------- | ---- | ---- | ----
|
|
|Tax expense at statutory rate |      |      | $   
|Increase (decrease) in taxes  |      |      |     
|Resulting from:               |      |      |     
|State bank tax (net of        |      |      |     
|federal benefit)              |      |      |     
|Other                         |      |      |     
|                              |      |      |     
|Tax provision                 |      |      | $   
|                              |      |      |     

# NOTE 14  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, 2006 and 2005 approximated
$19,712,400 and $19,778,967, respectively.

# NOTE 15  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.

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, 2006,
unfunded commitments to extend credit were $28,160,256 of which $1,950,261 were at fixed
rates, and $26,209,995 were 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.

43

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

Collateral varies but may include
accounts receivable, inventory, property, plant and equipment, commercial and residential
real estate.

At December 31, 2006, there were
commitments totaling $22,807,261 for letters 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 16  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 2006, 2005, and 2004 amounted to $223,930, $117,497, and
$81,464, 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
$3,424,586 and $3,301,417 at December 31, 2006 and 2005, respectively. Income earned on
these policies is reflected as a separate line item in the Consolidated Statements of
Income. The Company recorded expense related to these benefits of $250,272 in 2006 and
$158,578 in 2005.

# NOTE 17  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 402,702 incentive stock options, adjusted for the stock split, at an option
price per share not less than the fair market value on the date of grant. As discussed in
Note 1, the Company fully vested all options on December 14, 2005 that had been granted,
including an additional 117,000 options issued to directors on the same date.

The fair value of the option grant is
estimated on the date of grant using the Black-Scholes option pricing model. There were no
options granted for the year ended December 31, 2006. For the year ended December 31,
2005, the risk free interest rate used ranged from 4.04% to 4.76%, the expected option
life was 10 years, volatility ranged from 34.98% to 35.58% and the assumed dividend rate
was zero. For the year ended December 31, 2004, the risk free interest rate used ranged
from 4.04% to 4.76%, the expected option life was 10 years, volatility ranges from 29.02%
to 30.20%, and the assumed dividend rate was zero.

A summary of the status of the plan
as of December 31, 2006, 2005 and 2004 and changes during the years ended on those dates
is presented below adjusted for the stock splits:

|                       | 2006 | 2005 | 2004
|---------------------- | ---- | ---- | ----
|
|
|
|
|Outstanding at         |      |      |     
|beginning of year      |      |      |     
|Granted                |      |      |     
|Exercised              |      |      |     
|Forfeited or expired   |      |      |     
|                       |      |      |     
|Outstanding at end     |      |      |     
|of year                |      |      |     
|                       |      |      |     
|Options exercisable at |      |      |     
|year-end               |      |      |     
|                       |      |      |     
|Shares available for   |      |      |     
|Grant                  |      |      |     
|                       |      |      |     
|Weighted Average fair  |      |      |     
|value of options       |      |      |     
|granted                |      |      |     

44

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

NOTE 17  STOCK OPTION
PLANS continued

The total fair value of shares vested
during the years ended December 31, 2006, 2005, and 2004 was $0, $2,030,054, and $531,357,
respectively.

The total intrinsic value of options
exercised during the years ended December 31, 2006, 2005 and 2004 was $256,118, $158,245,
and $661,062, respectively.

As of December 31, 2006 all options
outstanding were exercisable. The aggregate intrinsic value of these options was
$5,632,103 and the weighted average remaining contractual term of the options was 6.92
years at December 31, 2006.

# NOTE 18 
SHAREHOLDERS EQUITY

Stock Dividends  In
October 2006, the Company announced a 3-for-2 stock split effected in the form of a 50%
stock dividend to shareholders of record on December 1, 2006. The dividend was paid on
December 21, 2006. All earnings per share amounts for all periods have been adjusted to
reflect this 3-for-2 split. In April 2004, the Company announced a 3-for-2 stock split
effected in the form of a 50% stock dividend to shareholders of record on May 12, 2004.
The dividend was paid on June 2, 2004. All earnings per share amounts for all periods have
been adjusted to reflect this 3-for-2 split.

Stock Offering  On June
14, 2005, the Company closed on a secondary stock offering whereby 1,150,000 shares of the
Companys stock was issued at $18.75 per share. Net proceeds after deducting
underwriter discounts and expenses were $19.9 million. Proceeds from the offering will be
used to support the growth of the Company.

Cash 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 Office of the Comptroller of the Currency. 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 19 
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 mustmeet 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, 2006,
that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2006, 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.

45

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

NOTE 19  REGULATORY
MATTERS  continued

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

|                           |  |  | To be well capitalized
|-------------------------- |  |  | ----------------------
|
|
|
|
|
|As of December 31, 2006    |  |  |                       
|Total Capital (to risk     |  |  |                       
|weighted assets)           |  |  | $                     
|Tier 1 Capital (to risk    |  |  |                       
|weighted assets)           |  |  |                       
|Tier 1 Capital (to average |  |  |                       
|assets)                    |  |  |                       
|                           |  |  |                       
|As of December 31, 2005    |  |  |                       
|Total Capital (to risk     |  |  |                       
|weighted assets)           |  |  | $                     
|Tier 1 Capital (to risk    |  |  |                       
|weighted assets)           |  |  |                       
|Tier 1 Capital (to average |  |  |                       
|assets)                    |  |  |                       

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, 2006    |  |  |                       
|Total Capital (to risk     |  |  |                       
|weighted assets)           |  |  | $                     
|Tier 1 Capital (to risk    |  |  |                       
|weighted assets)           |  |  |                       
|Tier 1 Capital (to average |  |  |                       
|assets)                    |  |  |                       
|                           |  |  |                       
|As of December 31, 2005    |  |  |                       
|Total Capital (to risk     |  |  |                       
|weighted assets)           |  |  | $                     
|Tier 1 Capital (to risk    |  |  |                       
|weighted assets)           |  |  |                       
|Tier 1 Capital (to average |  |  |                       
|assets)                    |  |  |                       

# NOTE 20  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.

46

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

NOTE 20  FAIR
VALUE OF FINANCIAL INSTRUMENTS  continued

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. 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. Fair value for junior subordinated
debentures approximates their carrying value since the debentures were issued at a
floating rate. Fair value for other borrowings approximates their carrying value since the
borrowings bear a floating 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    |             
|Trust Preferred Securities           |             
|                                     |             
|Financial Liabilities:               |             
|Deposits                             |             
|Advances from Federal Home Loan Bank |             
|                                     |             
|Other borrowings                     |             
|Junior subordinated debt             |             

Financial Instruments with Off-Balance Sheet Risks:

|                             | Notional | Fair | Notional | Fair      
|---------------------------- | -------- | ---- | -------- | ----------
|
|Commitments to extend credit |          |      |          | 28,160,256
|Cash and due from banks      |          |      |          | 22,807,261

47

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

# NOTE 21  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                                       |             
|Investment in Bank subsidiary              |             
|Investment in Beach First National Trusts  |             
|Investment in BFNM, LLC                    |             
|Other assets                               |             
|                                           |             
|Total assets                               |             
|                                           |             
|Liabilities and Shareholders Equity       |             
|Accounts payable                           |             
|Due to Bank subsidiary                     |             
|Junior subordinated debentures             |             
|Shareholders equity                       |             
|                                           |             
|Total liabilities and shareholders' equity |             
|                                           |             

# Condensed Statements
of Income

|                                      | For the years ended December 31,
|------------------------------------- | --------------------------------
|
|Income                                |                                 
|Expenses                              |                                 
|Interest                              |                                 
|Amortization                          |                                 
|Other expenses                        |                                 
|                                      |                                 
|Total expenses                        |                                 
|                                      |                                 
|Income before equity in undistributed |                                 
|net income of subsidiaries            |                                 
|Equity in undistributed net income of |                                 
|Subsidiaries                          |                                 
|                                      |                                 
|                                      |                                 
|                                      |                                 
|Net income                            |                                 
|                                      |                                 

48

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

# NOTE 21  PARENT
COMPANY FINANCIAL INFORMATION  continued

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 subsidiaries                                    |                                 
|Amortization                                             |                                 
|Increase (decrease) in due to 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                            |                                 
|Additional investment in BFNM, LLC                       |                                 
|Investment in Beach First National Trusts                |                                 
|Commissions paid on trust preferred securities           |                                 
|Proceeds from sale of securities available for sale      |                                 
|Purchase of premises and equipment                       |                                 
|                                                         |                                 
|Net cash provided (used for) investing activities        |                                 
|                                                         |                                 
|Financing activities                                     |                                 
|Proceeds from issuance of junior subordinated debentures |                                 
|Proceeds from exercise of stock options                  |                                 
|Cash in lieu of stock dividend                           |                                 
|Proceeds from stock issuance, net                        |                                 
|                                                         |                                 
|Net cash provided by financing activities                |                                 
|                                                         |                                 
|Net increase in cash and cash equivalents                |                                 
|                                                         |                                 
|CASH AND CASH EQUIVALENTS,                               |                                 
|BEGINNING OF YEAR                                        |                                 
|                                                         |                                 
|CASH AND CASH EQUIVALENTS, END OF YEAR                   |                                 
|                                                         |                                 

49

---

# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Notes to Consolidated Financial Statements

# NOTE 22  QUARTERLY
DATA (UNAUDITED)

|                          | 2006 | 2005
|------------------------- | ---- | ----
|
|
|
|Interest income           |      |     
|Interest expense          |      |     
|                          |      |     
|Net interest income       |      |     
|Provision for loan losses |      |     
|Net interest income after |      |     
|provision for loan losses |      |     
|                          |      |     
|Noninterest income        |      |     
|Noninterest expenses      |      |     
|                          |      |     
|Income before taxes       |      |     
|Income tax expense        |      |     
|                          |      |     
|Net Income                |      |     
|                          |      |     
|Earnings per share:       |      |     
|Basic                     |      |     
|Diluted                   |      |     

50

---

# BEACH FIRST NATIONAL BANCSHARES,
INC. AND SUBSIDIARIES

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 18, 2007, beginning at 2
p.m.

Stock Information

The Companys stock trades on
the NASDAQ Global Market® under the symbol BFNB. As of March 2, 2007, the
Company had approximately 2,974 stockholders and 4,768,413 shares of common stock
outstanding. This does not reflect the number of persons or entities who hold stock in
nominee or street name. For information contact:

|                                 | 
|-------------------------------- | 
|Sandler O'Neill & Partners, L.P. | 
|                                 | 
|                                 | 
|Scott & Stringfellow             | 
|                                 | 
|                                 | 
|Hill, Thompson, Magid, and Co.   | 
|                                 | 
|                                 | 
|Monroe Securities                | 
|                                 | 
|Wedbush Morgan Securities        | 
|                                 | 

You can also learn about Beach First
National Bancshares via the Internet. You may visit NASDAQ.com, enter BFNB,
and click on Info Quotes. You may also visit the shareholder relations section
of our website, beachfirst.com, for additional details and company news.

Stock Performance

[GRAPHIC]

51

---

# BEACH FIRST NATIONAL BANCSHARES,
INC. AND SUBSIDIARIES

Form 10-K

Copies of the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2006, as filed with the
Securities and Exchange Commission, will be furnished at no charge to shareholders upon
written request to Richard N. Burch, Executive Vice President and Chief Financial Officer,
3751 Robert M. Grissom Parkway, Suite 100, Myrtle Beach, SC 29577, or via e-mail
(dburch@beachfirst.com).

Forward Looking Statement

Certain statements in this
Report may contain certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, such as statements
relating to future plans and expectations, and are thus prospective. Such forward-looking
statements are subject to risk, uncertainties, and other factors, such as a downturn in
the economy, which could cause actual results to differ materially from future results
expressed or implied by such forward-looking statements.

Although we believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove to be inaccurate. Therefore, we can give no assurance that the
results contemplated in the forward-looking statements will be realized. The inclusion of
this forward-looking information should not be construed as a representation by our
Company or any person that the future events, plans, or expectations contemplated by our
Company will be achieved. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events, or
otherwise.

# Officers

# Executive Officers

Walter E. Standish, III
PresidentChief Executive Officer

Richard N. BurchExecutive
Vice PresidentChief Financial Officer

M. Katharine Huntley
(Katie)Executive Vice PresidentChief Credit Officer

Julien E. SpringsExecutive
Vice PresidentBusiness Development Officer

# Departments

# Accounting

Melissa Downs-HighAssistant
Vice PresidentComptroller

Joey HousandAccounting
Manager

52

---

# BEACH FIRST NATIONAL BANCSHARES,
INC. AND SUBSIDIARIES

# Deposit Operations

Tiffany P. SuggsVice President
Deposit Operations Manager

Deborah J. MyersAssistant
Vice PresidentCredit Card Services Manager

# Human Resources

Lorie Y. RunionVice President 
Director of Human Resources

# Information Technology
and Facilities

William E. HinsonVice President 
Information Technology and Facilities

M. Scott Williamson
Assistant Vice PresidentSystems Analyst

# Loan Operations

Linda S. Dickinson
Vice PresidentLoan Operations Manager

John D. Brown, Jr.
Vice PresidentLoan Administration

# Compliance

Rita M. Maxson, CRCM
Vice PresidentDirector of Compliance

# Marketing

Barbara W. Marshall
Vice PresidentDirector of Marketing

# Mortgage

H. David Stacy
Vice President Director of Mortgage Loans

53

---

# BEACH FIRST NATIONAL BANCSHARES,
INC. AND SUBSIDIARIES

# Security

C. Dale LongAssistant Vice
PresidentSecurity Officer

# Branches

# Grand Strand

# Myrtle Beach Office

Barbara H. Abrams
Vice PresidentBranch Manager

Harry G. Bates, IV
Vice President Commercial Relationship Manager

Dreama S. Osborne
Vice PresidentMerchant/Credit Card Services Representative

Jolene McCune
Banking Officer Loan Support Specialist

# North Strand

Marcus G. McDowellVice
PresidentRegional Manager

# North Myrtle Beach Office

John L. Breeden, III
Vice President Commercial Relationship Manager

# South Strand

O. Kendall BucknerVice
PresidentRegional Manager

# Litchfield Office

Patricia A. Tyler
Vice PresidentBranch Manager

54

---

# BEACH FIRST NATIONAL BANCSHARES,
INC. AND SUBSIDIARIES

# Surfside Beach Office

Orit Perez
Assistant Vice PresidentBranch Manager

Collier J. Schettig
Assistant Vice PresidentRelationship Manager

# Hilton Head Island

Paul R. Walter
Vice PresidentRegional Manager

# The Village at Wexford

Michelle N. Wilson
Vice PresidentMortgage Banker

Donnie Jo Thibault
Assistant Vice PresidentRelationship Manager

# Pineland Station

Matt RichardsonAssistant
Vice PresidentRelationship/Branch Manager

Nat Green
Assistant Vice PresidentRelationship Manager

Equal Employment
Opportunity

Beach First is an equal opportunity
employer. It is the banks policy to grant equal employment opportunity (EEO) to all
qualified persons without regard to race, color, sex, religion, age, national origin,
physical or mental disability, physical or mental disability, veterans status, or
any other characteristics protected by applicable law (Protected
Characteristics). The bank provides equal opportunities in employment, promotion,
wages, benefits, and all other privileges, terms, and conditions of employment. This
policy has the support of the highest levels of management,. Unfavorable speech or actions
by employees regarding the Protected Characteristics of other employees, agents,
contractors, vendors, customers, or others having an affiliation with the Bank will not be
tolerated. All employees and managers are expected to comply with our equal employment
opportunity policy.

Beach First is a South Carolina
Family Friendly Workplace.

(picture)

Member FDICEqual Housing
Lender Logo

55

---

# BEACH FIRST NATIONAL BANCSHARES,
INC. AND SUBSIDIARIES

# Board of Directors

Michael Bert Anderson
Managing OwnerPatricia Resorts

Bart Buie Certified Public
AccountantBartlett Buie, CPA, P.A.

Raymond E. Cleary, III,
DDS Chairman of the BoardBeach First National Bancshares, Inc.Dentist
Glenns Bay Dentists at Surfside

E. Thomas Fulmer 
OwnerBeachcomber Realty

Michael D. Harrington
General ContractorHarrington Construction Company, Inc.

Joe N. Jarrett, Jr. MD
Orthopaedic SurgeonStrand Orthopaedic Consultants, LLC

Richard E. LesterAttorney 
Lester, Lester, and Harwell, P.A.

Leigh Ammons Meese
PresidentSea Mist Resort and Family Kingdom Amusement Park

Rick H. Seagroves
OwnerSoutheast Restaurant Corporation

Don J. Smith
President Coldwell Banker Chicora Real Estate

Samuel R. Spann, Jr.
President Spann Roofing and Sheet Metal, Inc.

B. Larkin Spivey, Jr.
OwnerSpivey Company, LLC

Walter E. Standish, III
President and Chief Executive OfficerBeach First National Bank

56

---

# BEACH FIRST NATIONAL BANCSHARES,
INC. AND SUBSIDIARIES

James C. Yahnis
Beverage WholesalerThe Yahnis Company

# Business Development
Boards

# North Strand

J. Michael Campbell
Sales Representative, Blanchard Machinery

Bunkie Ford
Owner, Fords Fuel Service, Inc. and Fords Propane, Inc.

Tina Yates
Owner, Hoskins Restaurant

Roger P. Roy, Jr.
Attorney, Cook & Roy, LLC

Linda Hope Taylor
Owner, Hope Taylor & Co.

Mickey Thompson
Owner, Marine Service Center of Little River

Joey ToddOwner, Atlantic Heating
and Cooling

Quinn Thompson 
Owner, Thompson Roofing Company

# South Strand

Frederick C. Parsons, III
Attorney, Parsons, Ouverson, Stark, Guest, and Neill, PA

Laura Jackson Hoy
The Jackson Companies

Brian J. Brady, CPA/PFS,
ChFC Lawlor & Brady CPAs, LLCLawlor & Brady Financial Planning, LLC

Tim Conner
Owner, American Athletic Clubs

Helen SmithProject Manager, SE Smith
Construction Co., Inc.

Allen B. Foxworth
Owner, Foxworth Construction, Inc.

57

---

# BEACH FIRST NATIONAL BANCSHARES,
INC. AND SUBSIDIARIES

# Hilton Head Island

Christopher L. Corkern
Financial Planner, Prudential Financial Services

David Howard
President, Allied Management Group

Joe Ryan
Broker-in-Charge/Owner, Weichert Realty-Coastal Properties

Gloria LaCoe
Realtor, Dunes Marketing

Paul Cale
Owner/President, Hilton Head Vacation Rentals

Dennis Sexton
President, Dennis Sexton Home Builders

Jeff Wilson
President, Pinnacle Southeastern, Inc.

Chuck Slusne
Owner, Coastal Home & Villa Rentals

Hale Mayer
Retired

Mary Navis
President-Billy Wood Appliance

Mark June, CPA
Managing Director, June & Associates, CPA

# Pawleys Island

Van Arrington
Pastor, My Fathers House

Jackie Epperson, MD
Inlet Medical Associates

Joe Burger
Owner, McDonalds Pawleys Island and Andrews

Vida Miller
Owner, Gray Man Gallery

Donald Godwin
Owner, Southern Asphalt

Heyward Gulledge
Investor

Lee Hewitt
Co-Owner, Garden City 'Realty

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# BEACH FIRST NATIONAL BANCSHARES,
INC. AND SUBSIDIARIES

Banking Offices

Main Office
3751 Grissom Parkway, Suite 100Myrtle Beach, SC 29577843.626.2265

North Myrtle Beach
710 Highway 17 NorthNorth Myrtle Beach, SC 29582843.663.2265

Surfside Beach
3064 Dick Pond RoadSurfside Beach, SC 29588 843.294.6000

Pawleys Island
115 Willbrook Blvd., Suite APawleys Island, SC 29585843.979.5300

Hilton Head
Island-Village at Wexford1000 William Hilton Parkway, Suite F-4
Hilton Head Island, SC 29928 843.842.3232

Hilton Head
Island-Pineland Station430 William Hilton Parkway, Suite 501Hilton Head Island, SC 29926 
843.342.8866

Mortgage Offices

Myrtle Beach
3751 Grissom Parkway,Suite 100Myrtle Beach, SC 29577843.626.2265

Gastonia
1519 South Marietta StreetGastonia, NC 28054704.868.3460

Wilmington
1442 Military Cutoff Road, Suite 27Wilmington, NC 28403910.256.2038

Burke
9554-F Old Keene RoadBurke, VA 22015703.564.8000

Chantilly
4229 Lafayette Center Dr., Suite 1880Chantilly, VA 20151 703.956.6730

Fredericksburg
520 William Street, Suite BFredericksburg, VA 22401540.368.8133

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# BEACH FIRST NATIONAL BANCSHARES,
INC. AND SUBSIDIARIES

Vienna
1921 Gallows Road, Suite 860Vienna, VA 22182866.782.9063

Frederick
5235 Westview Drive, Suite 100Frederick, MD 21703301.620.7940

Back Cover

3751 Grissom Parkway,
Myrtle Beach, South Carolina 29577/843.626.2265/beachfirst.com

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