Beach First National Bancshares (BFNB) 10QSB 2003 Q3 Quarterly report (small business)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

[X]	Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period endedSeptember 30, 2003

[   ]	Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from ___________ to _____________

Commission file number33-95562

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

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

1550 Oak Street, Myrtle Beach, South Carolina 29577
(Address of principal executive offices)   (Zip Code)

(843) 626-2265
(Telephone Number)

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

           Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   X  No    

          State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 1,318,368 shares of the issuer's common stock, par value $1.00 per share, were issued and outstanding as of October 20, 2003.

          Transitional Small Business Disclosure Format (check one): Yes   X  No    

PART I
FINANCIAL INFORMATION
Item 1.  Financial Statements.

Beach First National Bancshares, Inc. and Subsidiary
Myrtle Beach, South Carolina
Consolidated Balance Sheets

		September 30,				December 31,
	2003			2002			2002
	(unaudited)			(unaudited)			(audited)
ASSETS
Cash and due from banks	$	4,363,595		$	4,717,941		$	4,457,614
Federal funds sold and short term investments		3,277,756			2,572,433			5,429,214
Investment securities available for sale		12,228,511			8,249,910			7,552,282
Loans, net		128,541,354			80,854,581			92,024,574
Federal Reserve Bank stock		309,000			164,700			164,700
Federal Home Loan Bank stock		575,000			200,000			200,000
Premises and equipment, net		4,373,662			2,830,590			4,577,770
Other assets		4,700,044			3,832,917			4,002,671
Total assets	$	158,368,922		$	103,423,072		$	118,408,825
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Noninterest bearing deposits	$	25,542,423		$	14,592,449		$	19,316,292
Interest bearing deposits		105,662,578			69,885,295			80,549,745
Total deposits		131,205,001			84,477,744			99,866,037
Other borrowings		11,500,000			4,000,000			4,000,000
Other liabilities		1,331,889			1,164,650			614,420
Total liabilities		144,036,890			89,642,394			104,480,457
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 10,000,000 shares
authorized; 1,318,368 shares issued and outstanding		1,318,368			1,318,368			1,318,368
Paid-in capital		11,787,899			11,787,899			11,787,899
Retained earnings		1,393,352			550,425			709,390
Accumulated other comprehensive income (loss)		(167,587	)		123,986			112,711
Total shareholders' equity		14,332,032			13,780,678			13,928,368
Total liabilities and shareholders' equity	$	158,368,922		$	103,423,072		$	118,408,825

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

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Beach First National Bancshares, Inc. and Subsidiary
Myrtle Beach, South Carolina
Consolidated Statements of Operations
(Unaudited)

	Nine Months Ended				Three Months Ended
	September 30,				September 30,
	2003		2002		2003			2002
INTEREST INCOME
Interest and fees on loans	$	5,752,885	$	4,251,053	$	2,125,266		$	1,515,803
Investment securities		386,932		296,076		130,495			117,426
Federal funds sold and short term
Investments		36,940		84,457		11,762			14,229
Total interest income		6,176,757		4,631,586		2,267,523			1,647,458
INTEREST EXPENSE
Deposits		1,732,938		1,505,346		568,939			472,658
Other borrowings		143,197		34,543		49,798			34,352
Total interest expense		1,876,135		1,539,889		618,737			507,010
Net interest income		4,300,622		3,091,697		1,648,786			1,140,448
PROVISION FOR POSSIBLE LOAN
LOSSES		566,000		314,000		275,000			132,000
Net interest income after provision
for possible loan losses		3,734,622		2,777,697		1,373,786			1,008,448
NONINTEREST INCOME
Service fees on deposit accounts		364,145		300,797		117,247			110,294
Gain (loss) on sale of investment		134,703		525		(108	)		333
Securities
Other income		269,357		142,887		69,655			72,160
Total noninterest income		768,205		444,209		186,794			182,787
NONINTEREST EXPENSES
Salaries and wages		1,514,336		1,041,756		530,882			372,301
Employee benefits		290,330		180,272		92,758			65,513
Supplies and printing		77,505		58,850		20,236			17,183
Advertising and public relations		118,141		67,331		40,826			31,571
Professional fees		92,355		108,338		31,220			44,099
Depreciation and amortization		317,272		234,987		106,055			69,432
Occupancy		264,074		161,360		91,793			55,729
Data processing fees		226,572		156,091		81,437			63,369
Other operating expenses		523,801		338,766		143,064			128,745
Total noninterest expenses		3,424,386		2,347,751		1,138,271			847,942
Income before income taxes		1,078,441		874,155		422,309			343,293
INCOME TAX EXPENSE		394,479		325,848		151,830			127,115
Net income	$	683,962	$	548,307	$	270,479		$	216,178
BASIC NET INCOME PER COMMON
SHARE	$	.52	$	.42	$	.21		$	.16
DILUTED NET INCOME PER COMMON
SHARE	$	.51	$	.41	$	.20		$	.16

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

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Beach First National Bancshares, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)

									Accumulated
									Other		Total
	Common Stock				Paid In		Retained		Comprehensive		Shareholders'
	Shares		Amount		Capital		Earnings		Income		Equity
BALANCE, DECEMBER 31, 2001	$	1,318,368	$	1,318,368	$	11,787,899	$	2,119	$	40,444	$	13,148,830
Net income		-		-		-		548,307		-		548,307
Other comprehensive income, net of taxes:
Unrealized loss on investment securities		-		-		-		-		83,542		83,542
Less reclassification adjustments for losses
included in net income		-		-		-		-
Comprehensive income		-		-		-		-		-		631,849
BALANCE, SEPTEMBER 30, 2002	$	1,318,368	$	1,318,368	$	11,787,899	$	550,425	$	123,986	$	13,780,678

									Accumulated
									Other			Total
	Common Stock				Paid In		Retained		Comprehensive			Shareholders'
	Shares		Amount		Capital		Earnings		Income			Equity
BALANCE, DECEMBER 31, 2002	$	1,318,368	$	1,318,368	$	11,787,899	$	709,390	$	112,711		$	13,928,368
Net income		-		-		-		683,962		-			683,962
Other comprehensive income, net of taxes:
Unrealized loss on investment securities		-		-		-		-		(280,298	)		(280,298	)
Less reclassification adjustments for losses
included in net income		-		-		-		-		-
Comprehensive income		-		-		-		-		-			403,664
BALANCE, SEPTEMBER 30, 2002	$	1,318,368	$	1,318,368	$	11,787,899	$	1,393,352	$	(167,587	)	$	14,332,032

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

4

Beach First National Bancshares, Inc. and Subsidiary
Myrtle Beach, South Carolina
Consolidated Statements of Cash Flows
(Unaudited)

	Nine Months Ended
	September 30,
	2003			2002
OPERATING ACTIVITIES
Net income	$	683,962		$	548,307
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred income taxes		377,934			118,491
Provisions for loan losses		566,000			314,000
Depreciation and amortization		317,272			(234,987	)
Gain (Loss) on sale of investment securities		134,960			-
Increase (decrease) in other assets		(1,075,307	)		(3,144,626	)
Increase (decrease) in other liabilities		277,329			661,632
Net cash provided by operating activities		1,282,150			(1,737,183	)
INVESTING ACTIVITIES
Purchase of investment securities		(14,128,927	)		(2,944,672	)
Proceeds from sale or call of investment securities		9,037,440			404,384
Purchase of FHLB Stock		(144,300	)		-
Purchase of Federal Reserve Bank Stock		(375,000	)		-
Decrease (increase) in Federal funds sold & short term investments		2,151,458			3,106,858
Increase in loans, net		(37,082,780	)		(18,816,160	)
Purchase of premises and equipment		(113,164	)		(27,128	)
Net cash used in investing activities		(40,655,273	)		(18,276,718	)
FINANCING ACTIVITIES
Increase in Federal funds purchased & borrowings		7,500,000			4,000,000
Net increase in deposits		31,779,104			17,344,776
Net cash provided by financing activities		39,279,104			21,344,776
Net decrease in cash and cash equivalents		(94,019	)		1,330,875
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD	$	4,457,614		$	3,387,066
CASH AND CASH EQUIVALENTS, END OF
PERIOD	$	4,363,595		$	4,717,941
CASH PAID FOR
Income taxes	$	394,478		$	321,301
Interest	$	1,886,841		$	1,551,783

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

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

1.  Basis of Presentation

The accompanying unaudited consolidated financial statements for Beach First National Bancshares, Inc. (“Company”) were prepared in accordance with instructions for Form 10-QSB and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles. All adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for fair presentation of the interim consolidated financial statements have been included. The results of operations for the nine month periods ended September 30, 2003 and 2002 are not necessarily indicative of the results that may be expected for the entire year. These consolidated financial statements do not include all disclosures required by generally accepted accounting principles and should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2002.

2.  Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiary, Beach First National Bank. All significant inter-company items and transactions have been eliminated in consolidation.

3.  Earnings Per Share

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

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

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

For the Nine Months Ended
September 30, 2003

	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Basic EPS	$	683,962		1,318,368	$	0.52
Effect of Diluted Securities:
Stock options		-		20,869
Diluted EPS	$	683,962		1,339,237	$	0.51

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For the Three Months Ended
September 30, 2003

	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Basic EPS	$	270,479		1,318,368	$	0.21
Effect of Diluted Securities:
Stock options		-		20,869
Diluted EPS	$	270,479		1,339,237	$	0.20

Note 2 — Stock-Based Compensation — Our stock-based employee compensation plan are accounted for under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees,andrelated Interpretations. No compensation cost is reflected in net income, as all and options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123,Accounting for Stock-Based Compensation, had been applied to the Option Plans.

	Nine Months Ended September 30,
	2003		2002
Net Income, as reported	$	683,962	$	548,307
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects		12,063		9,589
Pro forma net income	$	671,899	$	538,718
Earnings per share:
Basic - as reported	$	0.52	$	0.42
Basic - pro forma	$	0.51	$	0.41
Diluted - as reported	$	0.51	$	0.41
Diluted - pro forma	$	0.50	$	0.41

	Three Months Ended September 30,
	2003		2002
Net Income, as reported	$	270,479	$	216,178
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects		4,021		3,196
Pro forma net income	$	266,458	$	212,982
Earnings per share:
Basic - as reported	$	0.21	$	0.16
Basic - pro forma	$	0.20	$	0.16
Diluted - as reported	$	0.20	$	0.16
Diluted - pro forma	$	0.20	$	0.16

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Item 2.   Management’s Discussion and Analysis or Plan of Operation.

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

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

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

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

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

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

o changes occurring in business conditions and inflation;

o changes in technology;

o the level of allowance for loan loss;

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

o the rates of loan growth;

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

o changes in monetary and tax policies;

o changes in the securities markets; and

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

Results of Operations
EARNINGS REVIEW

Our net income was $683,962, or $.52 per common share, for the nine months ended September 30, 2003 as compared to a net income of $548,307, or $.42 per common share, for the nine months ended September 30, 2002. Our net income was $270,479, or $.21 per common share, for the three months ended September 30, 2003 as compared to net income of $216,178, or $.16 per common share, for the same period of 2002. The improvement in net income reflects the bank’s continued growth, as average earning assets increased to $142.7 million during the first nine months of 2003 from $83.3 million during the same period of 2002. The improvement in net income also reflects a gain on the sale of securities of $134,703 during the first nine months of 2003, compared to $525 during the first nine months of 2002. This continued growth is the result of our local ownership and management and the expansion into North Myrtle Beach and Hilton Head Island, South Carolina in 2002 and 2003, respectively. The return on average assets for the nine month period ended September 30 was .59% in 2003 compared to .82% in 2002. The return on average equity was 6.44% in 2003 versus 5.48% in 2002.

Net Interest Income

During the first nine months of 2003, net interest income increased to $4,300,622, from $3,091,697 in the same period of 2002. The growth in net interest income resulted from the 59% increase in outstanding loans and the declining interest rate environment. For the three months ended September 30, 2003, net interest income increased to $1,648,786 from $1,140,448 during the comparable period of 2002. The net interest spread was 3.59% in the nine months of 2003

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compared to 4.12% during the same period of 2002. The net interest margin was 4.03% for the nine month period ended September 30, 2003 compared to 4.96% for the same period of 2002.

Provision for Loan Losses

The provision for loan losses was $566,000 for the first nine months of 2003 and $314,000 for the same period of 2002. For the three month period ending September 30, 2003 and 2002, the provision was $275,000 and $132,000, respectively. The increase in the provision for the nine month period ending September 30, 2003 was the result of increased charge offs during this period combined with 59% loan growth compared to 2002. The increase for the three month period was increased loan demand and our management’s assessment of the adequacy of the reserve for possible loan losses given the size, mix and quality of the current loan portfolio. Our management anticipates loan growth will continue to be strong in 2003 and that it will continue to increase the amount of the provision for loan losses as the portfolio grows. See also “Allowance for Possible Loan Losses” below.

Noninterest Income

Noninterest income increased to $768,205 in the first nine months of 2003 from $444,209 in the same period of 2002. For the three months ended September 30, 2003, noninterest income was $186,794 as compared to $182,787 for the same period in 2002. Service fees on deposit accounts, the largest component of noninterest income, increased from $300,797 for the first nine months of 2002 to $364,145 during the same period of 2003. This category of noninterest income increased due to growth in the number of deposit accounts as well as increased fee-related activities of our customers. Other income increased to $269,357 for the first nine months of 2003 compared to $142,887 for the same period of 2002. For the three months ended September 30, 2003, other income was $69,655 compared to $72,160 in 2002. Other income increased primarily due to the bank’s purchase of bank owned life insurance to help fund employee and director benefit programs. The net gain on the sale of investment securities was $134,703 compared to $525 for the nine month period ended September 30, 2003 and 2002, respectively.

Noninterest Expense

Noninterest expenses totaled $3,424,386 for the nine months ended September 30, 2003, an increase of $1,076,635 over the $2,347,751 reported for the nine months ended September 30, 2002, and totaled $1,138,271 for the three months ended September 30, 2003 compared to $847,942 in the same period of 2002. As an annualized percentage of average total assets, our total noninterest expenses declined from 3.51% in 2002 to 2.97% in 2003. While we have grown at a 30% rate over year end 2002, we have been able to manage our expenses while accommodating our growth. Salary, wages and employee benefits increased by $582,638 during the nine months ended September 30, 2003 and $185,826 during the three months ended September 30, 2003 compared to the same periods in 2002. These increases are the results of personnel additions made to our productive capacity, normal compensation adjustments, higher costs associated with group insurance coverage and certain incentive awards.

Due to the opening of two new branches in North Myrtle Beach and Hilton Head Island, South Carolina, advertising and public relations expense increased by $50,810, depreciation and amortization increased by $82,285, and occupancy increased by $102,714 during the nine months ended September 30, 2003 as compared to the same period in 2002. For the three months ended September 30, 2003, advertising and public relations expense increased by $9,255, depreciation and amortization increased by $36,623, and occupancy increased by $36,064 as compared to the same period in 2002.

For the nine month period ended September 30, 2003, data processing expense increased to $226,572 from $156,091 during the same period of 2002. During the three month period ended September 30, data processing expense increased to $81,437 in 2003 from $63,369 in 2002. During this period, the bank converted to a new data processing vendor, reducing our account processing costs; however, additional features and functions were added to provide efficiency and competitive advantages. In addition, the volume of loan and deposit accounts and associated transaction activity has increased, thus increasing our data processing costs. The category of other expenses increased to $523,801 for the first nine months of 2003 compared to $338,766 for the same period of 2002, and increased to $143,064 during the three month period ended September 30, 2003 from $128,745 in the same period of 2002. This increase was due to our new branch openings, home equity closing costs program and the growth in loans and deposits.

9

BALANCE SHEET REVIEW

Loans

At September 30, 2003, net loans (gross loans less unearned fees and the allowance for loan losses) totaled $128.5 million, an increase of $47.7 million from September 30, 2002. Average total loans increased from $72.1 million with a yield of 7.88% in the first nine months of 2002 to $126.4 million with a yield of 6.08% in 2003. The interest rates charged on loans vary with the degree of risk and the maturity and amount of the loan. Competitive pressures, money market rates, availability of funds and government regulations also influence interest rates.

        The following table shows the composition of the loan portfolio by category at September 30, 2003 and 2002.

Composition of Loan Portfolio

	September 30, 2003						September 30, 2002
				Percent						Percent
	Amount			of Total			Amount			of Total
Commercial	$	29,785,289			22.8	%	$	17,925,953			21.8	%
Real estate - construction		10,769,632			8.3	%		4,922,955			6.0	%
Real estate - mortgage		81,671,475			62.6	%		51,536,176			62.8	%
Consumer		8,182,744			6.3	%		7,696,228			9.4	%
Loans, gross		130,409,140			100.0	%		82,081,312			100.0	%
Unearned income		(268,019	)					(104,675	)
Allowance for possible loan losses		(1,599,767	)					(1,122,056	)
Loans, net	$	128,541,354					$	80,854,581

The principal component of our loan portfolio at September 30, 2003 and 2002 was mortgage loans, which represented 62.6% and 62.8% of the portfolio, respectively. In the context of this discussion, a “real estate mortgage loan” is defined as any loan, other than loans for construction purposes, secured by real estate, regardless of the purpose of the loan. We follow the common practice of financial institutions in our market area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. The 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 will attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentrations of collateral.

Off Balance Sheet Risk

Through the operations of our bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At September 30, 2003, we had issued commitments to extend credit of $7.2 million through various types of commercial and consumer lending arrangements. 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 September 30, 2003, the bank had issued commitments to extend credit of $3.4 million through various types of lending arrangements. The commitments expire over next 36 months. Past experience indicates that many of these

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commitments to extend credit will expire unused. We believe that it has adequate sources of liquidity to fund commitments that are drawn upon by the borrower.

Allowance for Possible Loan Losses

There are risks inherent in making all loans, including risks with respect to the period of time over which loans may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers, and, in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral. To address these risks, we have developed policies and procedures to evaluate the overall quality of our credit portfolio and the timely identification of potential problem loans. We maintain an allowance for possible loan losses which we establish through charges in the form of a provision for loan losses. We charge loan losses and credit recoveries directly to this allowance.

We attempt to maintain the allowance at a level that will be adequate to provide for potential losses in our loan portfolio. To maintain the allowance at an adequate level, we periodically make additions to the allowance by charging an expense to the provision for loan losses on our statement of operations. We evaluate the allowance for loan losses on an overall portfolio basis, as well as allocating the allowance to loan categories. We consider a number of factors in determining the level of this allowance, including our total amount of outstanding loans, our amount of past due loans, our historic loan loss experience, general economic conditions, and our assessment of potential losses, classified and criticized loans, concentrations of credit and internal credit risk ratings. Our evaluation is inherently subjective as it requires estimates that are susceptible to significant change. In addition, regulatory agencies periodically review our allowance for loan losses as part of their examination process, and they may require us to record additions to the allowance based on their judgment about information available to them at the time of their examinations. Our losses will undoubtedly vary from our estimates, and there is a possibility that charge-offs in future periods will exceed the allowance for loan losses as estimated at any point in time.

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 nine months ending September 30, 2003 and 2002.

Allowance for Loan Losses

	Nine months ending September 30,
	2003			2002
Average total loans outstanding	$	126,406,767		$	72,119,482
Total loans outstanding at period end		130,141,121			81,976,637
Total nonperforming loans		489,468			473,150
Beginning balance of allowance	$	1,275,778		$	851,222
Loans charged off		(242,168	)		(44,076	)
Total recoveries		157			909
Net loans charged off		(242,011	)		(43,167	)
Provision for loan losses		566,000			314,000
Balance at period end	$	1,599,767		$	1,122,056
Net charge-offs to average total loans		.19	%		.05	%
Allowance as a percent of total loans		1.23	%		1.37	%
Nonperforming loans as a
percentage of total loans		.38	%		.58	%
Non performing loans as a
percentage of allowance		30.60	%		42.17	%

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

Allocation of the Allowance for Loan Losses

	As of September 30, 2003
			%
Residential real estate	$	78,401		4.90
Commercial construction		89,340		5.58
Commercial real estate		251,510		15.73
Commercial		273,970		17.13
Consumer		94,600		5.91
Other		1,900		0.12
Unallocated		383,152		23.95
Special Allocated	$	426,894		26.68
Total allowance for
Loan losses	$	1,599,767		100.0	%

Investment Securities

Total securities averaged $12.8 million in the first nine months of 2003 and totaled $13.1 million at September 30, 2003. During the same period of 2002, total securities averaged $7.4 million and totaled $8.6 million at September 30, 2002. At September 30, 2003, our total investment securities portfolio had a book value of $13,112,511 and a market value of $13,069,690 for an unrealized net loss of $42,821. We primarily invest in U.S. Government Agencies and U.S. Government Mortgage- backed securities.

At September 30, 2003, short-term investments totaled $3,277,756 compared to $2,572,433 as of September 30, 2002. These funds are one source of our bank’s liquidity and are generally invested in an earning capacity on an overnight or short-term basis.

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Deposits and Other Interest-Bearing Liabilities

        Average total deposits were $131.2 million and average interest-bearing deposits were $107.2 million in the first nine months of 2003. Average total deposits were $73.5 million and average interest-bearing deposits were $60.9 million in the same period of 2002.

        The following table sets forth our deposits by category as of September 30, 2003 and September 30, 2002.

	Deposits
	September 30, 2003					September 30, 2002
			Percent of					Percent of
	Amount		Deposits			Amount		Deposits
Demand deposit accounts	$	25,542,423		19.5	%	$	14,592,449		17.4	%
Interest bearing checking accounts		5,493,067		4.2	%		4,073,852		4.8	%
Money market accounts		22,649,197		17.3	%		19,807,338		23.4	%
Savings accounts		3,157,363		2.4	%		3,062,296		3.6	%
Time deposits less than $100,000		42,846,902		32.6	%		20,795,799		24.6	%
Time deposits of $100,000 or over		31,516,049		24.0	%		22,146,010		26.2	%
Total deposits	$	131,205,001		100.0	%	$	84,477,744		100.0	%

Internal growth, resulting primarily from special promotions and increased advertising, generated the new deposits.

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 $99.7 million at September 30, 2003 compared to $62.3 million at September 30, 2002. We expect a stable base of deposits to be our primary source of funding to meet both our short-term and long-term liquidity needs. Core deposits as a percentage of total deposits were approximately 76.0% at September 30, 2003 and 74.0% at September 30, 2002. Our loan-to-deposit ratio was 95.3% at September 30, 2003 versus 94.2% at September 30, 2002. The average loan-to-deposit ratio was 96.3% during the first nine months of 2003 and 94.2% during the same period of 2002.

In addition to deposits, we obtained funds from the Federal Home Loan Bank to help fund our loan growth. Average borrowings from the Federal Home Loan Bank were $7.0 million during the third quarter of 2003 and totaled $11.5 million at September 30, 2003. We currently have two fixed rate advances and one convertible rate advance, one for $4.0 million obtained in July 2002 at a rate of 3.69% maturing in July 2005, a $2.5 million advance obtained in February 2003 at a rate of 1.83% maturing in February 2005 and a 5/2 convertible advance of $5.0 million at a rate of 1.86%.

CAPITAL

Under the capital guidelines of the Office of the Comptroller of the Currency and the Federal Reserve, we are required to maintain a minimum total risk-based capital ratio of 8%, with at least 4% being Tier 1 capital, at both the bank and holding company levels.To be considered “well-capitalized,” we must meet regulatory standards of 10% for total risk-based capital and 6% for Tier 1 capital. Tier 1 capital consists of common shareholders’ equity, qualifying perpetual preferred stock, and minority interest in equity accounts of consolidated subsidiaries, less goodwill. In addition, we must maintain a minimum Tier 1 leverage ratio (Tier 1 capital to total average assets) of at least 4%. The “well-capitalized” standard for the Tier 1 leverage ratio is 5%. At September 30, 2003, our total shareholders’ equity was $14.5 million ($13.3 million at the bank level). We were considered to be “well capitalized” at both the holding company and bank level for regulatory purposes at September 30, 2003, as our Tier 1 capital ratio was 10.9%(8.9% at the bank level), our total risk-based capital ratio was 12.2% (10.1% at the bank level), and our Tier 1 leverage ratio was 9.5% (7.7% at the bank level).

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LIQUIDITY AND INTEREST RATE SENSITIVITY

Our primary sources of liquidity are core deposits, scheduled repayments on our loans and interest on and maturities of our investments. All of our securities have been classified as available for sale. Occasionally, we might sell investment securities in connection with the management of our interest sensitivity gap or to manage cash availability. Our ability to maintain and expand our deposit base and borrowing capabilities also serves as a source of liquidity. 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 $7,000,000 and secured advances of approximately $12,000,000 through the Federal Home Loan Bank. We believe that our existing stable base of core deposits and other funding sources along with continued growth in our deposit base, are adequate to meet our operating needs and we are not aware of any events which may result in a significant adverse impact on liquidity.

IMPACT OF INFLATION

Unlike most industrial companies, the assets and liabilities of financial institutions such as our company and bank are primarily monetary in nature. Therefore, interest rates have a more significant impact on our performance than do the effects of changes in the general rate of inflation and changes in prices. In addition, interest rates do not necessarily move in the same magnitude as the prices of goods and services. As discussed previously, management seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation.

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 the footnotes to the consolidated financial statements at December 31, 2002 as filed on our annual report on Form 10-KSB. Certain accounting policies involve significant judgments and assumptions by us which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe 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 which could have a material impact on our carrying values of assets and liabilities and our results of operations.

We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.

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

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statements for interim period beginning after December 15, 2002. The Company has adopted the disclosure provisions of SFAS No. 148 which had no impact on the financial condition or operating results of the Company.

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

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

In June 2003, the American Institute of Certified Public Accountants (AICPA) issued an exposure draft of a proposed Statement of Position (SOP),Allowance for Credit Losses. The proposed SOP addresses the recognition and measurement by creditors of the allowance for credit losses related to all loans, as that term is defined in SFAS No. 114,Accounting by Creditors for Impairment of a Loan. The proposed SOP provides that the allowance for credit losses reported on a creditor’s balance sheet should consist only of (1) a component for individual loan impairment recognized and measured pursuant to FASB Statement No. 114 and (2) one or more components of collective loan impairment recognized pursuant to FASB Statement No. 5,Accounting for Contingencies, and measured in accordance with the guidance in the proposed SOP. The provisions of the proposed SOP would be effective for financial statements for fiscal years beginning after December 15, 2003, with earlier application permitted. The effect of initially applying the provisions of the proposed SOP would be reported as a change in accounting estimate. Comments on the exposure draft were due by September 19, 2003. The effect on the financial condition or operating results of the Company related to the adoption of this proposed SOP have not been determined, but would most likely be material.

Item 3. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective as of September 30, 2003.

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

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

        There are no material legal proceedings to which we or any of our subsidiaries is a party or of which any of our property is the subject.

Item 2. Changes in Securities.

         Not applicable.

Item 3. Defaults Upon Senior Securities.

         Not applicable.

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

         Not applicable.

Item 5. Other Information.

         Not applicable.

Item 6. Exhibits and Reports on Form 8-K.

(a)     Exhibits:

10.1     Description of the Director Deferred Compensation Plan (Amended)

31        Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit is not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 but is instead furnished as provided by applicable rules of the Securities and Exchange Commission.

(b)         Reports on Form 8-K.

               The following reports were filed on Form 8-K during the third quarter ended September 30, 2003.

               The Company filed a Form 8-K on July 15, 2003 to announce the earnings for the second quarter ending June 30, 2003.

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SIGNATURES

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

BEACH FIRST NATIONAL BANCSHARES, INC.

November 12, 2003
By:  /s/ Walter E. Standish, III
        Walter E. Standish, III
         President and Chief Executive Officer

By:  /s/ Richard N. Burch
        Richard N. Burch
        Chief Financial and Principal Accounting Officer

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INDEX TO EXHIBITS

Exhibit
Number         Description

10.1 Description of the Director Deferred Compensation Plan (Amended)

31 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit is not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 but is instead furnished as provided by applicable rules of the Securities and Exchange Commission.

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