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

# FORM 10-Q

| | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
| | ---------------------------------------------------------------------------------
| | For the quarterly period ended:   March 31, 2006                                 

| | TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
| | ----------------------------------------------------------------------------------
| | For the transition period from ___________ to _____________                       

Commission file number:  
000-22503

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

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

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

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

Not Applicable(Former name, former address and former fiscal year, if changed since last report)

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

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

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

State the number of shares outstanding of each of the issuer's classes of common equity, as of the
latest practicable date:  On April 30, 2006, 3,174,508 shares of the issuer's common stock, par value $1.00 per share, were issued and outstanding.

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

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# PART I
FINANCIAL INFORMATIONItem 1.   Financial Statements.

Beach First National Bancshares, Inc. and SubsidiariesMyrtle Beach, South CarolinaConsolidated Condensed Balance Sheets

|                                                | March 31, | December 31,
|----------------------------------------------- | --------- | ------------
|
|
|ASSETS                                          |           |             
|Cash and due from banks                         |           |             
|Federal funds sold and short-term investments   |           |             
|Investment securities available for sale        |           |             
|Loans, net                                      |           |             
|Federal Reserve Bank stock                      |           |             
|Federal Home Loan Bank stock                    |           |             
|Premises and equipment, net                     |           |             
|Cash value of life insurance                    |           |             
|Other assets                                    |           |             
|                                                |           |             
|Total assets                                    |           |             
|                                                |           |             
|LIABILITIES AND SHAREHOLDERS EQUITY            |           |             
|LIABILITIES:                                    |           |             
|Deposits                                        |           |             
|Noninterest bearing deposits                    |           |             
|Interest bearing deposits                       |           |             
|                                                |           |             
|Total deposits                                  |           |             
|Advances from Federal Home Loan Bank            |           |             
|Other borrowings                                |           |             
|Junior subordinated debentures                  |           |             
|Other liabilities                               |           |             
|                                                |           |             
|Total liabilities                               |           |             
|                                                |           |             
|SHAREHOLDERS EQUITY:                           |           |             
|Common stock, $1 par value; 10,000,000 shares   |           |             
|authorized; 3,174,458 issued and outstanding at |           |             
|March 31, 2006 and 2,016,158 at March 31, 2005  |           |             
|and 3,169,958 at December 31, 2005              |           |             
|Paid-in capital                                 |           |             
|Retained earnings                               |           |             
|Accumulated other comprehensive income (loss)   |           |             
|                                                |           |             
|Total shareholders equity                      |           |             
|                                                |           |             
|Total liabilities and shareholders equity      |           |             
|                                                |           |             

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

2

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# Beach First National
Bancshares, Inc, and Subsidiaries Myrtle Beach, South Carolina Consolidated Condensed
Statements of Income (unaudited)

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

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

3

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

|                                            |  |  |  |           | Accumulated |  
|------------------------------------------- |  |  |  | --------- | ----------- | -
|
|
|
|
|BALANCE, DECEMBER 31, 2004                  |  |  |  | 2,013,508 |             | $
|Net income                                  |  |  |  | -         |             |  
|Other comprehensive income, net of taxes:   |  |  |  |           |             |  
|Unrealized gain on investment securities    |  |  |  | -         |             |  
|Plus Reclassification adjustments for gains |  |  |  |           |             |  
|included in net income                      |  |  |  |           |             |  
|                                            |  |  |  |           |             |  
|Comprehensive income                        |  |  |  | -         |             |  
|Exercise of stock options                   |  |  |  | 2,650     |             |  
|                                            |  |  |  |           |             |  
|BALANCE, MARCH 31, 2005                     |  |  |  | 2,016,158 |             | $
|                                            |  |  |  |           |             |  

|                                            |  |  |  |           | Accumulated |  
|------------------------------------------- |  |  |  | --------- | ----------- | -
|
|
|
|
|BALANCE, DECEMBER 31, 2005                  |  |  |  | 3,169,958 |             | $
|Net income                                  |  |  |  | -         |             |  
|Other comprehensive income, net of taxes:   |  |  |  |           |             |  
|Unrealized loss on investment securities    |  |  |  | -         |             |  
|Plus Reclassification adjustments for gains |  |  |  |           |             |  
|included in net income                      |  |  |  | -         |             |  
|                                            |  |  |  |           |             |  
|Comprehensive income                        |  |  |  | -         |             |  
|Exercise of stock options                   |  |  |  | 4,500     |             |  
|                                            |  |  |  |           |             |  
|BALANCE, MARCH 31, 2006                     |  |  |  | 3,174,458 |             | $
|                                            |  |  |  |           |             |  

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

4

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# Beach First National
Bancshares, Inc. and SubsidiariesMyrtle Beach, South CarolinaConsolidated Condensed
Statements of Cash Flows(Unaudited)



|                                                            | Three Months Ended | For the Year Ended
|----------------------------------------------------------- | ------------------ | ------------------
|
|
|
|OPERATING ACTIVITIES                                        |                    |                   
|Net income                                                  |                    |                   
|Adjustments to reconcile net income to net cash provided by |                    |                   
|(used in) operating activities:                             |                    |                   
|Deferred income taxes                                       |                    |                   
|Provisions for loan losses                                  |                    |                   
|Depreciation and amortization                               |                    |                   
|Accretion of deferred loan fees                             |                    |                   
|Loss on sale of investment securities                       |                    |                   
|Discount accretion and premium amortization                 |                    |                   
|Increase in other assets                                    |                    |                   
|Increase in other liabilities                               |                    |                   
|Investment in Beach First National Trust                    |                    |                   
|                                                            |                    |                   
|Net cash provided by operating activities                   |                    |                   
|                                                            |                    |                   
|INVESTING ACTIVITIES                                        |                    |                   
|Purchase of investment securities                           |                    |                   
|Purchase of FHLB stock                                      |                    |                   
|Purchase of Federal Reserve stock                           |                    |                   
|Proceeds from sale of investment securities                 |                    |                   
|Decrease (increase) in Federal funds sold                   |                    |                   
|Increase in loans, net                                      |                    |                   
|Purchase of premises and equipment                          |                    |                   
|Purchase of life insurance contracts                        |                    |                   
|                                                            |                    |                   
|Net cash used in investing activities                       |                    |                   
|                                                            |                    |                   
|FINANCING ACTIVITIES                                        |                    |                   
|Advances from Federal Home Loan Bank                        |                    |                   
|Net increase in deposits                                    |                    |                   
|Advances from junior subordinated debentures                |                    |                   
|Exercise of stock options                                   |                    |                   
|Proceeds from other borrowings                              |                    |                   
|Proceeds from stock issuance, net                           |                    |                   
|                                                            |                    |                   
|Net cash provided by financing activities                   |                    |                   
|                                                            |                    |                   
|Net increase (decrease) in cash and cash equivalents        |                    |                   
|                                                            |                    |                   
|CASH AND DUE FROM BANKS, BEGINNING OF PERIOD                |                    |                   
|                                                            |                    |                   
|CASH AND DUE FROM BANKS, END OF PERIOD                      |                    |                   
|                                                            |                    |                   
|CASH PAID FOR                                               |                    |                   
|Income taxes                                                |                    |                   
|                                                            |                    |                   
|Interest                                                    |                    |                   
|                                                            |                    |                   

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

5

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

# 1.     Basis of Presentation

The accompanying unaudited
consolidated condensed financial statements for Beach First National Bancshares, Inc.
(Company) were prepared in accordance with instructions for Form 10-Q and,
therefore, do not include all disclosures necessary for a complete presentation of
financial condition, results of operations, and cash flows in conformity with generally
accepted accounting principles. All adjustments, consisting only of normal recurring
accruals, which are, in the opinion of management, necessary for fair presentation of the
interim consolidated financial statements have been included. The results of operations
for the three month period ended March 31, 2006 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, 2005.

# 2.     Principles of
Consolidation

The accompanying unaudited
consolidated condensed financial statements include the accounts of the Company and its
subsidiaries, Beach First National Bank and BFNM, LLC (See 5. Investment in BFMN, LLC
below). The Company also owns two grantor trusts, Beach First National Trust I and Beach
First National Trust II. All significant inter-company items and transactions have been
eliminated in consolidation. In accordance with current accounting guidance, the financial
statements of the trusts have not been included in the Companys financial
statements.

# 3.     Earnings Per Share

The Company calculates earnings per
share in accordance with 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.

In 2005, the board of directors
authorized the issuance of 1,150,000 shares of common stock which were sold in a public
offering.

In 2005, the board of directors
approved the listing on the NASDAQ National Market System. The stock began trading on
NASDAQ on June 9, 2005, under the symbol of BFNB.

6

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

# For the Three Months
Ended March 31, 2006

| |  | Income | Shares                        | Per Share
| |  | ------ | ----------------------------- | ---------
|
| |  |        | Basic EPS                     |          
| |  |        | Effect of Diluted Securities: |          
| |  |        | Stock options                 |          
| |  |        |                               |          
| |  |        | Diluted EPS                   |          
| |  |        |                               |          

# For the Three Months Ended March 31, 2005

| |  | Income | Shares                        | Per Share
| |  | ------ | ----------------------------- | ---------
|
| |  |        | Basic EPS                     |          
| |  |        | Effect of Diluted Securities: |          
| |  |        | Stock options                 |          
| |  |        |                               |          
| |  |        | Diluted EPS                   |          
| |  |        |                               |          

# 4  Stock-Based
Compensation

On January 1, 2006, the Company
adopted the fair value recognition provisions of Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards (SFAS) No.
123(R), Accounting for Stock Based Compensation, to account for compensation costs
under its stock option plans. The Company previously 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. Prior to January 1, 2006, the Company only disclosed the pro forma effects
on net income and earnings per share as if the fair value recognition provisions of SFAS
123(R) had been utilized.

In December 2005, the Company elected
to fully vest all outstanding options effective immediately. No options were issued during
the quarter ended March 31, 2006.

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

7

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# 5  Investment in
BFNM, LLC

The Company formed a subsidiary, BFNM
Building, LLC in partnership with our legal counsel, Nelson Mullins Riley &
Scarborough LLP, for purposes of acquiring a parcel of land and constructing an office
building on the property. The Company owns two-thirds of BFNM Building, LLC and Nelson
Mullins Riley & Scarborough owns the remaining one-third. The building will be a
three-story, 46,066 square foot office building located on 3.5 acres at the southwest
corner of Robert Grissom Parkway and 38th Avenue North in Myrtle Beach, South
Carolina. Once completed, the Company will move its main office to this location and
Nelson Mullins Riley & Scarborough will relocate its Myrtle Beach legal office to the
building. BFNM Building, LLC purchased the land for approximately $1.8 million and it is
financing the construction project through a third-party lender with each of the owners
being responsible for their respective interests in the project. The Company estimates
that the total land and construction project will cost approximately $7.0 million,
exclusive of tenant improvements. The Company intends to lease two-thirds of the building
(approximately 30,000 square feet) from the entity that owns the building. Because the
Company will initially only occupy approximately 11,000 square feet of space, it intends
to lease the other 19,000 square feet of its portion to outside tenants. Nelson Mullins
Riley & Scarborough will lease the remaining one-third of the building from the entity
that owns it.

On September 1, 2005, BFNM Building,
LLC entered into an A1A Document A114-2001 Standard Form of ® Agreement between Owner
and Contractor with Harrington Construction Co. and Graham Group Architects to construct
the building on the property for $5,237,478. Michael Harrington, a member of the
Companys board of directors, is the owner and president of Harrington Construction
Co. The Company expects that the building will be completed by September 2006. Harrington
Construction Co. was awarded the contract after a competitive bidding process. Harrington
Construction Co.s total fee for the project is $233,116. As of March 31, 2006, $3.3
million in advances have been drawn on the BFNM, LLC construction loan.

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

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

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

8

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

# Critical Accounting
Policies

We
have adopted various accounting policies that govern the application of accounting
principles generally accepted in the United States and with general practices within the
banking industry in the preparation of our consolidated financial statements. Our
significant accounting policies are described in the footnotes to our audited consolidated
financial statements as of December 31, 2005 as filed on our Form 10-KSB.

Certain
accounting policies involve significant judgments and assumptions by management which have
a material impact on the carrying value of certain assets and liabilities. We consider
such accounting policies to be critical accounting policies. The judgments and assumptions
we use are based on historical experience and other factors, which are believed to be
reasonable under the circumstances. Because of the nature of the judgments and assumptions
we make, actual results could differ from these judgments and estimates. These differences
could have a material impact on our carrying values of assets and liabilities and our
results of operations.

We
believe the allowance for loan losses is 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.

# Overview

The
following discussion describes our results of operations for the quarter ended March 31,
2006 as compared to the quarter ended March 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, on which we pay
interest. Consequently, one of the key measures of our success is our amount of net
interest income, or the difference between the income on our interest-earning assets, such
as loans and investments, and the expense on our interest-bearing liabilities, such as
deposits. Another key measure is the spread between the yield we earn on these
interest-earning assets and the rate we pay on our interest-bearing liabilities.

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

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

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

# Results of Operations

# Earnings Review

Our
net income was $1,211,807, or $0.37 diluted net income per common share, for the three
months ended March 31, 2006 as compared to $481,852, or $0.23 diluted net income per
common share, for the same period in 2005.

9

---

The increase in net income reflects
our continued growth, with average earning assets increasing to $398.5 million during the
first three months of 2006 from $249.0 million during the same period of 2005. The return
on average assets for the three month period ended March 31, 2006 was 1.17% as compared to
0.73% for the same period in 2005. The return on average equity was 12.02% for the three
month period ended March 31, 2006 versus 11.5% for the same period in 2005.

Net Interest Income

Our
primary source of revenue is net interest income, which represents the difference between
the income on interest-earning assets and expense on interest-bearing liabilities. During
the first three months of 2006, net interest income increased 55.8% to $4,340,299 from
$2,785,430 for the same period of 2005. The growth in net interest income resulted from an
increase of $3,498,805 in interest income, partially offset by an increase in interest
expense of $1,943,936. 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 and the increases in the prime rate are the primary drivers of the increase
in net interest income. Average total loans increased from $260.9 million in the first
three months of 2005 to $333.8 million in the same period in 2006. The prime rate has
increased 225 basis points since February 2005. In addition, average securities increased
to $51.0 million in the first three months of 2006 compared to $37.3 million for the first
three months of 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 3.88% in
the first three months of 2006 compared to 4.21% during the same period of 2005. The net
interest margin was 4.42% for the three month period ended March 31, 2006 compared to
4.54% for the same period of 2005. The decline in the net interest spread and the net
interest margin are due to the rising interest rate environment and the increased
competition in our markets for deposits.

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 $522,200
for the first three months of 2006 and $500,000 for the same period of 2005. The increase
in the provision was the result of increased loan growth and managements assessment
of the adequacy of the reserve for possible loan losses given the size, mix, and quality
of the current loan portfolio. Please see the discussion below under Allowance for
Possible Loan Losses for a description of the factors we consider in determining the
amount of the provision we expense each period to maintain this allowance.

Noninterest Income

Noninterest
income increased to $311,520 for the three months ended 2006, up 18.4% from $263,180 for
the same period in 2005. Service fees on deposit accounts, the largest component of
noninterest income, decreased 8.9% to $127,965 for the three months ended 2006 from
$140,461 for the same period in 2005. Service fees on deposit accounts decreased due to
increases in the analysis rate charged on commercial demand accounts and increased usage
of electronic services by personal checking customers. Income from cash value life
insurance was $34,850 for the first three months of 2006 compared to $25,338 for the same
period in 2005. Mortgage loan referral fees increased to $66,385 during the three months
ended March 31, 2006 compared to $39,821 for the same period in 2005. This increase is
primarily due to the increased mortgage activity in all of our markets. Other income
increased 38.1% to $60,061 for the three months ended March 31, 2006 from $43,479 for the
same period in 2005. Other income is primarily made up of debit card and ATM fee income in
addition to charges on check sales.

10

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Noninterest Expense

Total
noninterest expense increased 25.2% to $2,237,793 for the three month period ended March
31, 2006 from $1,787,638 for the same period in 2005. As an annualized percentage of
average total assets, our total noninterest expenses decreased from 2.7% in 2005 to 2.0%
in 2006. While our total assets have grown at a 64.1% growth rate over year-end 2005
compared to year-end 2004 and 48.4 %for the first three months of 2006 compared to the
same period in 2005, we have been able to manage our expenses while accommodating our
growth. Salary and wages and employee benefits expense increased $292,119 to $1,257,791
during the three month period ended March 31, 2006 compared to the same period in 2005.
These increases are the result of personnel additions, normal compensation adjustments,
higher costs associated with group insurance coverage, and certain incentive awards.

For
the three months ended March 31, 2006, advertising and public relations costs increased
$10,544 to $83,515. This increase was due primarily to special promotions, such as
newspaper advertisements, to attract deposits in all markets. Professional fees increased
$4,815 to $77,522 for the three month period ended March 31, 2006 compared to the same
period in 2005. These fees continue to increase due to our growth, the regulatory fees
associated with such growth, and the cost of accounting, auditing, and legal services for
a public company.

Occupancy
expenses increased $5,669 to $189,484 during the three months ended March 31, 2006
compared to the same period in 2005. As we continue to expand, we expect that occupancy
costs will continue to increase.

Data
processing fees increased during the three months ended March 31, 2006 to $116,969 from
$109,688 during the same period in 2005. Data processing costs are primarily related to
the volume of loan and deposit accounts and associated transaction activity. We believe
our data processing costs are consistent with our expansion.

Other
operating expenses increased 53.8% to $353,671 during the three months ended March 31,
2006 compared to $229,985 during the same period in 2005. These increases are primarily
the result of increased operating expenses related to the growth of the company, along
with other expenses associated with the expansion of loans and deposits. Specifically,
credit and collection expenses increased $10,110, furniture and equipment increased
$10,986, dues and subscriptions increased $9,402, travel expenses increased $13,989,
director deferred compensation plan expenses increased $35,528, merchant expenses
increased $7,127, NASDAQ expenses were $6,125, debit/ATM expenses increased $4,862,
collectively totaling $98,129, or 79% of the total increase of $123,686.

# Balance Sheet Review

General

We
had total assets of $426.7 million at March 31, 2006, an increase of 48.4% from $287.6
million at March 31, 2005. Total assets consisted primarily of $344.3 million in net
loans, $55.0 million in investments, $6.1 million in federal funds sold and short-term
investments, and $4.6 million in cash and due from banks. Our liabilities at March 31,
2006 totaled $386.6 million, consisting primarily of $337.9 million in deposits, $32.5
million in FHLB advances, and $10.3 million of junior subordinated debentures. Our total
deposits increased to $337.9 million at March 31, 2006, up 40.4% from $240.7 million at
March 31, 2005. Shareholders equity increased $23.7 million, primarily as a result
of a secondary offering in the later part of the second quarter of 2005.

Investment Securities

Total
investment securities averaged $51.0 million during the first three months of 2006 and
totaled $55.0 million at March 31, 2006. Total investment securities averaged $37.3
million during the first three months of 2005 and totaled $36.4 million at March 31, 2005.
At March 31, 2006, our total investment securities portfolio had a book value of $56.5
million and a fair market value of $55.0 million for an unrealized net loss of $1.5
million. We primarily invest in U.S. Government Agency and U.S. Agency mortgage backed
securities.

At
March 31, 2006, short-term investments totaled $6.1 million, compared to $16.7 million at
March 31, 2005. These funds are one source of our banks liquidity and are generally
invested in an earning capacity on an overnight or short-term basis. This decline in
short-term investments is primarily due to higher loan demand during this quarter and the
competitive market for deposits.

11

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Loans

Since
loans typically provide higher yields than other types of earning assets, a substantial
percentage of our earning assets are invested in our loan portfolio. As of March 31, 2006,
loans represented 83.8% of average earning assets as compared to 83.1% at March 31, 2005.
At March 31, 2006, net loans (gross loans less the allowance for loan losses and deferred
loan fees) totaled $344.3 million, an increase of $125.7 million, or 57.5%, from March 31,
2005. Average gross loans increased from $333.8 million with a yield of 8.29% during the
first three months of 2006 to $206.9 million with a yield of 7.13% during the same period
in 2005. The increase in yield on loans during these periods is due to the increasing
interest rate environment in 2005 and 2006. The interest rates charged on loans vary with
the degree of risk and the maturity and amount of the loan. Competitive pressures, money
market rates, availability of funds, and government regulations also influence interest
rates.

The
following table summarizes the composition of our loan portfolio at March 31, 2006 and
2005.

# Composition of Loan
Portfolio

|                           | At March 31,
|-------------------------- | ------------
|
|
|
|
|Commercial                 |             
|Real estate - construction |             
|Real estate - mortgage     |             
|Consumer                   |             
|                           |             
|Loans, gross               |             
|                           |             
|Deferred loan fees         |             
|Allowance for loan losses  |             
|                           |             
|Loans, net                 |             
|                           |             

The
principal component of our loan portfolio at March 31, 2006 and 2005 was mortgage loans,
which represented 75.23% and 72.92%, 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.

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

12

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under SFAS No. 114 and assigned
specific allocations. Other identified high-risk loans or credit relationships based on
internal risk ratings are also individually assessed and assigned specific allocations.

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

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

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

At
March 31, 2006, the allowance for loan losses was $4.9 million, or 1.40% of total
outstanding loans, compared to an allowance for loan losses of $2.9 million, or 1.32% of
total outstanding loans, at March 31, 2005. During the first three months of 2006, we had
one charge-off totaling $5,496. During the same period in 2005, we had three charge-offs
totaling $7,900. We had non-performing loans totaling $1.9 million and $299,172 at March
31, 2006 and March 31, 2005, respectively. While there can be no assurances, we do not
expect significant losses relating to these nonperforming loans because we believe that
the collateral supporting these loans is largely sufficient to cover the outstanding loan
balance. 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 three months
ended March 31, 2006 and 2005.

|                                                   | Three Months Ended March 31,
|-------------------------------------------------- | ----------------------------
|
|Average loans outstanding                          |                             
|Total loans outstanding at period end              |                             
|Total nonperforming loans                          |                             
|                                                   |                             
|Beginning balance of allowance                     |                             
|Total loans charged off                            |                             
|Total recoveries                                   |                             
|                                                   |                             
|Net loans charged off                              |                             
|Provision for loan losses                          |                             
|                                                   |                             
|Balance at period end                              |                             
|                                                   |                             
|Net charge-offs to average total loans             |                             
|Allowance as a percentage of total loans           |                             
|Allowance for loan losses to nonperforming loans   |                             
|Nonperforming loans as a percentage of total loans |                             

The
following table sets forth the breakdown of the allowance for loan losses by loan category
and the percentage of loans in each category to gross loans as of March 31, 2006. 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.

13

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|As of March 31, 2006      
|--------------------------
|Commercial                
|Real estate - construction
|Real estate - mortgage    
|Consumer                  
|Unallocated               
|                          
|Total allowance for       
|loan losses               
|                          

Nonperforming Assets

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

Deposits

Average
total deposits were $326.5 million for the three months ended March 31, 2006, up 50.0%
from $218.3 million during the same period in 2005. Average interest-bearing deposits were
$296.5 million for three months ended March 31, 2006, up 57.8% from $187.9 million during
the same period of 2005.

The
following table sets forth our deposits by category as of March 31, 2006 and March 31,
2005.

|                                  | As of March 31,
|--------------------------------- | ---------------
|
|
|
|
|Noninterest bearing demand        |                
|Interest bearing demand           |                
|Money market                      |                
|Savings                           |                
|Time deposits less than $100,000  |                
|Time deposits of $100,000 or over |                
|                                  |                
|Total                             |                
|                                  |                

Deposit
growth was attributable to internal growth and the generation of new deposit accounts due
primarily to special promotions and increased advertising. Demand deposit accounts
increased as a result of an expanded focus on demand deposit accounts in addition to the
opening of new branch offices in 2005. Interest bearing checking accounts increased
primarily due to a change mandated by the South Carolina Bar Association requiring that
all lawyer trust accounts be interest bearing. This created a shift from demand deposit
accounts to interest bearing checking accounts.

Core
deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively
stable funding source for our loan portfolio and other earning assets. Our core deposits
were $240.2 million at March 31, 2006, an increase of 27.7% compared to $188.1 million at
March 31, 2005. 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 71.1% at March 31, 2006 and 78.2% at March 31, 2005. Our
loan-to-deposit ratio was 103.4% at

14

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March 31, 2006 versus 92.0% at March
31, 2005. The average loan-to-deposit ratio was 100.0% during the first three months of
2006 and 94.7% during the same period of 2005.

# Advances from Federal
Home Loan Bank

In
addition to deposits, we obtained funds from the FHLB to help fund our loan growth.
Average borrowings from the FHLB were $35.6 million during the first quarter of 2006 and
totaled $32.5 million at March 31, 2006. The following table reflects the current
borrowing terms.

| |  |  |                   | 
| |  |  | ----------------- | 
| |  |  | FHLB Description  | 
| |  |  | Fixed Rate Credit | 
| |  |  | Convertible       | 
| |  |  | Convertible       | 
| |  |  | Convertible       | 
| |  |  | Convertible       | 
| |  |  | Convertible       | 
| |  |  |                   | 
| |  |  |                   | 
| |  |  |                   | 

# Junior Subordinated
Debentures

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

Debt
issuance costs, net of accumulated amortization, from the junior subordinated debentures
totaled $44,534 at March 31, 2006 and $69,000 at March 31, 2005. These costs are included
in other assets on our consolidated balance sheet. Amortization of debt issuance costs
from trust preferred debt totaled $836 for the three month period ended March 31, 2006 and
$625 for the three month period ended March 31, 2005. These costs are reported in other
noninterest expense on the consolidated statement of income.

The
trust preferred securities accrue and pay distributions annually at a rate per annum equal
to the three month LIBOR plus 270 and 190 basis points, respectively, which was 7.314% and
6.810% at March 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.

# Capital Resources

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

15

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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%.

The
Federal Reserve guidelines contain an exemption from the capital requirements for
small bank holding companies. On March 31, 2006, the Federal Reserve changed
the definition of a small bank holding company to bank holding companies with less than
$500 million in total assets (an increase from $150 million under the prior rule).
However, bank holding companies will not qualify under the new definition if they (i) are
engaged in significant nonbanking activities either directly or indirectly through a
subsidiary, (ii) conduct significant off-balance sheet activities, including
securitizations or managing or administering assets for third parties, or (iii) have a
material amount of debt or equity securities (including trust preferred securities)
outstanding that are registered with the SEC. Although we have less than $500 million in
assets, it is unclear at this point whether we otherwise meet the requirements for
qualifying as a small bank holding company. According to the Federal Reserve
Board, the revision of the criterion to exclude any bank holding company that has
outstanding a material amount of SEC-registered debt or equity securities reflects the
fact that SEC registrants typically exhibit a degree of complexity of operations and
access to multiple funding sources that warrants excluding them from the new policy
statement and subjecting them to the capital guidelines. In the adopting release for the
new rule, the Federal Reserve Board stated that what constitutes a material
amount of SEC-registered debt or equity for a particular bank holding company depends on
the size, activities and condition of the relevant bank holding company. In lieu of using
fixed measurable parameters of materiality across all institutions, the rule provides the
Federal Reserve with supervisory flexibility in determining, on a case-by-case basis, the
significance or materiality of activities or securities outstanding such that a bank
holding company should be excluded from the policy statement and subject to the capital
guidelines. Prior to adoption of this new rule, our holding company was subject to these
capital guidelines, as it had more than $150 million in assets. Until the Federal Reserve
provides further guidance on the new rules, it will be unclear whether our holding company
will be subject to the exemption from the capital requirements for small bank holding
companies. Regardless, our bank falls under these minimum capital requirements as set per
bank regulatory agencies.

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
March 31, 2006, our total shareholders equity was $40.1 million ($40.1 million at
the bank level). At March 31, 2006, our Tier 1 capital ratio was 14.5% (11.9% at the bank
level), our total risk-based capital ratio was 15.9% (13.1% at the bank level), and our
Tier 1 leverage ratio was 12.4% (10.0% at the bank level). The bank was considered
well capitalized and the holding company met or exceeded its applicable
regulatory capital requirements.

# 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 $16.4 million. 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
$16.7 million at March 31, 2006. The FHLB has approved borrowings up

16

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to 15% of the banks total
assets less advances outstanding. The borrowings are available by pledging additional
collateral and purchasing FHLB stock. At March 31, 2006, we had borrowed $32.5 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 March 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 noncore deposits.

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

# 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
March 31, 2006, the bank had issued commitments to extend credit of $40.6 million through
various types of lending arrangements, of which $38.5 million was at variable rates. The
commitments expire over the next 18 months. Past experience indicates that many of these
commitments to extend credit will expire unused. We believe that we have adequate sources
of liquidity to fund commitments that are drawn upon by the borrowers.

In
addition to commitments to extend credit, we also issue standby letters of credit which
are assurances to a third party that they will not suffer a loss if our customer fails to
meet its contractual obligation to the third party. Standby letters of credit totaled $5.3
million at March 31, 2006. Past experience indicates that many of these standby

17

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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.

# Impact of Inflation

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

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

# Recently Issued
Accounting Standards

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

In
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 note believe the adoption of SFAS No. 156 will
have a material impact on its financial position, results of operations and cash flows.

In
February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instrumentsan amendment of FASB Statements No. 133 and 140. This Statement
amends SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This Statement resolves issues
addressed in SFAS No. 133 Implementation Issue No. D1, Application of Statement 133
to Beneficial Interests in Securitized Financial Assets. SFAS No. 155 is effective
for all financial instruments acquired or issued after the beginning of an entitys
first fiscal year that begins after September 15, 2006. The Company does not believe that
the adoption of SFAS No. 155 will have a material impact on its financial position,
results of operations and cash flows.

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.

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

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

18

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

The
primary objective of asset and liability management is to manage interest rate risk and
achieve reasonable stability in net interest income throughout interest rate cycles. This
is achieved by maintaining the proper balance of rate-sensitive earning assets and
rate-sensitive interest-bearing liabilities. The relationship of rate-sensitive earning
assets to rate-sensitive interest-bearing liabilities is the principal factor in
projecting the effect that fluctuating interest rates will have on future net interest
income. Rate-sensitive assets and liabilities are those that can be repriced to current
market rates within a relatively short time period. Management monitors the rate
sensitivity of earning assets and interest-bearing liabilities over the entire life of
these instruments, but places particular emphasis on the next twelve months. At March 31,
2006, on a cumulative basis through 12 months, rate-sensitive liabilities exceeded
rate-sensitive assets by $4.84 million. This liability-sensitive position is largely
attributable to short-term certificates of deposit, money market accounts and NOW
accounts, which totaled $273.6 million at March 31, 2006.

# Item 4.   Controls and
Procedures.

As
of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our current
disclosure controls and procedures are effective as of March 31, 2006. There have been no
significant changes in our internal controls over financial reporting during the fiscal
quarter ended March 31, 2006 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.

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

# PART II

# OTHER INFORMATION

# Item 1.   Legal
Proceedings.

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

# Item 1A.   Risk Factors.

There
were no material changes from the risk factors presented in our annual report on Form
10-KSB for the year ended December 31, 2005.

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

Not
applicable.

# Item 3.   Defaults Upon
Senior Securities.

Not
applicable.

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

Not
applicable.

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# Item 5.   Other
Information.

Not
applicable.

# Item 6.   Exhibits.

Exhibit        Description

31.1             Rule 13a-14(a)
Certification of the Principal Executive Officer

31.2             Rule 13a-14(a) Certification
of the Principal Financial Officer

32                Section 1350
Certifications

20

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SIGNATURES

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

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

|Date:May 11, 2006 |  | By:  /s/ Walter E. Standish, III
        Walter E. Standish, III        
President and Chief Executive Officer
|----------------- |  | --------------------------------------------------------------------------------------------------------------

|Date:May 11, 2006 |  | By:  /s/ Richard N. Burch
        Richard N. Burch       
Chief Financial and Principal Accounting Officer
|----------------- |  | ----------------------------------------------------------------------------------------------------------

21

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INDEX TO EXHIBITS

ExhibitNumber        Description

31.1             Rule 13a-14(a)
Certification of the Principal Executive Officer

31.2             Rule 13a-14(a) Certification
of the Principal Financial Officer

32                Section 1350
Certifications

22