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

# FORM 10-Q

| | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
| | ---------------------------------------------------------------------------------
| | For the quarterly period ended:   June 30, 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 August 1, 2006, 3,179,008 shares of the issuer's common stock, par value $1.00 per share, were
issued and outstanding.

---

# PART IFINANCIAL INFORMATIONItem 1.   Financial Statements.

# Beach First National Bancshares, Inc. and Subsidiaries
Myrtle Beach, South CarolinaConsolidated Balance Sheets

|                                                         | June 30, | December 31,
|-------------------------------------------------------- | -------- | ------------
|
|
|ASSETS                                                   |          |             
|Cash and due from banks                                  |          |             
|Federal funds sold and short term investments            |          |             
|Investment securities available for sale                 |          |             
|Loans, net                                               |          |             
|Federal Reserve Bank stock                               |          |             
|Federal Home Loan Bank stock                             |          |             
|Premises and equipment, net                              |          |             
|Cash value 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; shares issued and outstanding - 3,174,508 at |          |             
|June 30, 2006, 3,168,458 at June 30, 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 financial statements.

2

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Beach First National
Bancshares, Inc. and SubsidiariesMyrtle Beach, South Carolina Consolidated
Statements of Income(Unaudited)

|                                                   | Six Months Ended | Three Months Ended
|-------------------------------------------------- | ---------------- | ------------------
|
|
|INTEREST INCOME                                    |                  |                   
|Interest and fees on loans                         |                  |                   
|Investment securities                              |                  |                   
|Fed funds sold & short term investments            |                  |                   
|                                                   |                  |                   
|Total interest income                              |                  |                   
|                                                   |                  |                   
|INTEREST EXPENSE                                   |                  |                   
|Deposits                                           |                  |                   
|Advances from the FHLB and federal funds purchased |                  |                   
|Junior subordinated debentures                     |                  |                   
|                                                   |                  |                   
|Total interest expense                             |                  |                   
|                                                   |                  |                   
|Net interest income                                |                  |                   
|                                                   |                  |                   
|PROVISION FOR POSSIBLE LOAN                        |                  |                   
|LOSSES                                             |                  |                   
|                                                   |                  |                   
|Net interest income after provision                |                  |                   
|for possible loan losses                           |                  |                   
|                                                   |                  |                   
|NONINTEREST INCOME                                 |                  |                   
|Service fees on deposit accounts                   |                  |                   
|Gain on sale of loan                               |                  |                   
|Gain on sale of 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                   |                  |                   
|Legal and 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                |                  |                   
|                                                   |                  |                   

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

3

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# Beach First National
Bancshares, Inc. and Subsidiaries Consolidated 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 loss on investment securities     |  |  |  | -         |             |  
|Less reclassification adjustments for losses |  |  |  |           |             |  
|included in net income                       |  |  |  | -         |             |  
|                                             |  |  |  |           |             |  
|Comprehensive income (loss)                  |  |  |  | -         |             |  
|Exercise of stock options                    |  |  |  | 4,950     |             |  
|Issuance of common stock                     |  |  |  | 1,150,000 |             |  
|                                             |  |  |  |           |             |  
|BALANCE JUNE 30, 2005                        |  |  |  | 3,168,458 |             | $
|                                             |  |  |  |           |             |  

|                                            |  |  |  |           | Accumulated |  
|------------------------------------------- |  |  |  | --------- | ----------- | -
|
|
|
|
|BALANCE, DECEMBER 31, 2005                  |  |  |  | 3,169,958 |             | $
|Net income                                  |  |  |  | -         |             |  
|Other comprehensive income, net of taxes:   |  |  |  |           |             |  
|Unrealized loss on investment securities    |  |  |  | -         |             |  
|Less reclassification adjustments for gains |  |  |  |           |             |  
|included in net income                      |  |  |  | -         |             |  
|                                            |  |  |  |           |             |  
|Comprehensive income (loss)                 |  |  |  | -         |             |  
|Exercise of stock options                   |  |  |  | 4,550     |             |  
|                                            |  |  |  |           |             |  
|BALANCE JUNE 30, 2006                       |  |  |  | 3,174,508 |             | $
|                                            |  |  |  |           |             |  

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

4

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

|                                                                   | Six Months Ended
|------------------------------------------------------------------ | ----------------
|
|
|OPERATING ACTIVITIES                                               |                 
|Net income                                                         |                 
|Adjustments to reconcile net income to                             |                 
|net cash provided by operating activities:                         |                 
|Deferred income taxes                                              |                 
|Provisions for loan losses                                         |                 
|Accretion of deferred loan fees                                    |                 
|Depreciation and amortization                                      |                 
|Gain on sale of investment securities                              |                 
|Gain on sale of property and equipment                             |                 
|Discount accretion and premium amortization                        |                 
|Increase (decrease) in other assets                                |                 
|Increase (decrease) in other liabilities                           |                 
|                                                                   |                 
|Net cash provided by operating activities                          |                 
|                                                                   |                 
|INVESTING ACTIVITIES                                               |                 
|Purchase of investment securities                                  |                 
|Purchase of Federal Home Loan Bank stock                           |                 
|Purchase of Federal Reserve stock                                  |                 
|Proceeds from sale of investment securities                        |                 
|Decrease (increase) in Federal funds sold & short term investments |                 
|Increase in loans, net                                             |                 
|Purchase of premises and equipment                                 |                 
|Purchase of life insurance contracts                               |                 
|Proceeds from sale of property and equipment                       |                 
|                                                                   |                 
|Net cash used in investing activities                              |                 
|                                                                   |                 
|FINANCING ACTIVITIES                                               |                 
|Advances from Federal Home Loan Bank                               |                 
|Investment in BFNB Trust                                           |                 
|Net increase in deposits                                           |                 
|Proceeds from other borrowings                                     |                 
|Issuance of common stock, net                                      |                 
|Exercise of stock options                                          |                 
|                                                                   |                 
|Net cash provided by financing activities                          |                 
|                                                                   |                 
|Net increase (decrease) in cash and cash equivalents               |                 
|                                                                   |                 
|CASH AND CASH EQUIVALENTS, BEGINNING                               |                 
|OF PERIOD                                                          |                 
|                                                                   |                 
|CASH AND CASH EQUIVALENTS, 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 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 six month period ended June 30, 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 (now the NASDAQ Global Market). 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 Six Months
EndedJune 30, 2006

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

# For the Six Months EndedJune 30, 2005

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

# For the Three Months
Ended June 30, 2006

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

# For the Three Months Ended June 30, 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

7

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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 June 30, 2006.

|                                                     | Six Months Ended June 30,
|---------------------------------------------------- | -------------------------
|
|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                                  |                          
|                                                     |                          

|                                                     | Three Months Ended June 30,
|---------------------------------------------------- | ---------------------------
|
|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                                  |                            
|                                                     |                            

# 5.   Investment in BFNM,
LLC

The Company formed a subsidiary, BFNM
Building, LLC, in partnership with its 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

8

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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 June 30, 2006, $5.0 million in advances have been drawn on the BFNM,
LLC construction loan.

# 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:

| |  | 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 o 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.

9

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We believe the allowance for loan
losses is the critical accounting policy that requires the most significant judgments 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 June 30, 2006 as compared to the quarter
ended June 30, 2005 as well as results for the six months ended June 30, 2006 and 2005,
and also analyzes our financial condition as of June 30, 2006 as compared to December 31,
2005. Like most community banks, we derive most of our income from interest we receive on
our loans and investments. Our primary source of funds for making these loans and
investments is our deposits, 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 section 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 $2,634,898, or
$.81 per diluted common share, for the six months ended June 30, 2006 as compared to net
income of $1,145,101, or $.52 per diluted common share, for the six months ended June 30,
2005. Our net income was $1,423,091, or $.44 per diluted common share, for the three
months ended June 30, 2006 as compared to net income of $663,251, or $.29 per diluted
common share, for the same period of 2005. The increase in net income reflects the
banks continued growth, as average earning assets increased to $413.0 million during
the first six months of 2006 from $266.2 million during the same period of 2005. The
return on average assets for the six month period ended June 30 was 1.22% in 2006 compared
to .82% in 2005. The return on average equity was 12.88% in 2006 versus 11.52% 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 six months of 2006,
net interest income increased 54.8% to $9,216,939 from $5,952,479 for the same period of
2005. For the three months ended June 30, 2006, net interest income increased 54.0% to
$4,876,640 from $3,167,050 during the comparable period of 2005. The growth in net
interest income during the six month period resulted from an increase of $7,242,611 in
interest income, partially offset by an increase in interest expense of $3,978,151. Our
level of net interest income is determined by the level of our earning assets and the
management of our net interest margin. Increases in the prime rate and continued growth of
our loan portfolio are the primary drivers of the increase in net interest income. Average
total loans increased from $221.3 million in the first six

10

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months of 2005 to $348.5 million in
the same period in 2006. In addition, average securities increased to $54.3 million in the
first six months of 2006 compared to $39.5 million for the first six 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 3.95% in the first six months of 2006
compared to 4.14% during the same period of 2005. The net interest margin was 4.50% for
the six month period ended June 30, 2006 compared to 4.51% for the same period of 2005.
Our net interest spread declined due to the rising interest rate environment and the
increased competition in our markets for deposits. Despite this decline, we have
maintained a solid net interest margin.

Provision for Loan Losses

We have established an allowance for
loan losses through a provision for loan losses charged as an expense on our statement of
income. We review our loan portfolio periodically to evaluate our outstanding loans and to
measure both the performance of the portfolio and the adequacy of the allowance for loan
losses. The provision for loan losses was $1,187,400 for the first six months of 2006 and
$1,099,000 for the same period of 2005. The provision for loan losses was $655,200 for the
three months ended June 30, 2006 and $599,000 for the same period in 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 considered in determining
the amount of the provision we expense each period to maintain this allowance.

Noninterest Income

Noninterest income increased to
$1,272,766 for the first six months of 2006 compared to $555,147 in the same period of
2005. For the three months ended June 30, 2006, noninterest income increased to $961,247
as compared to $291,967 in 2005. Service fees on deposit accounts, the largest component
of noninterest income, decreased 7.2% to $261,948 for the first six months of 2006 from
$282,269 during the same period of 2005. For the three months ended June 30, 2006, service
fees on deposit accounts declined to $133,982 from $141,807 at June 30, 2005. These
decreases are 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 $70,526 for the first six months of 2006 and $46,899 for the
first six months of 2005. For the three months ended June 30, 2006 and 2005, income from
cash value life insurance was $35,676 and $21,561, respectively. Income from cash value
life insurance in 2005 decreased due to an accrual adjustment in 2005. Mortgage loan
referral fees increased to $120,874 during the six months ended June 30, 2006 compared to
$106,317 for the same period in 2005; however declined to $54,489 for the three months
ending June 30, 2006 compared to $66,497 at June 30, 2005. Mortgage activity was strong
during the first three months of 2006, but declined sharply in direct response to the
increasing interest rate environment. With the addition of the mortgage division, mortgage
loan referral fees should continue to decline as we phase out our mortgage referral
business and begin making mortgage loans within our new mortgage division. Other income
increased to $759,056 for the first six months of 2006 compared to $95,387 for the same
period of 2005. For the three months ended June 30, 2006, other income was $698,967
compared to $51,907 in 2005. This increase is due to a one-time gain of $581,711 on the
sale of the banks main office in anticipation of occupying the new main office under
construction. We did not record a gain or loss on the sale of investment securities for
the first six months of 2006 compared to a gain of $9,665 for the same period in 2005. For
the three months ended June 30, 2006, we did not record a gain or loss, compared to a gain
of $10,195 for the same period in 2005.

Noninterest Expense

Total noninterest expense increased
43.5% to $5,186,828 (36.3%, or $4,926,828, net of one time costs) for the six months ended
June 30, 2006 from $3,614,595 for the same period of 2005 and increased 61.4% to
$2,949,036 (47.2%, or $2,689,036, net of one time costs) for the three months ended June
30, 2006 from $1,826,956 in the same period of 2005. This includes one time expenses of
$260,000 in start up costs associated with the mortgage division, including $60,000 in
legal expenses, $40,000 for consulting fees, $100,000 for an employee contract, and
$60,000 for the purchase of assets. As an annualized percentage of average total assets,
our total noninterest expenses decreased from 2.6% in 2005 to 2.4% in 2006. While our
total assets have grown at a 64.1% growth rate over year-end 2005 compared to year-end
2004 and 46.0% for the first six months of 2006 compared to the same period in 2005, we
have been able to manage our expenses while accommodating our growth.

11

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Salaries and wages and employee
benefits increased $946,289 to $2,923,509 for the six months ended June 30, 2006 compared
to the same period in 2005, and $654,171 to $1,665,719 for the quarter ended June 30, 2006
compared to the same period in 2005. These increases include a $200,000 midyear adjustment
to the salary incentive expense accrual related to the addition of 38 mortgage employees
and the addition of 9 employees in relationship and support positions. This also includes
a $100,000 employee contract commitment related to the startup of the mortgage operation.
Increases are also the result of personnel additions, normal compensation adjustments, and
higher costs associated with group insurance coverage.

Advertising and public relations
costs increased $35,838 for the six months ended June 30, 2006 compared to the same period
in 2005, and increased $25,294 for the three months ended June 30, 2006 compared to the
same period in 2005. This increase was due primarily to special promotions, such as
newspaper advertisements, to attract deposits in all markets. Legal and professional
expenses increased $120,406 for the six months ended June 30, 2006 compared to the same
period in 2005, and $115,592 for the three months ended June 30, 2006 compared to the same
period in 2005. In addition to the regulatory fees associated with our growth and the
escalating cost of accounting, auditing and legal services for a public company, these
increases are due to $60,000 in legal fees and $40,000 in consulting fees related to the
start up of the mortgage division.

Occupancy expenses increased $44,023
during the six month period ended June 30, 2006 compared to the same period in 2005 and by
$38,354 for the three months ended June 30, 2006 compared to the same period in 2005. Of
these increases, $28,500 is related to lease payments for our current main office as we
await the completion of the new main office. As we continue to expand, we expect that
occupancy costs will continue to increase.

Data processing fees increased during
the six months ended June 30, 2006 to $246,776 compared to $220,211 for the same period in
2005. For the three months ended June 30, 2006, data processing costs totaled $129,806
compared to $110,523 for June 30, 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
86.5% to $859,209 during the first six months of 2006 compared to $460,686 for the same
period in 2005. Other operating expenses increased 119.1%, or $274,837, for the three
months ended June 30, 2006 compared to the same period in 2005. Specifically, for the six
months ended June 30, 2006, merchant credit card processing expense increased $42,882 and
our credit card issuance processing fees increased $39,151. For the three months ended
June 30, 2006, we recorded a $40,100 loss on the purchase of assets for the mortgage
division and merchant credit card processing expenses increased $17,511. Merchant credit
card processing was introduced in the first quarter of 2006 and the issuance of credit
cards was introduced in the three months ended June 30, 2006.

Director deferred compensation plan
expense increased $63,220 to $88,076 for the six months ended June 30, 2006 and $27,692 to
$40,130 for the three month period ended June 30, 2006. These increases are related to a
modification of the plan. Travel increased $35,380 for the six months ended June 30, 2006
and $21,391 for the three month period ended June 30, 2006. Of this amount, $15,600 is
related to the 2006 fall board retreat and $8,200 is related to management planning the
retreat held in January of 2006. Entertainment expenses increased $28 984 for the six
month period ended June 30, 2006 and $26,255 for the three months ended June 30, 2006.
$25,000 is related to the establishment of an account at the Waccamaw Community
Foundation. Dues and subscriptions increased $21,084 during the first six months ended
June 30, 2006 and $11,682 for the three month period ended June 30, 2006. This increase is
related to the formation of the audit and compliance staff, as well as, the mortgage
division. Furniture and equipment expenses increased $20,518 for the six months ended June
30, 2006 and $9,532 for the three months ended June 30, 2006. The increase is related to
security equipment upgrades. NASDAQ expenses increased $12,250 for the six months ended
June30, 2006 and $6,125 for the three months ended June 30, 2006. The increase is related
to our listing in June 2005. In summary, these increases are primarily the result of
increased operating expenses related to the growth of the company, the formation of the
mortgage division, the launch of the merchant and credit card services, along with other
expenses associated with the expansion of loans and deposits. We expect our operating
expenses to grow as we continue to grow.

# BALANCE SHEET REVIEW

General
We had total assets of $461.9 million at June 30, 2006, an increase of 45.6% from $317.3 million at June 30, 2005 and an
increase of 16.2% from $397.4 at December 31, 2005. Total assets consisted primarily of
$375.3 million in net loans, $59.3 million in investments, $1.1 million in federal funds
sold and short-term investments, and $7.7 million in cash and

12

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due from banks. Our liabilities at
June 30, 2006 totaled $421.0 million, consisting primarily of $370.7 million in deposits,
$32.5 million in FHLB advances, and $10.3 million of junior subordinated debentures. Our
total deposits increased to $370.7 million at June 30, 2006, up 48.9% from $248.9 million
at June 30, 2005 and up 19.2% from $311.0 million at December 31, 2005. Shareholders
equity increased $3,052,426 to $40,820,012 at June 30, 2006, as compared to $37,767,586 at
June 30, 2005 and increased $1,694,598 from December 31, 2005.

Investment Securities

Total investment securities averaged
$54.3 million during the first six months of 2006 and totaled $59.3 million at June 30,
2006. Total investment securities averaged $37.9 million during the first six months of
2005 and totaled $44.3 million at June 30, 2005. Total investment securities averaged
$42.6 million over the twelve months ended December 31, 2005 and totaled $46.5 million at
December 31, 2005. At June 30, 2006, our total investment securities portfolio had a book
value of $61.9 million and a fair market value of $59.3 million for a gross unrealized net
loss of $2.6 million. We primarily invest in U.S. Government Agency and U. S. Agency
mortgage backed securities.

At June 30, 2006, short-term
investments totaled $1.1 million, compared to $10.0 million at June 30, 2005. At December
31, 2005, short-term investments totaled $25.5 million. 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.

Loans

Since loans typically provide higher
yields than other types of earning assets, a substantial percentage of our earning assets
are invested in our loan portfolio. As of June 30, 2006, loans represented 84.4% of
average earning assets compared to 83.1% at June 30, 2005 and 84.2% at December 31, 2005.
At June 30, 2006, net loans (total loans less the allowance for loan losses) totaled
$375.3 million, an increase of $128.8 million from June 30, 2005 and an increase of $67.9
million from December 31, 2005. . Average total loans increased from $221.3 million, with
a yield of 7.26%, in the first six months of 2005 to $348.5 million, with a yield of
8.46%, during the same in 2006. Average total loans at December 31, 2005 were $251.3
million with a yield of 7.54%, and increase of $97.2 million. 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 shows the
composition of the loan portfolio by category at June 30, 2006, June 30, 2005, and
December 31, 2005.

# Composition of Loan
Portfolio

|                                   | June 30, 2006 | June 30, 2005 | December 31, 2005
|---------------------------------- | ------------- | ------------- | -----------------
|
|
|
|Commercial                         |               |               | $                
|                                   |               |               |                  
|Real estate - construction         |               |               |                  
|                                   |               |               |                  
|Real estate - mortgage             |               |               |                  
|                                   |               |               |                  
|Consumer                           |               |               |                  
|                                   |               |               |                  
|                                   |               |               |                  
|                                   |               |               |                  
|Unearned loan fees and costs, net  |               |               |                  
|                                   |               |               |                  
|Allowance for possible loan losses |               |               |                  
|                                   |               |               |                  
|                                   |               |               | $                
|                                   |               |               |                  

13

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The principal component of our loan
portfolio at June 30, 2006, June 30, 2005 and December 31, 2005 was mortgage loans, which
represented 76.2%, 74.3% and 75.8% 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%. Because of our
relatively small size and the short period of time our loan portfolio has existed, the
current portfolio mix may not be indicative of the on-going mix. We will attempt to
maintain a relatively diversified loan portfolio to help reduce the risk inherent in
concentrations of collateral.

Allowance for Possible
Loan Losses

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

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

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

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

At June 30, 2006, the allowance for
possible loan losses was $5,329,391, or 1.40% of outstanding loans, compared to an
allowance for possible loan losses of $3,433,929, or 1.37% of outstanding loans, at June
30, 2005 and an allowance for possible loan losses of $4,364,287 or 1.40% of outstanding
loans at December 31, 2005. In the first six months of 2006, we had net charge-offs
totaling $222,296. During the same period in 2005 we had net charge-offs totaling $86,910.
For the twelve months ended December 31, 2005, we had net charge-offs totaling $241,552.
We had non-performing loans totaling $1,695,566 at June 30, 2006, $532,512 at June 30,
2005 and $1,111,264 at December 31, 2005. While there can be no assurances, we do not
expect significant losses relating to these non-performing loans.

The following table sets forth
certain information with respect to our allowance for loan losses and the composition of
charge-offs and recoveries for the six months ended June 30, 2006, June 30, 2005 and
December 31, 2005.

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# Allowance for Loan
Losses

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

The following table sets forth the
breakdown of the allowance for loan losses by loan category and the percentage of loans in
each category to 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 June 30, 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 June 30, 2006, there were no loans
accruing interest which were 90 days or more past due and we had no restructured loans.

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Deposits and Other
Interest-Bearing Liabilities

Average total deposits were $340.2
million and average interest-bearing deposits were $308.8 million in the first half of
2006. Average total deposits were $228.8 million and average interest-bearing deposits
were $199.0 million in the same period of 2005. Average total deposits were $248.0 million
and average interest-bearing deposits were $216.8 million at December 31, 2005.

The following table sets forth our
deposits by category as of June 30, 2006, June 30, 2005 and December 31, 2005.

# Deposits

|                                   | June 30, 2006 | June 30, 2005 | December 31, 2005
|---------------------------------- | ------------- | ------------- | -----------------
|
|
|
|Demand deposit accounts            |               |               | $                
|Interest bearing checking accounts |               |               |                  
|Money market accounts              |               |               |                  
|Savings accounts                   |               |               |                  
|Time deposits less than $100,000   |               |               |                  
|Time deposits of $100,000 or over  |               |               |                  
|                                   |               |               |                  
|Total deposits                     |               |               | $                
|                                   |               |               |                  

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

Core deposits, which exclude
certificates of deposit of $100,000 or more and brokered deposits, provide a relatively
stable funding source for our loan portfolio and other earning assets. Our core deposits
were $274.1 million at June 30, 2006 compared to $183.1 million at June 30, 2005, and
$227.5 million at December 31, 2005. Our brokered deposits were $29.5 million as of June
30, 2006, $8.7 million as of June 30, 2005 and $23.7 million as of December 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 approximately 73.9% at June 30, 2006, 73.6% at June 30, 2005 and 73.2% at December
31, 2005. Our loan-to-deposit ratio was 101.2% at June 30, 2006 versus 93.1% at June 30,
2005 and 98.8% at December 31, 2005. The average loan-to-deposit ratio was 102.4% during
the first six months of 2006, 95.5% during the same period of 2005 and 100.0% at December
31, 2005.

# Other Borrowings

Advances from Federal
Home Loan Bank 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 $32.9 million during the first six months of 2006 and totaled $32.5 million at
June 30, 2006. The following table reflects the current borrowing terms as of June 30, 2006.

| | FHLB Description | Balance | Current Rate      | Maturity Date
| | ---------------- | ------- | ----------------- | -------------
| |                  |         | Fixed Rate Credit |              
| |                  |         | Convertible       |              
| |                  |         | Convertible       |              
| |                  |         | Convertible       |              
| |                  |         | Convertible       |              
| |                  |         | Convertible       |              
| |                  |         |                   |              
| |                  |         |                   |              
| |                  |         |                   |              

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Other Borrowings At June 30, 2006, we had $5.0 million
in other borrowings. This represents our portion of the total amount advanced on a $7.2
million line of credit on the construction loan that was obtained by BFNM, LLC to fund the
construction of an office building that will house our main office.

# 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 $45,946 at June
30, 2006, $46,457 at June 30, 2005 and $45,740 at December 31, 2005. These costs are
included in other assets on our consolidated balance sheet. Amortization of debt issuance
costs from trust preferred debt totaled $2,086 for the six month period ended June 30,
2006, $1,876 for the six month period ended June 30, 2005 and $3,962 at December 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 7.790% and 7.229% at June 30, 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-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

17

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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 June 30, 2006, our total
shareholders equity was $40.8 million ($41.0 million at the bank level). At June 30,
2006, our Tier 1 capital ratio was 14.1% (11.5% at the bank level), our total risk-based
capital ratio was 15.3% (12.7% at the bank level), and our Tier 1 leverage ratio was 12.3%
(9.7% 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 $16.3 million at June 30, 2006.
The FHLB has approved borrowings up to 15% of the banks total assets less advances
outstanding. The borrowings are available by pledging additional collateral and purchasing
FHLB stock. At June 30, 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. We also have access to funds utilizing the discount window upon
pledging of collateral.

# 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.

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We actively monitor and manage our
interest rate risk exposure principally by measuring our interest sensitivity
gap, which is the positive or negative dollar difference between assets and
liabilities that are subject to interest rate repricing within a given period of time. A
gap is considered positive when the amount of interest-rate sensitive assets exceeds the
amount of interest-rate sensitive liabilities, and it is considered negative when the
amount of interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. We generally would benefit from increasing market interest rates when we
have an asset-sensitive, or a positive, interest rate gap and we would generally benefit
from decreasing market interest rates when we have liability-sensitive, or a negative,
interest rate gap. When measured on a gap basis, we are liability-sensitive
over the cumulative one-year time frame and asset-sensitive after one year as of June 30,
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 June 30, 2006 the bank had issued
commitments to extend credit of $30.4 million through various types of lending
arrangements, of which $28.8 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 $3.0 million at June 30, 2006. Past
experience indicates that many of these standby letters of credit will expire unused.
However, through our various sources of liquidity, we believe that we will have the
necessary resources to meet these obligations should the need arise.

# 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.

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# Recently Issued
Accounting Standards

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

The primary objective of asset and
liability management is to manage interest rate risk and achieve reasonable stability in
net interest income throughout interest rate cycles. This is achieved by maintaining the
proper balance of rate-sensitive earning assets and rate-sensitive interest-bearing
liabilities. The relationship of rate-sensitive earning assets to rate-sensitive
interest-bearing liabilities is the principal factor in projecting the effect that
fluctuating interest rates will have on future net interest income. Rate-sensitive assets
and liabilities are those that can be repriced to current market rates within a relatively
short time period. Management monitors the rate sensitivity of earning assets and
interest-bearing liabilities over the entire life of these instruments, but places
particular emphasis on the next twelve months. At June 30, 2006, on a cumulative basis
through 12 months, rate-sensitive liabilities exceeded rate-sensitive assets by $46.2
million. This liability-sensitive position is largely attributable to short-term
certificates of deposit, money market accounts and NOW accounts, which totaled $320.2
million at June 30, 2006.

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# Item 4.   Controls and
Procedures.

As of the end of the period covered
by this report, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures as defined in
Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our current disclosure controls and procedures
are effective as of June 30, 2006. There have been no significant changes in our internal
controls over financial reporting during the fiscal quarter ended June 30, 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.

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# 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.

There
was one matter submitted to a vote of security holders during the three months ended June
30, 2006 at our annual meeting of shareholders held on April 19, 2006.

# Proposal #1 
Election of Class II Directors

Our
board of directors is divided into three classes with each class to be as nearly equal in
number as possible. The three classes of directors have staggered terms, so that the terms
of only approximately one-third of the board members will expire at each annual meeting of
shareholders. The current Class I directors are Raymond E. Cleary, III, DDS, Joe N.
Jarrett, Jr., MD, Richard E. Lester and Don J. Smith. The current Class II directors are
Michael Bert Anderson, O. Bartlett Buie, Michael D. Harrington, Rick H. Seagroves and
Walter E. Standish, III. The current Class III directors are James C. Yahnis, Samuel
Robert Spann, Jr., B. Larkin Spivey, Jr., Leigh Ammons Meese and E. Thomas Fulmer. The
Class II directors were up for reelection at this years annual meeting held April
19, 2006. Each of the existing Class II directors were re-elected at the annual meeting
for a three-year term expiring at the 2009 annual meeting of shareholders. For Mr.
Anderson, 2,732,205 votes were cast in favor of his reelection as director with 98,781
abstained. For Mr. Buie, 2,711,805 votes were cast in favor of his reelection as director
with 118,181 abstained. For Mr. Harrington, 2,812,680 votes were cast in favor of his
reelection as director with 17,306 abstained. For Mr. Seagroves, 2,826,205 votes were cast
in favor of his reelection as director with 3,781 abstained. For Mr. Standish, 2,805,075
votes were cast in favor of his reelection as director with 24,911 abstained. There were
no votes cast against any of the five directors. The terms of the Class III directors will
expire at the 2007 annual shareholders meeting, and the terms of the Class I directors
will expire at the 2008 annual shareholders meeting.

# Item 5.   Other Information

Not
applicable.

# Item 6.   Exhibits

Exhibit          Description

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

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

32                   Section 1350 Certifications.

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# SIGNATURES

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

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

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

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

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# INDEX TO EXHIBITS

# Exhibit Number          Description

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

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

32        
             Section 1350 Certifications.

24