# U.S. SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549

# FORM 10-QSB

|[X] | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------
|    | For the quarterly period ended:   September 30, 2005                             

|[   ] | 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)

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

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

State the  number of shares  outstanding  of each of the  issuer's  classes  of  common  equity,  as of the  latest
practicable  date: On November 1, 2005,  3,168,458  shares of the issuer's  common  stock,  par value $1.00 per share,
were issued and outstanding.

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

---

# PART IFINANCIAL INFORMATIONItem 1. Financial
Statements.

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

|                                                           | September 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                                  |               |             
|Investment in BFNB Trusts                                  |               |             
|Other assets                                               |               |             
|                                                           |               |             
|Total assets                                               |               |             
|                                                           |               |             
|LIABILITIES AND SHAREHOLDERS' EQUITY                       |               |             
|LIABILITIES:                                               |               |             
|Deposits                                                   |               |             
|Noninterest bearing deposits                               |               |             
|Interest bearing deposits                                  |               |             
|                                                           |               |             
|Total deposits                                             |               |             
|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 - 3,168,458 at September 30, |               |             
|2005, 2,013,008 at September 30, 2004 and 2,013,508 at     |               |             
|December 31, 2004                                          |               |             
|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 Subsidiaries Myrtle Beach, South Carolina Consolidated
Statements of Income (Unaudited)

|                                              | Nine Months Ended | Three Months Ended |  
|--------------------------------------------- | ----------------- | ------------------ | -
|
|
|INTEREST INCOME                               |                   |                    |  
|Interest and fees on loans                    |                   |                    | $
|Investment securities                         |                   |                    |  
|Fed funds sold and short term investments     |                   |                    |  
|Dividends on long-term investments            |                   |                    |  
|                                              |                   |                    |  
|Total interest income                         |                   |                    |  
|INTEREST EXPENSE                              |                   |                   
|Deposits                                      |                   |                    |  
|Short-term borrowings                         |                   |                    |  
|Long-term borrowings-junior subordinated debt |                   |                    |  
|                                              |                   |                    |  
|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 (loss) on sale of investment securities  |                   |                    |  
|Income from cash value life insurance         |                   |                    |  
|Mortgage loan referral fees                   |                   |                    |  
|Other income                                  |                   |                    |  
|                                              |                   |                    |  
|Total noninterest income                      |                   |                    |  
|                                              |                   |                    |  
|NONINTEREST EXPENSES                          |                   |                   
|Salaries and wages                            |                   |                    |  
|Employee benefits                             |                   |                    |  
|Supplies and printing                         |                   |                    |  
|Advertising and public relations              |                   |                    |  
|Professional fees                             |                   |                    |  
|Depreciation and amortization                 |                   |                    |  
|Occupancy                                     |                   |                    |  
|Data processing fees                          |                   |                    |  
|Other operating expenses                      |                   |                    |  
|                                              |                   |                    |  
|Total noninterest expenses                    |                   |                    |  
|                                              |                   |                    |  
|Income before income taxes                    |                   |                    |  
|INCOME TAX EXPENSE                            |                   |                    |  
|                                              |                   |                    |  
|Net income                                    |                   |                    | $
|                                              |                   |                    |  
|BASIC NET INCOME PER COMMON SHARE             |                   |                   
|                                              |                   |                    | $
|                                              |                   |                    |  
|DILUTED NET INCOME PER COMMON SHARE           |                   |                    | $
|                                              |                   |                    |  

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(Unaudited)

|                                            |  |  |  |           | Accumulated |  
|------------------------------------------- |  |  |  | --------- | ----------- | -
|
|
|
|BALANCE, DECEMBER 31, 2003                  |  |  |  | 1,323,768 |             | $
|Net income                                  |  |  |  | -         |             |  
|Other comprehensive income, net of taxes:   |  | 
|Unrealized loss on investment securities    |  |  |  | -         |             |  
|Less reclassification adjustments for gains |  | 
|included in net income                      |  |  |  | -         |             |  
|Comprehensive income                        |  |  |  |           |             |  
|                                            |  |  |  |           |             |  
|Exercise of stock options                   |  |  |  | 18,250    |             |  
|Stock dividend                              |  |  |  | 670,990   |             |  
|                                            |  |  |  |           |             |  
|BALANCE, SEPTEMBER 30, 2004                 |  |  |  | 2,013,008 |             | $
|                                            |  |  |  |           |             |  

|                                             |  |  |  |           | 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                         |  |  |  |           |             |  
|                                             |  |  |  |           |             |  
|Exercise of stock options                    |  |  |  | 4,950     |             |  
|Issuance of common stock                     |  |  |  | 1,150,000 |             |  
|                                             |  |  |  |           |             |  
|BALANCE, SEPTEMBER 30, 2005                  |  |  |  | 3,168,458 |             | $
|                                             |  |  |  |           |             |  

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

4

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

|                                                                   | Nine Months Ended
|------------------------------------------------------------------ | -----------------
|
|
|OPERATING ACTIVITIES                                               |                  
|Net income                                                         |                  
|Adjustments to reconcile net income to                             |                  
|net cash provided by operating activities:                         |                  
|Provisions for loan losses                                         |                  
|Accretion of deferred loan fees                                    |                  
|Depreciation and amortization                                      |                  
|Loss (Gain) on sale of investment securities                       |                  
|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                                  |                  
|Proceeds from sale or call of investment securities                |                  
|Purchase of FHLB Stock                                             |                  
|Purchase of Federal Reserve Bank Stock                             |                  
|Purchase of BFNB Trust Stock                                       |                  
|Decrease (increase) in Federal funds sold & short term investments |                  
|Increase in loans, net                                             |                  
|Purchase of life insurance contracts                               |                  
|Purchase of premises and equipment                                 |                  
|                                                                   |                  
|Net cash used in investing activities                              |                  
|                                                                   |                  
|FINANCING ACTIVITIES                                               |                  
|Increase in Federal funds purchased & borrowings                   |                  
|Investment in BFNB Trusts                                          |                  
|Exercise of stock options                                          |                  
|Issuance of common stock, net                                      |                  
|Net increase in deposits                                           |                  
|                                                                   |                  
|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-QSB and,
therefore, do not include all disclosures necessary for a complete presentation of
financial condition, results of operations, and cash flows in conformity with generally
accepted accounting principles. All adjustments, consisting only of normal recurring
accruals, which are, in the opinion of management, necessary for fair presentation of the
interim consolidated financial statements have been included. The results of operations
for the nine month period ended September 30, 2005 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, 2004.

# 2. Principles of
Consolidation

The accompanying unaudited
consolidated condensed financial statements include the accounts of the Company and its
subsidiary, Beach First National Bank. 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 Trust I and Trust II 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 2004, the board of directors
declared a 3 for 2 stock split on the Companys common stock in the form of a 50%
stock dividend. The stock dividend was paid June 2, 2004 to shareholders of record as of
May 12, 2004. Shareholders of record received one additional share for every two shares
held as of the close of business on the record date. Fractional shares resulting from the
stock split were paid in cash based on the closing price as of the record date of May 12,
2004. As a result of the common stock dividend, earnings per share were retroactively
restated for all previous periods.

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

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

6

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

# For the Nine Months
Ended September 30, 2005

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

# For the Nine Months Ended September 30, 2004

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

# For the Three Months
Ended September 30, 2005

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

# For the Three Months Ended September 30, 2004

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

7

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

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

8

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On September 1, 2005, BFNM Building,
LLC entered into an A1A Document A114-2001 Standard Form of Agreement between Owner and
Contractor with Harrington Construction Co. and Graham Group Architects to construct the
building on the property for $5,237,478. Michael Harrington, a member of the
Companys board of directors, is the owner and president of Harrington Construction
Co. The Company expects that the building will be completed by March 22, 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 September 30, 2005,
no material transactions had occurred with respect of BFNM, LLC.

# 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
| | - | --------------------------------------

| |  | 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, 2004 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

---

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

# Overview

The
following discussion describes our results of operations for the quarter ended September
30, 2005 as compared to the quarter ended September 30, 2004 as well as results for the
nine months ended September 30, 2005 and 2004, and also analyzes our financial condition
as of September 30, 2005 as compared to December 31, 2004. Like most community banks, we
derive most of our income from interest we receive on our loans and investments. Our
primary source of funds for making these loans and investments is our deposits, on which
we pay interest. Consequently, one of the key measures of our success is our amount of net
interest income, or the difference between the income on our interest-earning assets, such
as loans and investments, and the expense on our interest-bearing liabilities, such as
deposits. Another key measure is the spread between the yield we earn on these
interest-earning assets and the rate we pay on our interest-bearing liabilities.

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

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

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

# Results of Operations
EARNINGS REVIEW

Our net income was $2,132,652, or
$.86 per common share, for the nine months ended September 30, 2005 as compared to a net
income of $1,022,009, or $.51 per common share, for the nine months ended September 30,
2004. Our net income was $987,551, or $.31 per common share, for the three months ended
September 30, 2005 as compared to net income of $383,777, or $.19 per common share, for
the same period of 2004. The improvement in net income reflects the banks continued
growth, as average earning assets increased to $278.5 million during the first nine months
of 2005 from $181.7 million during the same period of 2004. The return on average assets
for the nine month period ended September 30, 2005 was .97% compared to .70% for the same
period in 2004. The return on average equity was 10.81% for the nine month period ended
September 30, 2005 versus 8.74% for the same period in 2004.

# 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 nine months of 2005,
net interest income increased to $9,809,336, from $5,838,186 in the same period of 2004.
For the three months ended September 30, 2005, net interest income increased to $3,856,858
from $2,171,392 during the comparable period of 2004. The growth in net interest income
during the nine month period resulted from an increase of $6,477,500 in interest income,
partially offset by an increase in interest expense of $2,506,350. Our level of net
interest income is determined by the level of our earning assets and the management of our
net interest margin. The continued growth of our loan portfolio is the primary driver of
the increase in net interest income. Average total loans increased from $151.7 million in
the first nine months

10

---

of 2004 to $235.0 million in the same
period of 2005. In addition, average securities increased to $41.2 million in the first
nine months of 2005 compared to $22.3 million for the first nine months of 2004. Net
interest spread, the difference between the rate we earn on interest-earning assets and
the rate we pay on interest-bearing liabilities, was 4.21% in the first nine months of
2005 compared to 4.06% during the same period of 2004. The net interest margin was 4.65%
for the nine month period ended September 30, 2005 compared to 4.36% for the same period
of 2004.

# 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 $1,643,000 for the first nine months of 2005 and
$838,000 for the same period of 2004. For the three month period ended September 30, 2005
and 2004, the provision was $544,000 and $330,000, respectively. The increase in the
provision for the nine month period ended September 30, 2005 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
$823,919 for the first nine months of 2005 compared to $769,637 in the same period of
2004. For the three months ended September 30, 2005, noninterest income decreased to
$268,771 as compared to $295,085 in 2004. Service fees on deposit accounts, the largest
component of noninterest income, increased from $392,118 for the first nine months of 2004
to $407,166 during the same period of 2005. This category of noninterest income increased
due to growth in the number of deposit accounts as well as increased fee-related
activities of our customers. For the three months ended September 2005 and 2004, service
fees on deposit accounts were $124,897 and $128,181, respectively. Income from cash value
life insurance was $68,371 for the first nine months of 2005 compared to $121,158 for the
first nine months of 2004. This decrease is the result of an over-accrual during 2004 that
is being corrected in 2005 and a reduction in the discount rate on the policies. For the
three months ended September 30, 2005, income from cash value life insurance was $21,472
compared to $40,386 for the same period in 2004.

Mortgage loan referral fees increased
to $180,541 during the first nine months of 2005 compared to $100,974 for the same period
of 2004. For the three months ended September 30, 2005, mortgage loan referral fees
increased to $74,224 compared to $41,424 for the same period of 2004. This increase is
primarily due to our increased focus on the mortgage business in all of our markets.
Mortgage income generally is directly related to the rate environment; however, we
anticipate our referral fee income to be constant for the remainder of 2005.

Other income increased to $157,166
for the first nine months of 2005 compared to $117,992 for the same period of 2004. For
the three months ended September 30, 2005, other income was $61,778 compared to $39,694 in
2004. We recorded a net gain on the sale of a loan in the amount of $14,610 in the first
nine months of 2005. We recorded a net loss of $3,935 on the sale of investment securities
for the first nine months of 2005 compared to a net gain of $37,395 in 2004. For the three
months ended September 30, 2005, we recorded a net loss of $13,600 on the sale of
investment securities compared to a net gain of $37,400 in 2004.

# Noninterest Expense

Total noninterest expenses have
increased 36.74% to $5,656,281 for the nine months ended September 30, 2005 from
$4,136,481 for the same period of 2004, and increased 34.00% to $2,041,686 for the three
months ended September 30, 2005 from $1,523,690 in the same period of 2004. As an
annualized percentage of average total assets, our total noninterest expenses decreased
from 2.85% in 2004 to 2.56% in 2005. While our total assets have grown at a 46.64% growth
rate over year end 2004 compared to year-end 2003 and 50.66% for the first nine months of
2005 compared to the same period in 2004, we have been able to manage our expenses while
accommodating our growth.

Salary and wages and employee
benefits increased by $924,662 to $3,125,846 during the nine months ended September 30,
2005 and $354,038 to $1,148,625 during the three months ended September 30, 2005 compared
to the same periods in 2004. These increases are the results of personnel additions,
normal compensation adjustments, higher costs associated with group insurance coverage and
certain incentive awards.

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Advertising and public relations
expense increased $26,560 for the nine months ended September 30, 2005 compared to the
same period in 2004 and increased $5,679 for the three months ended September 30, 2005
compared to the same period in 2004. This increase is due primarily to the new Wexford
office on Hilton Head Island that opened in January of 2005 and special promotions such as
newspaper advertisements, to attract deposits in all markets. Professional fees increased
$77,255 for the nine months ended September 30, 2005 compared to the same period in 2004,
and $21,418 for the three months ended September 30, 2005 compared to the same period in
2004. These fees continue to increase due to our growth, the regulatory fees associated
with such growth and the escalating cost of accounting, auditing and legal services for a
public company.

Occupancy expense increased by
$197,000 during the nine months ended September 30, 2005 compared to the same period in
2004, and $45,742 for the three months ended September 30, 2005 compared to the same
period in 2004. This increase is the result of the opening of the Litchfield and Wexford
offices and increases on lease payments for most locations. As we continue to expand, we
expect that occupancy costs will increase.

Data processing fees increased
$74,111 during the nine months ended September 30, 2005 to $335,706 from $261,595 for the
same period of 2004, and $21,993 for the three months ended September 30, 2005 compared to
the same period in 2004. Data processing costs are primarily related to the volume of loan
and deposit accounts and associated transaction activity. We believe data processing costs
are consistent with our expectations.

Other operating expenses increased
23.15% to $735,046 during the nine months ended September 30, 2005 compared to $596,892
for the same period in 2004. For the three month period ended September 30, 2005, other
operating expenses increased 18.21% to $274,362 compared to $232,093 for the same period
in 2004. These increases are primarily the result of increased operating expenses related
to the opening of the new branch offices in the Litchfield/Pawleys Island area of the
Grand Strand and the Wexford branch on Hilton Head Island, along with other expenses
associated with the expansion of loans and deposits. Specifically, furniture and equipment
increased $40,920, armored car expenses increased $14,964, dues and subscriptions
increased $13,167, travel increased $27,561, entertainment increased $11,395, ATM and
Debit card expenses increased $13,157, collectively totaling $121,164, or 88% of the total
increase of $138,154 for the nine months ended September 30, 2005 compared to the same
period in 2004.

As described below under Recently
Issued Accounting Standards, beginning with calendar year 2006, SFAS No. 123(R) will
require us to measure all our employee stock-based compensation awards using a fair value
method and record this expense in our financial statements. Consequently, our noninterest
expense in future reporting periods will include a compensation expense for the fair value
of stock options we have granted. If we have been required to report this expense for the
nine months ended September 30, 2005, we would have reported an additional compensation
expense of $70,208.

# BALANCE SHEET REVIEW

# General

We had total assets of $341.8 million
at September 30, 2005, an increase of 50.6% from $226.9 million at September 30, 2004.
Total assets consisted primarily of $276.7 million in net loans, $47.4 million in
investments, $607,000 in federal funds sold and short-term investments, and $5.2 million
in cash and due from banks. Our liabilities at September 30, 2005 totaled $303.6 million,
consisting primarily of $267.1 million in deposits, $24.6 million in FHLB advances, and
$10.3 million of junior subordinated debentures. Our total deposits increased to $267.1
million at September 30, 2005, up 41.9% from $188.2 million at September 30, 2004.
Shareholders equity increased $22.1 million, net of offering costs, primarily as a
result of a secondary offering in the later part of the second quarter.

# Investment Securities

Total securities averaged $41.2
million in the first nine months of 2005 and totaled $47.4 million at September 30, 2005.
During the same period of 2004, total securities averaged $22.6 million and totaled $37.6
million at September 30, 2004. At September 30, 2005, our total investment securities
portfolio had a book value of $48.1 million and a market value of $47.4 million for an
unrealized net loss of $800,223. We primarily invest in U.S. Government Agencies and U.S.
Government Mortgage- backed securities.

12

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At September 30, 2005, short-term
investments totaled $607,305 compared to $4.2 million as of September 30, 2004. 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 September 30, 2005, loans represented 83.3% of
average earning assets compared to 80.6% at September 30, 2004. At September 30, 2005, net
loans (total loans less the allowance for loan losses) totaled $276.7 million, an increase
of $104.8 million from September 30, 2004. Average total loans increased from $151.7
million, with a yield of 6.47%, in the first nine months of 2004 to $235.0 million, with a
yield of 7.48%, during the same period in 2005. The increase in yield on loans during
these periods is due to the increasing interest rate environment in 2004 and 2005. The
interest rates charged on loans vary with the degree of risk and the maturity and amount
of the loan. Competitive pressures, money market rates, availability of funds and
government regulations also influence interest rates.

The
following table shows the composition of the loan portfolio by category at September 30,
2005 and 2004.

# Composition of Loan
Portfolio

|                                   | September 30, 2005 | September 30, 2004
|---------------------------------- | ------------------ | ------------------
|
|
|Commercial                         |                    |                   
|Real estate - construction         |                    |                   
|Real estate - mortgage             |                    |                   
|Consumer                           |                    |                   
|                                   |                    |                   
|Loans, gross                       |                    |                   
|                                   |                    |                   
|Unearned income                    |                    |                   
|Allowance for possible loan losses |                    |                   
|                                   |                    |                   
|Loans, net                         |                    |                   
|                                   |                    |                   

The principal component of our loan
portfolio at September 30, 2005 and 2004 was mortgage loans, which represented 75.8% and
71.2% of the portfolio, respectively. In the context of this discussion, a real
estate mortgage loan is defined as any loan, other than loans for construction
purposes, secured by real estate, regardless of the purpose of the loan. We follow the
common practice of financial institutions in our market area of obtaining a security
interest in real estate whenever possible, in addition to any other available collateral.
The collateral is taken to reinforce the likelihood of the ultimate repayment of the loan
and tends to increase the magnitude of the real estate loan portfolio component.
Generally, we limit the loan-to-value ratio to 80%. We 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.

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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 September 30, 2005, the allowance
for possible loan losses was $3.9 million, or 1.39% of outstanding total loans, compared
to an allowance for possible loan losses of $2.1 million, or 1.20% of outstanding total
loans, at September 30, 2004. This increase is due to growth in the loan portfolio and
needs based on ongoing evaluations of credits. In the first nine months of 2005, we had
net charge-offs totaling $163,047. During the same period in 2004, we had net charge-offs
totaling $509,109. We had non-performing loans totaling $1.0 million at September 30, 2005
and $804,595 at September 30, 2004. 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 nine months ended September 30, 2005 and 2004.

# Allowance for Loan
Losses

|                                       | Nine months ended September 30,
|-------------------------------------- | -------------------------------
|
|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                |                                

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Nonperforming loans are defined as
loans currently not accruing interest or past due greater than 90 days and still accruing
interest. At September 30, 2005, we had 6 loans totaling $1,010,006 listed as
nonperforming. This balance is made up of three loans secured by real estate totaling
$240,958, one loan totaling $741,787 secured by a leasehold mortgage and two consumer
loans totaling $27,261.

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

# Allocation of the
Allowance for Loan Losses

|                        | As of September 30, 2005
|----------------------- | ------------------------
|Residential real estate |                         
|Commercial construction |                         
|Commercial real estate  |                         
|Commercial              |                         
|Consumer                |                         
|Other                   |                         
|Unallocated             |                         
|Special Allocated       |                         
|                        |                         
|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 September 30, 2005, 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 $237.7
million and average interest-bearing deposits were $206.7 million in the first nine months
of 2005. Average total deposits were $158.3 million and average interest-bearing deposits
were $132.7 million in the same period of 2004.

The
following table sets forth our deposits by category as of September 30, 2005 and September
30, 2004.

|                                   |  | Deposits |  
|---------------------------------- |  | -------- | -
|
|
|
|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. The slight increase in demand deposit accounts
during this reporting period was primarily the result of a shift of approximately $15.0
million in demand deposits to interest bearing 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, provide a relatively stable funding source
for our loan portfolio and other earning assets. Our core deposits were $206.3 million at
September 30, 2005 compared to $148.5 million at September 30, 2004. 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 77.2% at September 30, 2005 and 78.9% at September 30, 2004. Our
loan-to-deposit ratio was 96.5% at September 30, 2005 versus 90.6% at September 30, 2004.
The average loan-to-deposit ratio was 98.9% during the first nine months of 2005 and 88.6%
during the same period of 2004.

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 $18.8 million during the first nine months of 2005
and totaled $21.5 million at September 30, 2005. The following table reflects the current
borrowing terms as of September 30, 2005.

|FHLB Description  | Balance | Current Rate | Maturity Date |           
|----------------- | ------- | ------------ | ------------- | ----------
|Fixed Rate Credit |         |              |               | 1,500,000 
|Convertible       |         |              |               | 5,000,000 
|Convertible       |         |              |               | 5,000,000 
|Convertible       |         |              |               | 5,000,000 
|Convertible       |         |              |               | 5,000,000 
|                  |         |              |               |           
|                  |         |              | $             | 21,500,000
|                  |         |              |               |           

# 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,
subject to certain limitations.

16

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Debt issuance costs, net of
accumulated amortization, from the junior subordinated debentures totaled $46,040 at
September 30, 2005 and are included in other assets on our consolidated balance sheet.
Amortization of debt issuance costs from trust preferred debt totaled $2,711 for the nine
month period ended September 30, 2005 and is 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 6.35% and 5.77% at September 30, 2005. 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%.

At September 30, 2005, our total
shareholders equity was $38.2 million ($37.9 million at the bank level). At
September 30, 2005, our Tier 1 capital ratio was 17.7% (14.0% at the bank level), our
total risk-based capital ratio was 19.1% (15.3% at the bank level), and our Tier 1
leverage ratio was 15.0% (11.9% at the bank level). The bank was considered well
capitalized and the holding company met or exceeded its applicable regulatory
capital requirements.

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.

# 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

17

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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
$20.7 million at September 30, 2005. 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 September 30, 2005, we had
borrowed $21.5 million on this line. We believe that our existing stable base of core
deposits, our bond portfolio, borrowings from the FHLB, and short-term federal funds lines
will enable us to successfully meet our liquidity needs for the next 12 months.

# Interest Rate Sensitivity

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

We
actively monitor and manage our interest rate risk exposure principally by measuring our
interest sensitivity gap, which is the positive or negative dollar difference
between assets and liabilities that are subject to interest rate repricing within a given
period of time. A gap is considered positive when the amount of interest-rate sensitive
assets exceeds the amount of interest-rate sensitive liabilities, and it is considered
negative when the amount of interest-rate sensitive liabilities exceeds the amount of
interest-rate sensitive assets. We generally would benefit from increasing market interest
rates when we have an asset-sensitive, or a positive, interest rate gap and we would
generally benefit from decreasing market interest rates when we have liability-sensitive,
or a negative, interest rate gap. When measured on a gap basis, we are
liability-sensitive over the cumulative one-year time frame and asset-sensitive after one
year as of September 30, 2005. However, our gap analysis is not a precise indicator of our
interest sensitivity position. The analysis presents only a static view of the timing of
maturities and repricing opportunities, without taking into consideration that changes in
interest rates do not affect all assets and liabilities equally. For example, rates paid
on a substantial portion of core deposits may change contractually within a relatively
short time frame, but we believe those rates are significantly less interest-sensitive
than market-based rates such as those paid on non-core deposits.

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

# 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
September 30, 2005, the bank had issued commitments to extend credit of $42.0 million
through various types of lending arrangements, of which $36.9 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 $8.2
million at September 30, 2005. 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.

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# Impact of Inflation

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

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

# Recently Issued
Accounting Standards

The
following is a summary of recent authoritative pronouncements that affect accounting,
reporting, and disclosure of financial information by us:

In
December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)). SFAS No. 123(R) will require companies to
measure all employee stock-based compensation awards using a fair value method and record
such expense in its financial statements. In addition, the adoption of SFAS No. 123(R)
requires additional accounting and disclosure related to the income tax and cash flow
effects resulting from share-based payment arrangements. SFAS No. 123(R) is effective
beginning as of the first annual reporting period beginning after December 15, 2005. The
Company is currently evaluating the impact that the adoption of SFAS No. 123(R) will have
on its financial position, results of operations and cash flows. The cumulative effect of
adoption, if any, will be measured and recognized in the statement of operations on the
date of adoption.

In
April 2005, the Securities and Exchange Commissions Office of the Chief Accountant
and its Division of Corporation Finance has released Staff Accounting Bulletin (SAB)
No.107 to provide guidance regarding the application of FASB Statement No.123 (revised
2004), Share-Based Payment. Statement No.123(R) covers a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase plans.
SAB 107 provides interpretive guidance related to the interaction between Statement
No.123R and certain SEC rules and regulations, as well as the staffs views regarding
the valuation of share-based payment arrangements for public companies. SAB 107 also
reminds public companies of the importance of including disclosures within filings made
with the SEC relating to the accounting for share-based payment transactions, particularly
during the transition to Statement No.123R.

In
December 2003, the FASB issued FIN No. 46 (revised), Consolidation of Variable
Interest Entities (FIN No. 46(R)), which addresses consolidation by
business enterprises of variable interest entities. FIN No. 46(R) requires a variable
interest entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entitys activities or entitled to
receive a majority of the entitys residual returns, or both. FIN No. 46(R) also
requires disclosures about variable interest entities that a company is not required to
consolidate, but in which it has a significant variable interest. FIN No. 46(R) provides
guidance for determining whether an entity qualifies as a variable interest entity by
considering, among other considerations, whether the entity lacks sufficient equity or its
equity holders lack adequate decision-making ability. The consolidation requirements of
FIN No. 46(R) applied immediately to variable interest entities created after
January 31, 2003. The consolidation requirements applied to the Companys
existing variable interest entities in the first reporting period ending after December
15, 2004.Certain of the disclosure requirements applied to all financial
statements issued after December 31, 2003, regardless of when the variable interest entity
was established. The adoption of FIN No. 46(R) did not have any material impact on the
Companys financial position or results of operations.

In
November 2003, the Emerging Issues Task Force (EITF) reached a consensus that
certain quantitative and qualitative disclosures should be required for debt and
marketable equity securities classified as available for sale or held to maturity under
SFAS No. 115 and SFAS No. 124 that are impaired at the balance sheet date but for which
other-than-temporary impairment has not been recognized. Accordingly the EITF issued EITF
No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. This issue addresses the meaning of other-than-temporary
impairment and its application to investments classified as either available for sale or
held to maturity under SFAS No. 115 and provides guidance on quantitative and qualitative
disclosures. The disclosure requirements of EITF No. 03-1 are effective for annual
financial statements for fiscal years ending after June 15, 2004. The effective date for
the measurement and recognition guidance of EITF No. 03-1 has been delayed.

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The FASB staff has issued a proposed
Board-directed FASB Staff Position (FSP), FSP EITF 03-1-a,
Implementation Guidance for the Application of Paragraph 16 of Issue No. 03-1.
The proposed FSP would provide implementation guidance with respect to debt securities
that are impaired solely due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairment under the measurement and recognition requirements of EITF
No. 03-1. The delay of the effective date for the measurement and recognition requirements
of EITF No. 03-1 will be superseded concurrent with the final issuance of FSP EITF 03-1-a.
Adopting the disclosure provisions of EITF No. 03-1 did not have any impact on the
Companys financial position or results of operations.

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

# Item 3. Controls and
Procedures

As
of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our current
disclosure controls and procedures are effective as of September 30, 2005. There have been
no significant changes in our internal controls over financial reporting during the fiscal
quarter ended September 30, 2005 that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting.

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

# PART II - OTHER
INFORMATION

# Item 1. Legal
Proceedings.

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

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

Not
applicable.

# Item 3. Defaults Upon
Senior Securities.

Not
applicable.

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

Not
applicable.

# Item 5. Other
Information.

Not
applicable.

# Item 6. Exhibits.

| |   
| | --
| | 10
| |   
| | 31
| | 31
| | 32

20

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# SIGNATURES

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

BEACH
FIRST NATIONAL BANCSHARES, INC.

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

|Date:November 9, 2005 |  | By:  /s/ Walter E. Standish, III
        Walter E. Standish, III        
President and Chief Executive Officer
|--------------------- |  | --------------------------------------------------------------------------------------------------------------

|Date:November 9, 2005 |  | By:  /s/ Richard N. Burch
        Richard N. Burch       
Chief Financial and Principal Accounting Officer
|--------------------- |  | ----------------------------------------------------------------------------------------------------------

21

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INDEX TO EXHIBITS

Exhibit

Number    Description

| |   
| | --
| | 10
| |   
| | 31
| | 31
| | 32

22