# 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:   September 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

Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest
practicable date:  On November 1, 2006, 3,179,008 shares of the issuer's common stock, par value $1.00 per share, were issued and
outstanding.

---

# PART I
FINANCIAL INFORMATIONItem 1.  Financial Statements.

# Beach First National Bancshares, Inc. and Subsidiaries
Myrtle Beach, South CarolinaConsolidated 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                                             |               |             
|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 - 4,768,512 at September 30, |               |             
|2006, 4,752,687 at September 30, 2005 and 4,754,937 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 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                     |                   |                   
|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 loans                     |                   |                   
|Loss on sale of investment securities     |                   |                   
|Income from cash value life insurance     |                   |                   
|Income from mortgage operations           |                   |                   
|Other income                              |                   |                   
|                                          |                   |                   
|Total noninterest income                  |                   |                   
|                                          |                   |                   
|NONINTEREST EXPENSES                      |                   |                   
|Salaries and wages                        |                   |                   
|Employee benefits                         |                   |                   
|Supplies and printing                     |                   |                   
|Advertising and public relations          |                   |                   
|Professional fees                         |                   |                   
|Depreciation and amortization             |                   |                   
|Occupancy                                 |                   |                   
|Data processing fees                      |                   |                   
|Other operating expenses                  |                   |                   
|                                          |                   |                   
|Total noninterest expenses                |                   |                   
|                                          |                   |                   
|Income before income taxes                |                   |                   
|                                          |                   |                   
|INCOME TAX EXPENSE                        |                   |                   
|                                          |                   |                   
|Net income                                |                   |                   
|                                          |                   |                   
|BASIC NET INCOME PER COMMON SHARE         |                   |                   
|                                          |                   |                   
|DILUTED NET INCOME PER COMMON SHARE       |                   |                   
|                                          |                   |                   

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                  |  |  |  | 2,013,008 |             | $
|                                            |  |  |  |           |             |  
|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                   |  |  |  | 4,950     |             |  
|                                            |  |  |  |           |             |  
|Stock dividend                              |  |  |  | 1,150,000 |             |  
|                                            |  |  |  |           |             |  
|BALANCE, SEPTEMBER 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 losses |  |  |   |           |             |  
|included in net income                       |  |  |   | -         |             |  
|                                             |  |  |   |           |             |  
|Comprehensive income                         |  |  |   |           |             |  
|                                             |  |  |   |           |             |  
|Exercise of stock options                    |  |  |   | 9,050     |             |  
|3-for-2 stock split                          |  |  |   | 1,589,504 |             |  
|                                             |  |  |   |           |             |  
|BALANCE, SEPTEMBER 30, 2006                  |  |  | $ | 4,768,512 |             | $
|                                             |  |  |   |           |             |  

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)

|                                                                   | Nine 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                                         |                  
|Depreciation and amortization                                      |                  
|Loss 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 by investing activities                              |                  
|                                                                   |                  
|FINANCING ACTIVITIES                                               |                  
|Advances from Federal Home Loan Bank                               |                  
|Advances from Junior Subordinated Debentures                       |                  
|Net increase in deposits                                           |                  
|Proceeds from other borrowings and fed funds purchased             |                  
|Issuance of common stock, net                                      |                  
|Exercise of stock options                                          |                  
|                                                                   |                  
|Net cash provided by financing activities                          |                  
|                                                                   |                  
|Net increase 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

---

# 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 nine month period ended September 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 consolidated
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.

As discussed in Note 6, the Company
declared a 3-for-2 stock split effected in the form of a 50% stock dividend to
shareholders of record as of December 1, 2006. The dividend will be paid on December 21,
2006. All earnings per share amounts for all periods have been adjusted to reflect the
3-for-2 split.

6

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

|For the Nine Months Ended    
|-----------------------------
|
|
|
|
|Basic EPS                    
|Effect of Diluted Securities:
|Stock options                
|                             
|Diluted EPS                  

|For the Nine Months Ended    
|-----------------------------
|
|
|
|
|Basic EPS                    
|Effect of Diluted Securities:
|Stock options                
|                             
|Diluted EPS                  

|For the Three Months Ended   
|-----------------------------
|
|
|
|
|Basic EPS                    
|Effect of Diluted Securities:
|Stock options                
|                             
|Diluted EPS                  

|For the Three Months Ended   
|-----------------------------
|
|
|
|
|Basic EPS                    
|Effect of Diluted Securities:
|Stock options                
|                             
|Diluted EPS                  

7

---

# 4.  Stock-Based
Compensation

On January 1, 2006, the Company
adopted the fair value recognition provisions of Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards (SFAS) No.
123(R), Accounting for Stock Based Compensation, to account for compensation costs
under its stock option plans. The Company previously utilized the intrinsic value method
under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees(as amended) (APB 25). Under the intrinsic value method
prescribed by APB 25, no compensation costs were recognized for the Companys stock
options because the option exercise price in its plans equals the market price on the date
of the grant. Prior to January 1, 2006, the Company only disclosed the pro forma effects
on net income and earnings per share as if the fair value recognition provisions of SFAS
123(R) had been utilized.

In December 2005, the Company elected
to fully vest all outstanding options effective immediately. No options were issued during
the nine months or the quarter ended September 30, 2006.

|                                       | 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                |                                 
|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

8

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

On September 1, 2005, BFNM Building,
LLC entered into an A1A Document A114-2001 Standard Form of Agreement between Owner and
Contractor with Harrington Construction Co. and Graham Group Architects to construct the
building on the property for $5,237,478. Michael Harrington, a member of the
Companys board of directors, is the owner and president of Harrington Construction
Co. The Company expects that the building will be completed in December 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, 2006,
$5.9 million in advances have been drawn on the BFNM, LLC construction loan.

# 6.  Subsequent Event

The Company declared a 3-for-2 stock
split effected in the form of a 50% stock dividend to shareholders of record of as of
December 1, 2006. The dividend will be paid on December 21, 2006. All earnings per share
amounts for all periods have been adjusted to reflect the 3-for-2 split.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

9

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# Critical Accounting
Policies

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

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

We believe the allowance for loan
losses is the critical accounting policy that requires the most significant 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 September 30, 2006 as compared to the
quarter ended September 30, 2005 as well as results for the nine months ended September
30, 2006 and 2005, and also analyzes our financial condition as of September 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 OperationsEARNINGS REVIEW

Our net income was $4,364,717, or
$.90 per diluted common share, for the nine months ended September 30, 2006 as compared to
net income of $2,132,652, or $.56 per diluted common share, for the nine months ended
September 30, 2005. Our net income was $1,729,819, or $.35 per diluted common share, for
the three months ended September 30, 2006 as compared to net income of $987,551, or $.20
per diluted common share, for the same period of 2005. The improvement in net income
reflects the banks continued growth, as average earning assets increased to $427.2
million during the first nine months of 2006 from $278.5 million during the same period of
2005. The return on average assets

10

---

for the nine month period ended
September 30, 2006 was 1.30% compared to .97% for the same period in 2005. The return on
average equity was 13.93% for the nine month period ended September 30, 2006 versus 10.81%
for the same period in 2005.

# Net Interest Income

Our primary source of revenue is net
interest income, which represents the difference between the income on interest-earning
assets and expense on interest-bearing liabilities. During the first nine months of 2006,
net interest income increased to $14,679,550, from $9,809,336 in the same period of 2005.
For the three months ended September 30, 2006, net interest income increased to $5,462,612
from $3,856,858 during the comparable period of 2005. The growth in net interest income
during the nine month period resulted from an increase of $11,226,752 in interest income,
partially offset by an increase in interest expense of $6,356,538. 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 $235.0 million in
the first nine months of 2005 to $360.7 million in the same period of 2006. In addition,
average securities increased to $57.4 million in the first nine months of 2006 compared to
$41.2 million for the first nine 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 4.04% in the first nine months of 2006 compared to 4.21%
during the same period of 2005. The net interest margin was 4.57% for the nine month
period ended September 30, 2006 compared to 4.65% for the same period of 2005. The slight
decline in the net interest spread and the net interest margin is primarily due to the
increase in interest rates during 2006.

# 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 $1,778,600 for the first nine months of 2006 and
$1,643,000 for the same period of 2005. For the three month period ended September 30,
2006 and 2005, the provision was $591,200 and $544,000, respectively. 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
$2,509,789 for the first nine months of 2006 compared to $823,919 in the same period of
2005. For the three months ended September 30, 2006, noninterest income increased to
$1,237,022 as compared to $268,771 in 2005. Service fees on deposit accounts, the largest
component of noninterest income, decreased from $407,166 for the first nine months of 2005
to $381,611 during the same period of 2006. For the three months ended September 2006 and
2005, service fees on deposit accounts were $119,663 and $124,897, respectively. These
decreases are due to increases in the analysis earnings rate charged on commercial demand
accounts that offset service fees charged and increased usage of electronic services by
personal checking customers. Income from cash value life insurance was $106,996 for the
first nine months of 2006 compared to $68,371 for the first nine months of 2005. For the
three months ended September 30, 2006, income from cash value life insurance was $36,469
compared to $21,472 for the same period in 2005. Income from cash value life insurance in
2006 increased due to an accrual adjustment in 2005.

Income from mortgage operations for
2005 represents referral fees on mortgage loans where the bank was acting as an agent for
a third party originator. With the formation of the companys mortgage division
during the second quarter of 2006, all sources of income from this division are included
in income from mortgage operations. The four components of the revenue are loan referral
fees, document preparation fees for both retail and wholesale loans which includes
origination fees, servicing release premiums for both retail and wholesale loans, and the
net gains on the sale of mortgage loans. The respective amounts for the nine months ended
September 30, 2006 are $244,254, $264,279, $283,586, and $258,842. With these amounts
included, mortgage operations income increased to $1,050,961 during the first nine months
of 2006 compared to $180,541 for the same period of 2005. For the three months ended
September 30, 2006, income from mortgage operations increased to $930,087 compared to
$74,224 for the same period of 2005. Of this increase, $547,864 is mortgage related fee
income from the mortgage division. Additional information on the expenses associated with
the mortgage division can be found within the noninterest expense section.

11

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Other income increased $752,663 to
$909,829 for the first nine months of 2006 as compared to $157,166 for the same period of
2005. This increase is primarily 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. Of the increase, $110,387 is related to the launch of merchant credit card
processing and the issuance of credit cards in the banks name. Prior to this
issuance, the bank offered credit cards through a third party. Debit card income is also
included in other income and increased $35,903 to $86,383 for the nine months ended
September 30, 2006. For the three months ended September 30, 2006, other income was
$150,802 compared to $61,778 in 2005.

We recorded a net gain on the sale of
a loan in the amount of $60,392 in the first nine months of 2006 as compared to a net gain
of $14,610 in 2005. We did not record a gain or loss on the sale of investment securities
for the first nine months of 2006 compared to a net loss of $3,935 in 2005. For the three
months ended September 30, 2006, we did not record a gain or loss on the sale of
investment securities compared to a net loss of $13,600 in 2005. For the three months
ended September 30, 2006, we recorded net gains of $258,842 on the sale of mortgage loans.

# Noninterest Expense

Total noninterest expenses have
increased 51.80% to $8,585,569 for the nine months ended September 30, 2006 from
$5,656,281 for the same period of 2005, and increased 66.47% to $3,398,741 for the three
months ended September 30, 2006 from $2,041,686 in the same period of 2005. The increase
for the nine months ended September 30, 2006 includes one time expenses of $260,000 in
start up costs associated with the mortgage division, including $60,000 in legal expenses,
$40,000 for consulting fees, $100,000 for an employee contract, and $40,100 loss on the
purchase of assets.

Salary and wages and employee
benefits increased by $1,842,041 to $4,967,887 during the nine months ended September 30,
2006 and $895,752 to $2,044,377 during the three months ended September 30, 2006 compared
to the same periods in 2005. These increases include a $200,000 midyear adjustment to the
salary incentive expense accrual related to the addition of nine employees in relationship
and support positions, and a $100,000 employee contract commitment related to the startup
of the mortgage operation. Of the increase, $465,255 is directly related to salary and
wages for the mortgage operations. Another $65,612 is directly related to employee
benefits for the mortgage operations employees. All other increases are the result of
personnel additions, normal compensation adjustments, and higher costs associated with
group benefits.

Advertising and public relations
expense increased $53,162 for the nine months ended September 30, 2006 compared to the
same period in 2005 and increased $17,324 for the three months ended September 30, 2006
compared to the same period in 2005. This increase is due primarily to special promotions,
such as newspaper advertisements, to attract deposits in all markets. Professional fees
increased $125,222 for the nine months ended September 30, 2006 compared to the same
period in 2005, and $4,817 for the three months ended September 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 expense increased by
$160,102 during the nine months ended September 30, 2006 compared to the same period in
2005, and $116,079 for the three months ended September 30, 2006 compared to the same
period in 2005. Of these increases, $47,500 is related to lease payments for our current
main office as we await the completion of the new main office and $70,779 is directly
related to rental expense for the mortgage operations. As we continue to expand, we expect
that occupancy costs will increase.

Data processing fees increased
$53,627 during the nine months ended September 30, 2006 to $389,333 from $335,706 for the
same period of 2005, and $27,063 for the three months ended September 30, 2006 compared to
the same period in 2005. Data processing costs are primarily related to the volume of loan
and deposit accounts and associated transaction activity. These data processing costs are
consistent with our expectations.

Other operating expenses increased
97.09% to $1,448,729 during the nine months ended September 30, 2006 compared to $735,046
for the same period in 2005. For the three month period ended September 30, 2006, other
operating expenses increased 114.87% to $589,519 compared to $274,362 for the same period
in 2005. Specifically, for the nine months ended September 30, 2006, merchant credit card
processing expense increased $111,159 and our credit card issuance processing fees
increased $44,785. These increases are related to the launch of the merchant processing
and credit card issuance.

12

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Credit and collection expense
increased $147,537 for the nine months ended September 30, 2006 and $122,068 for the three
month period ended September 30, 2006. Of this amount, $72,277 is related to the increase
in brokers fees and lenders credit expenses. The increases are related to the mortgage
division. Director deferred compensation plan expense increased $71,909 to $112,671 for
the nine months ended September 30, 2006 and decreased $3,623 to $24,596 for the three
month period ended September 30, 2006. The increase is related to a modification to
provide an increase in benefits. Travel increased $62,208 for the nine months ended
September 30, 2006 and $26,828 for the three month period ended September 30, 2006.
Entertainment expenses increased $27,488 for the nine month period ended September 30,
2006 and decreased $1,497 for the three months ended September 30, 2006. Of this amount,
$25,000 is related to the establishment of an account at the Waccamaw Community
Foundation. Dues and subscriptions increased $29,866 during the first nine months ended
September 30, 2006 and $8,782 for the three month period ended September 30, 2006. The
increases in dues and subscriptions are related to the launch of merchant processing and
credit card services, and the formation of the audit and compliance staff, as well as the
mortgage division. Furniture and equipment expenses increased $59,929 for the nine months
ended September 30, 2006 and $35,411 for the three months ended September 30, 2006. The
increase is related to equipment upgrades for the ATMs, costs associated with moving the
computer center from the current main office to the operations center, equipment upgrades
to the HVAC system at the operations center, along with normal equipment maintenance.
Operating losses increased $39,933 for the nine months ended September 30, 2006 and
decreased $4,529 for the three months ended September 30, 2006. The majority of the
operating losses were associated to one-time expenses with the acquisition of the mortgage
division.

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 credit card processing
and credit card issuance, along with other expenses associated with the expansion of loans
and deposits. We expect our operating expenses to increase as we continue to grow our
company.

# BALANCE SHEET REVIEW

# General

We had total assets of $492.0 million
at September 30, 2006, an increase of 43.9% from $341.8 million at September 30, 2005 and
an increase of 23.8% from $397.4 at December 31, 2005. Total assets consisted primarily of
$398.1 million in net loans, $66.4 million in investments, $11.2 million in premises and
equipment, and $6.7 million in cash and due from banks. Our liabilities at September 30,
2006 totaled $448.5 million, consisting primarily of $382.8 million in deposits, $37.5
million in FHLB advances, $10.3 million of junior subordinated debentures, and $8.9
million in fed funds purchased. Our total deposits increased to $382.8 million at
September 30, 2006, up 43.3% from $267.1 million at September 30, 2005 and up 23.1% from
$310.9 million at December 31, 2005. Shareholders equity increased $5.4 million to
$43.6 million at September 30, 2006, as compared to $38.2 million at September 30, 2005,
and increased $4.5 million as compared to $39.1 million at December 31, 2005.

# Investment Securities

Total securities averaged $57.4
million in the first nine months of 2006 and totaled $66.4 million at September 30, 2006.
During the same period of 2005, total securities averaged $41.2 million and totaled $47.4
million at September 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
September 30, 2006, our total investment securities portfolio had a book value of $67.5
million and a market value of $66.4 million for an unrealized net loss of $1.1 million. We
primarily invest in U.S. Government Agencies and U.S. Government Mortgage-backed
securities.

At September 30, 2006, short-term
investments totaled $235,866 compared to $607,305 as of September 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. The fluctuation in short-term investments is primarily due to higher
loan demand during the periods the investment amounts are lower. An increase in short-term
investments is related to a combination of deposit specials and a lower loan demand.

13

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# Loans

Since loans typically provide higher
yields than other types of earning assets, a substantial percentage of our earning assets
are invested in our loan portfolio. As of September 30, 2006, loans represented 84.4% of
average earning assets compared to 83.3% at September 30, 2005, and 84.2% at December 31,
2005. At September 30, 2006, net loans (total loans less the allowance for loan losses)
totaled $398.1 million, an increase of $121.5 million from September 30, 2005. Average
total loans increased from $235.0 million, with a yield of 7.48%, in the first nine months
of 2005 to $360.7 million, with a yield of 8.69%, during the same period in 2006. Average
total loans at December 31, 2005 were $251.3 million with a yield of 7.54%. 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 September 30, 2006, September 30, 2005
and December 31, 2005.

# 

|                                   | Composition of Loan
Portfolio | 
|---------------------------------- | ----------------------------- | 
|
|
|
|
|
|Commercial                         |                               | 
|                                   |                               | 
|Real estate - construction         |                               | 
|                                   |                               | 
|Real estate - mortgage             |                               | 
|                                   |                               | 
|Consumer                           |                               | 
|                                   |                               | 
|Loans, gross                       |                               | 
|                                   |                               | 
|Unearned loan fees and costs, net  |                               | 
|                                   |                               | 
|Allowance for possible loan losses |                               | 
|                                   |                               | 
|Loans, net                         |                               | 
|                                   |                               | 

The principal component of our loan
portfolio at September 30, 2006, September 30, 2005, and December 31, 2005 was mortgage
loans, which represented 76.9%, 75.8%, 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%. We attempt
to maintain a relatively diversified loan portfolio to help reduce the risk inherent in
concentrations of collateral.

# Allowance for Possible
Loan Losses

We have established an allowance for
loan losses through a provision for loan losses charged to expense on our statement of
income. The allowance for loan losses represents an amount which we believe will be
adequate to absorb probable losses on existing loans that may become uncollectible. Our
judgment as to the adequacy of the allowance for loan losses is based on a number of
assumptions about future events, which we believe to be reasonable, but which may or may
not prove to be accurate. The evaluation of the allowance is segregated into general
allocations and specific allocations. For general allocations, the portfolio is segregated
into risk-similar segments for which historical loss ratios are calculated and adjusted
for identified trends or changes in current portfolio characteristics. Historical loss
ratios are calculated by product type for consumer loans (installment and revolving),
mortgage loans, and commercial loans and may be adjusted for other risk factors. To allow
for modeling error, a range of probable loss ratios is then derived for each segment. The
resulting

14

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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, 2006, the allowance
for possible loan losses was $5.7 million, or 1.40% of outstanding total loans, compared
to an allowance for possible loan losses of $3.9 million, or 1.39% of outstanding total
loans, at September 30, 2005. This increase is due to growth in the loan portfolio our
ongoing evaluation of credits. In the first nine months of 2006, we had net charge-offs
totaling $471,395. During the same period in 2005, we had net charge-offs totaling
$163,047. We had non-performing loans totaling $2.6 million at September 30, 2006 and $1.0
million at September 30, 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 nine months ended September 30, 2006, September 30,
2005 and December 31, 2005.

# Allowance for Loan Losses

|                                                   | Nine months ending September 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   |                                  |             

15

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

# Allocation of the
Allowance for Loan Losses

| | As of September 30, 2006
| | ------------------------
|
| |                         
| |                         
| |                         
| |                         
| |                         
| |                         
| |                         

# 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, 2006, there was one
loan in the amount of $18,128 accruing interest that was 90 days or more past due and we
had no restructured loans.

# Deposits and Other
Interest-Bearing Liabilities

Average total deposits were $353.5
million and average interest-bearing deposits were $320.9 million in the first nine months
of 2006. Average total deposits were $237.7 million and average interest-bearing deposits
were $206.7 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 September 30, 2006, September 30, 2005, and December 31, 2005.

# 

|                                   | 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                     |          |  | $
|                                   |          |  |  

16

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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, provide a relatively stable funding source
for our loan portfolio and other earning assets. Our core deposits were $285.5 million at
September 30, 2006 compared to $206.3 million at September 30, 2005 and $227.5 million at
December 31, 2005. Our brokered deposits were $27.1 million as of September 30, 2006, $8.7
million as of September 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 74.6% at September 30, 2006, 77.2% at September 30, 2005, and 73.2% at
December 31, 2005. Our loan-to-deposit ratio was 105.5% at September 30, 2006 versus
105.2% at September 30, 2005 and 98.8% at December 31, 2005. The average loan-to-deposit
ratio was 102.1% at September 30, 2006, 98.9% at September 30, 2005 and 100.0% at December
31, 2005.

# 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 $32.5 million during the first nine months of 2006
and totaled $37.5 million at September 30, 2006. The following table reflects the current
borrowing terms as of September 30, 2006.

| | FHLB Description | Balance | Current Rate        | Maturity Date
| | ---------------- | ------- | ------------------- | -------------
| |                  |         | Fixed Rate Hybrid   |              
| |                  |         | Prime Based Advance |              
| |                  |         | Convertible         |              
| |                  |         | Convertible         |              
| |                  |         | Convertible         |              
| |                  |         | Convertible         |              
| |                  |         |                     |              
| |                  |         |                     |              
| |                  |         |                     |              

# Other Borrowings

Note Payable
At September 30, 2006, we had $5.9 million note payable which is included 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.

Fed Funds Purchased
At September 30, 2006, we had $8.9 million in fed funds purchased from Nexity Bank which is included in other borrowings. We
had no fed funds purchased at September 30, 2005 and at December 31, 2005.

# 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.

Debt issuance costs, net of
accumulated amortization, from the junior subordinated debentures totaled $44,865 at
September 30, 2006, $46,040 at September 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 $3,337 for the nine month period ended
September 30, 2006, $2,711 for the nine month period ended September 30, 2005, and $3,962
for the one year period ended December 31, 2005. These costs are reported in other
noninterest expense on the consolidated statement of income.

17

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The trust preferred securities accrue
and pay distributions annually at a rate per annum equal to the three month LIBOR plus 270
and 190 basis points, respectively, which was 8.21% and 7.29% at September 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 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 September 30, 2006, our total
shareholders equity was $43.6 million ($43.8 million at the bank level). At
September 30, 2006, our Tier 1 capital ratio was 13.8% (11.5% at the bank level), our
total risk-based capital ratio was 15.2% (12.8%

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at the bank level), and our Tier 1
leverage ratio was 12.2% (9.5% 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 $4.5 million at September 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 September 30, 2006, we had borrowed $42.0 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.

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, 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

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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, 2006, the bank had
issued commitments to extend credit of $35.3 million through various types of lending
arrangements, of which $33.3 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 $21.5 million at September 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.

# Recently Issued
Accounting Standards

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

In February 2006, the Financial
Accounting Standards Board (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.

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

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measurement methods for each class of
separately recognized servicing assets and servicing liabilities; at its initial adoption,
permits a one-time reclassification of available-for-sale securities to trading securities
by entities with recognized servicing rights, without calling into question the treatment
of other available-for-sale securities under Statement 115, provided that the
available-for-sale securities are identified in some manner as offsetting the
entitys exposure to changes in fair value of servicing assets or servicing
liabilities that a servicer elects to subsequently measure at fair value; and requires
separate presentation of servicing assets and servicing liabilities subsequently measured
at fair value in the statement of financial position and additional disclosures for all
separately recognized servicing assets and servicing liabilities. An entity should adopt
SFAS No.

156 as of the beginning of its first
fiscal year that begins after September 15, 2006. The Company does not believe the
adoption of SFAS No. 156 will have a material impact on its financial position, results of
operations and cash flows.

In July 2006, the FASB issued FASB
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
an enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attributable for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods,
disclosures and transitions. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company is currently analyzing the effects of FIN 48.

In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS 157 is effective
for the Company on January 1, 2008 and is not expected to have a significant impact on the
Companys financial statements.

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

In September, 2006, The FASB ratified
the consensuses reached by the FASBs Emerging Issues Task Force (EITF) relating to
EITF 06-4 Accounting for the Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 addresses
employer accounting for endorsement split-dollar life insurance arrangements that provide
a benefit to an employee that extends to postretirement periods should recognize a
liability for future benefits in accordance with FASB Statement of Financial Accounting
Standards (SFAS) No. 106, Employers Accounting for Postretirement Benefits
Other Than Pensions,or Accounting Principles Board (APB) Opinion No. 12,
Omnibus Opinion1967".EITF 06-4 is effective for fiscal years
beginning after December 15, 2006. Entities should recognize the effects of applying this
Issue through either (a) a change in accounting principle through a cumulative-effect
adjustment to retained earnings or to other components of equity or net assets in the
statement of financial position as of the beginning of the year of adoption or (b) a
change in accounting principle through retrospective application to all prior periods. The
Company does not believe the adoption of EITF 06-4 will have a material impact on its
financial position, results of operations and cash flows.

On September 13, 2006, the SEC issued
Staff Accounting Bulleting No. 108 (SAB 108). SAB 108 provides interpretive
guidance on how the effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a potential current year misstatement. Prior to SAB
108, Companies might evaluate the materiality of financial statement misstatements using
either the income statement or balance sheet approach, with the income statement approach
focusing on new misstatements added in the current year, and the balance sheet approach
focusing on the cumulative amount of misstatement present in a companys balance
sheet. Misstatements that would be material under one approach could be viewed as
immaterial under another approach, and not be corrected. SAB 108 now requires that
companies view financial statement misstatements as material if they are material
according to either the income

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statement or balance sheet approach.
The Company has analyzed SAB 108 and determined that upon adoption it will have no impact
on the reported results of operations or financial conditions.

Other accounting standards that have
been issued or proposed by the FASB or other standards-setting bodies are not expected to
have a material impact on the Companys financial position, results of operations and
cash flows.

# 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 September 30, 2006, on a cumulative
basis through 12 months, rate-sensitive liabilities exceeded rate-sensitive assets by
$29.4 million. This liability-sensitive position is largely attributable to short-term
certificates of deposit, money market accounts and NOW accounts, which totaled $341.2
million at September 30, 2006.

# Item 4.   Controls and
Procedures

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

# 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 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.

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# 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.

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

Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.

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

|Date:  November 9, 2006 |  | By:  /s/ Walter E. Standish, III
        Walter E. Standish, III        
President and Chief Executive Officer (Principal Executive Officer)
|----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|Date:  November 9, 2006 |  | By:  /s/ Richard N. Burch
        Richard N. Burch       
Chief Financial (Principal Financial and 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.

25