# Exhibit 13

Annual Report to Shareholders for the
year ended December 31, 2005.

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# Exhibit 13

Beach First National
Bancshares, Inc.2005 Annual ReportFocused on Service

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Beach First Center 3751 Grissom Parkway  Myrtle Beach, South Carolina 29577

(photo)

Opening Summer 2006

| | Constructed in accordance with LEED (Leadership in Energy and Environmental Design) Green
Building Rating System
|- | ----------------------------------------------------------------------------------------------------------------

| | Size:  46,066 Square Feet and Three Stories
|- | -------------------------------------------

| | Architect:  Graham Group Architecture of Pawleys Island
|- | -------------------------------------------------------

| | Contractor:  Harrington Construction Co., Inc. of Myrtle Beach
|- | --------------------------------------------------------------

| | Ownership:  Beach First National Bank in partnership with Nelson Mullins Riley & Scarborough, LLP
|- | -------------------------------------------------------------------------------------------------

| | First Floor:  A full service Beach First branch along with additional tenants, and a drive-up ATM
|- | -------------------------------------------------------------------------------------------------

| | Second Floor:  Beach First executive offices and additional tenants
|- | -------------------------------------------------------------------

| | Third Floor:  Nelson Mullins law offices
|- | ----------------------------------------

| | A number of firsts:  First "green" building to be constructed along the Grand Strand. First "green" bank
building in South Carolina and the Southeastern U.S. First multi-tenant "green" building in South Carolina.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Beach First Executive
Officers(photo)

From left to right are: Walt
Standish, president and chief executive officer; Julien Springs, executive vice president
and business development officer; Katie Huntley, executive vice president and chief credit
officer; and Dick Burch, executive vice president and chief financial officer.

About the Cover

Our focus on service at Beach First
extends throughout the company as demonstrated by the four employees featured on our cover
this year. From left to right are: Walt Standish, president and chief executive officer;
Yolonda Bryant, deposit operations assistant; O. Kendall Buckner, vice president and South
Strand regional manager; and Juanita Strnad, customer service representative for our
office at The Village at Wexford on Hilton Head Island.

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About Beach First

Beach First National Bancshares, Inc.
is the parent company of Beach First National Bank, headquartered in Myrtle Beach, South
Carolina. Beach First was organized in 1996 to meet the financial needs of consumers and
small-to-mid-sized businesses, and today serves the Grand Strand and Hilton Head Island
markets. The companys stock trades on the NASDAQ National Market® under the
symbol BFNB and its website is beachfirst.com.

Inside the Report

|                                       | 
|-------------------------------------- | 
|To Our Shareholders and Friends        | 
|Focused on Service                     | 
|Management's Discussion and Analysis   | 
|Report of Management                   | 
|Report of Independent Accountants      | 
|Consolidated Balance Sheets            | 
|Consolidated Statements of Income      | 
|Consolidated Statements of Changes in  | 
|Shareholders' Equity and Comprehensive | 
|Income                                 | 
|Consolidated Statements of Cash Flows  | 
|Notes                                  | 
|Corporate Information                  | 
|Staff                                  | 
|Directors                              | 

Corporate Headquarters1550
Oak StreetMyrtle Beach, SC 29577 843.626.2265 843.916.7818 (fax)

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Selected Financial
Highlights

|                                 | 2005 | 2004 | % Change
|-------------------------------- | ---- | ---- | --------
|
|Earnings                         |      |      |         
|Net Income                       |      |      | $       
|Net Income per share - basic     |      |      |         
|Net Income per share - diluted   |      |      |         
|Book Value per share             |      |      |         
|                                 |      |      |         
|Earnings Breakdown               |      |      |         
|Total Interest Income            |      |      | $       
|Total Interest Expense           |      |      |         
|Net Interest Income              |      |      |         
|Total Noninterest Income         |      |      |         
|Total Noninterest Expense        |      |      |         
|                                 |      |      |         
|Year End Balances (in thousands) |      |      |         
|Total Assets                     |      |      | $       
|Loans, net of unearned income    |      |      |         
|Deposits                         |      |      |         
|Shareholders' Equity             |      |      |         
|                                 |      |      |         
|Selected Ratios                  |      |      |         
|Allowance for loan loss to total |      |      |         
|Return on average assets         |      |      |         
|Return on average equity         |      |      |         
|Average equity to average assets |      |      |         

Graphs

Total Assets ($ millions)Net
Income ($ millions)Total Loans ($ millions)Total Deposits ($ millions)

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(Photo)

To Our Shareholders and
Friends:

Beach First continued its strong
financial performance in 2005, achieving milestones in balance sheet growth and net
income, while expanding its product menu and building its presence throughout the Grand
Strand and Hilton Head Island markets.

This busy and productive period in
our history has built a solid base for future growth and expansion, and I am pleased to
share the details with you in this Report.

Earnings Grow 134% in 2005

Beach Firsts earnings scaled
record heights in 2005, growing 134% to $3.2 million. Our financial performance can be
attributed to the robust local economies in the markets the bank serves, which fueled
dramatic growth in all areas of the balance sheet. Total assets ended the year at $397
million, while total loans grew to $312 million, and total deposits climbed to $311
million. Our branch network is maturing, and these well-established offices are performing
well, contributing to our earnings growth.

Our record performance also indicates
that Beach Firsts way of doing business  providing local, community bank
service along with technologically advanced products  has resonated with customers.
You can bank with Beach First in a branch, on the phone, or via the web; and in every
venue, you will receive the personalized service that only a community bank can provide.

Groundbreaking and
Expansion

In June 2005, we broke ground on our
new headquarters, a three-story, 46,000 square foot office facility being built in
partnership with the Nelson Mullins law firm. The new building is being constructed in
accordance with the LEED (Leadership in Energy and Environmental Design) Green Building
System. The building will house Beach First executive offices on the second floor and a
full service bank branch on the first floor, along with additional tenants to be
determined. Nelson Mullins law offices will occupy the entire third floor. The
buildings central location at 38th Avenue North and Grissom Parkway provides us with
a prominent address in a rapidly growing part of the Grand Strand and is convenient for
residents and businesses alike. We expect to occupy the building during the summer of
2006. For details about the project, please see the inside front cover of this Report.

(photo)

We also opened our second office on
Hilton Head Island and sixth overall in 2005. This new location at The Village at Wexford
on the Islands south end joins our first location at the Pineland Station Office
Building in bringing Beach Firsts brand of community banking to Beaufort County. We
have been pleased with the progress both offices continue to make in our first expansion
outside the Grand Strand.

Developing Infrastructure

Expansion  whether of locations
or product menu  requires talented staff not only to bring the plans to fruition,
but to manage the new efforts going forward.

During 2005, we established an
electronic banking department to further develop our product offerings in this important
area. As the demand for electronic services continues to grow, we need to be prepared to
handle the additional volume. Support staff has come on board to assist the marketing,
human resource, and accounting functions within the bank, as these areas have also felt
the impact of our rapid growth.

The bank also took an important step
in further developing its infrastructure with the hiring of an internal auditor who
reports to the audit committee of the banks board of directors. It is of vital
importance that we have this staff position in place to manage the controls and risk
assessment in advance of continued growth.

New Products and Services

We have seen fierce competition for
deposit products in all our markets throughout 2005, and expect this trend to continue in
2006. Growing deposits to fund loan growth, while maintaining the net interest margin,
will be a priority again this year.

To help enhance deposit growth during
2005, we added three products to our menu, all which encourage new customers to bank with
us. We added a free checking account, designed to counteract the many free products
flooding the markets, while also offering an attractive rate of interest on a key
transaction account. The need for deposits also inspired our Beach First Prime Account,
which pays 50% of the Wall Street Journal Prime Rate on

2

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select balances. This account is a
true relationship builder, because the customer does not need to continually shop rates
for the better deal. This account comes with a built-in better rate, ideal for customers
in a rising rate environment, and ideal for the bank because it builds customer loyalty.

Through these deposit accounts and
along with our NetTeller Internet banking product, we are focused on developing
relationships, which is the key to building deposits. We offer NetTeller with Bill Payer
Service free to customers as an important part of the financial products and services
package they can get at Beach First.

During 2006, we are bringing our
credit card program in-house, to be offered and managed by the electronic banking
department, beginning in April. We will offer three cards: Visa Classic, Visa Platinum,
and Visa Business Platinum. The platinum cards will provide a very attractive rewards
program with a point earned for every dollar spent with the card. Points can be redeemed
for merchandise or travel online or at travel organizations. Our merchant services program
will also be brought in-house this year. Both programs enhance the level of service the
bank brings to its customers, while providing important fee income.

Update on Stock
Information

In June, our companys common
stock began trading on the NASDAQ National Market® under the symbol BFNB. The new
listing provides the stock with greater visibility in the financial community and gives
our shareholders easy access to information on our bank. To view information about Beach
First, visit NASDAQ.com, enter BFNB, and click on Info Quotes. You
may also visit the shareholder relations section of our website, beachfirst.com, for
details about the company.

During 2005, we positioned the
company for future growth through a public offering of 1,150,000 shares of stock. The
offering was well received by investors, and the net proceeds are being used for general
corporate purposes, including support of asset growth within the bank.

Community Commitment

We can attribute our success to our
community bank philosophy. Our customers know that doing business with Beach First means
that you are interacting with staff members who live and work in the communities we serve,
while having access to the best and most advanced technological services. As a good
corporate citizen, we recognize the importance of community involvement, and support a
number of local endeavors, including the United Way organizations in Horry, Beaufort, and
Georgetown counties, the arts, and health and human services groups.

One of our most important arts
initiatives is our Childrens Art Calendar, now in its fifth year. In 2005, we
printed both a Grand Strand and a Hilton Head Island calendar, enabling us to directly
assist seven local elementary schools with their art programs.

The artwork of 24 students was
selected for the calendar, and more than 1250 students participated.

(photo)

The Future

During 2005, we continued to build a
strong foundation for our growing community bank. While much work remains to be done, I
hope you are pleased with our progress thus far. We appreciate your investment in the
bank, and I look forward to seeing you at our 2006 Annual Meeting of Shareholders, to take
place Wednesday, April 19, at 2 p.m. at the Myrtle Beach Convention Center.

/s/ Walter E. Standish III Walter E.
Standish, III President and Chief Executive Officer

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Focused on Service

At Beach First, we combine local
community bank service with the power of technology to yield a business experience that is
warm, friendly, and mutually rewarding. All Beach First employees, from the loan officers,
relationship managers, and tellers, to the behind the scenes personnel who drive our
technology, are focused on service. Our 2005 Report shares the stories of several
employees whose commitment and drive to provide the best service makes a difference for
our customers every day.

Southeast Restaurant
Corporation Gets Connected

During 2005, this long-time customer
made great strides in streamlining its banking processes through the use of Beach
Firsts Cash Management Services. Services such as NetTeller internet banking with
Bill Payer, ACH, and Sweep Accounts, help to better manage cash flow on a daily basis.
Another service used is direct deposit of payroll, which not only saves time for payroll
and accounts payable manager Christine Pardon, but also provides employees extra
convenience.

Behind these services you will find
Beach Firsts Debbie Myers, assistant vice president for electronic banking. She
worked directly with Southeast Restaurant Corporation, beginning with the initial sales
calls, through the training, and any maintenance needed. She is always available as a
resource for the customer.

Rick Seagroves, owner of Southeast
Restaurant Corporation, notes that Debbies hands-on approach and willingness to stay
in close contact with the staff throughout the entire process helped to put everyone at
ease in using the technology. Its the perfect blend of personal, one-on-one
service delivering high-tech products, Seagroves said.

(photo)
Debbie Myers of Beach First (center) with Christine Pardon (left) and Michelle Lever of Southeast Restaurant
Corporation

Its a Matter of
Trust for Allied Management Group

In just 12 years, Allied Management
Group has become a thriving real estate management firm, working with more than 30
properties on Hilton Head Island. Owner-operators Faye Jamison, Regina Young, and David
Howard recently turned to Beach First for their business and personal banking needs,
including NetTeller with Bill Payer, deposit accounts, and lending services.

They chose Beach First for the level
of personal service that relationship banker Donnie Jo Thibault provides. Faye Jamison
noted, I trust Donnie Jo and Beach First not to steer me wrong just to get my
business. I can call any time to ask questions and know she will be honest,
straightforward, and provide the response that will always be in our best interest. I
respect her advice.

Accessibility, integrity, and a good
ear are the essential qualities Allied Management Group sought for their banking
relationship. They have found all three in Donnie Jo Thibault and Beach First.

(photo) Relationship banker
Donnie Jo Thibault with Faye Jamison of Allied Management Group

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Growth Stays Hot at The
Ice Box Company

Local businessman Stephen Rhodes, Sr.
has manufactured ice machines for hotels and motels, and even invented a device to make
bagging ice a much easier task. Today, his firm, The Ice Box Company, sells more than 100
million bags for ice yearly, along with a variety of custom imprinted bags for retail
businesses.

As his business grew and developed
over the years, Beach First has been right there with him. Katie Huntley, the banks
executive vice president and chief credit officer, started working with Rhodes when the
business moved to Wesley Street in Myrtle Beach. Today, Jason Atkinson, a commercial
lender based at the banks Main Office, assisted in financing the companys new
warehouse space. Both Katie and Jason took the time to learn about The Ice Box
Companys business, gaining a thorough understanding of the companys needs.

Finding a local, hometown bank for
his business and personal financial needs was a priority for Rhodes, who runs the firm
along with son Steve. I like the way Beach First does business, the elder
Rhodes said. Katie and Jason have been there for us, and when you visit a branch,
the staff knows you by name and welcomes you. Its a complete banking
relationship.

(photo)
Stephen Rhodes, Sr. (left) of The Ice Box Company, with banker Jason Atkinson, son Steve Rhodes, and wife Judy
Rhodes

Legacy Place, LLC
Develops New Relationship with Beach First

When Scotty Trotter of Legacy Place,
LLC began to develop land at Litchfield Plantation for single family homes, he relied on
his old friend and banker Pat Tyler for financial assistance. She had just been named
manager of Beach Firsts office at Litchfield Market Village, and was pleased to
introduce him to the services available at her new bank.

Pat has been Scottys banker for
many years, handling both his personal and business accounts and is continuing in that
role at Beach First. The bank has assisted Legacy Place, LLC with financing for the
development project, providing quality service every step of the way.

Pats integrity, attention
to detail, and strong work ethic are important characteristics for a banker to have, and
when she came to Beach First, I welcomed the opportunity to begin a banking
relationship, Scotty said. I have found that same commitment to service in
everyone here at Beach First.

(photo) 
Scotty Trotter (right) and son Logan Trotter (left) of Legacy Place, LLC with Pat Tyler of Beach First

5

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Convenience,
Competitiveness, and Community Key to Avis Rollison

Beach First began offering its
community banking services on Hilton Head Island from one location at the Pineland Station
Office Building in 2003. The bank knew that to grow, a second office was imperative, and
in 2005, opened a location at The Village at Wexford.

News of the community banks
arrival on the Islands south end was welcomed by Avis Rollison, owner of The Wexford
Porcupine. Not only was Beach Firsts new location convenient to her upscale
womens clothing store at The Village at Wexford, but the bank offered competitive
rates of interest on loan services and deposit products, and enjoyed a reputation as a
community bank with local decision-makers. Best of all, a banker she knew and trusted,
Matt Richardson, had just come on board at Beach First.

With Matts help, Avis began a
relationship with the bank, securing financing for an expansion of her store, and using
electronic services, including NetTeller with Bill Payer and merchant services, to manage
her accounts and cash flow. Avis said, In Matt and Beach First, Ive found the
best possible combination of personal, community bank service, along with the
technologically advanced products usually offered only by much larger banks.

(Photo) >Avis Rollison of The
Wexford Porcupine with Beach Firsts Matt Richardson

Marshall Properties Looks
for Local Service

As an owner of Marshall Properties, a
North Myrtle Beach real estate development company, Ron Payne works in a challenging,
fast-paced environment. He needed a bank that not only could keep up with the pace, but
help him streamline his banking processes to save time and money.

When he began working with commercial
relationship manager John Breeden and Beach First, Ron knew he had made the right choice.
In Beach First, he found courteous service, quick turn around times, fair pricing for both
loans and deposits, along with products like NetTeller with Bill Payer, which have made
his business run more efficiently.

Ron said, I couldnt ask
for more in a local bank. The banks attention to detail and emphasis on personal
service have helped both in my day-to-day operations and long-term planning.

(photo) 
Ron Payne of Marshall Properties with commercial relationship manager John Breeden

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The Banks Front Line

To many customers, the teller is the
face, heart, and soul of a bank. Its no different at Beach First, where our team of
talented tellers assists our customers every day.

When a customer pulls up to our
Myrtle Beach drive through, Susie Barnhill is there with a sunny greeting. Her warm and
friendly personality has endeared her to customers who entrust her with their financial
transactions. The customer is the reason I am here, Susie stated. I
treat my customers the way I would like to be treated  with warmth and respect
 while making sure their transactions are handled accurately and efficiently.

(photo)Susie Barnhill

In North Myrtle Beach, Mary
Argondizzo is well known for her sense of humor and personal service. Its important
to her to be on a first name basis with her customers and to make them feel welcome when
they visit the North Myrtle Beach office. At Beach First, we want customers to be
pleased with every part of their banking experience, from the time they open the account,
to every point of contact they have with us. Its my job to ensure that level of
service for every visitor to my teller window, Mary stated.

(photo)Mary Argondizzo

On Hilton Head Island, Luretha Green
shares the same philosophy of service. She always has a greeting and a smile for visitors
to her window at the banks office in The Village at Wexford. Beach First is
known for being a local, home town bank, and I am responsible for providing professional,
personal service each time customers come to our office.

(photo)Luretha Green

Susie, Mary, and Luretha are just
three shining examples of how the tellers at Beach First play a crucial role in delivering
Beach Firsts brand of community banking to our customers.

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# 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.
| | - | --------------------------------------------------------------------------------------------------------------------

# Overview

Beach First National Bancshares, Inc.
(the Company) is the parent company of Beach First National Bank, (the
Bank), a wholly owned subsidiary and Beach First National Trust (the
Trust), Beach First National Trust II (the Trust II) both of which
are non-consolidated subsidiaries. The Company also owns 66% of BFNM, LLC, which is a
limited liability corporation formed solely for the construction of a corporate office
building that will house the main office for the Bank. The trusts were established
exclusively for the issuance of junior subordinated debt which was used to capitalize the
Bank. The Companys primary business activities are conducted by the Bank. We
commenced operations on September 23, 1996 and completed our ninth full year of operations
on December 31, 2005. From the outset, we have focused on serving the banking needs of
small businesses and individuals, and we have emphasized our local management and
ownership.

The Banks primary market areas
are located along the coastal regions of South Carolina and predominately center on the
Metro regions of Myrtle Beach and Hilton Head Island, South Carolina. We currently operate
from six banking locations. In addition to the main office in Myrtle Beach, we have added
five branches. We opened our Surfside branch in June 2001. In November 2002, we opened an
office in North Myrtle Beach, and in February 2003 we opened an office in Hilton Head
Island. In 2004, we opened an office in the Litchfield/Pawleys Island area of the Grand
Strand and in January 2005 we opened our second office on the south end of Hilton Head
Island. All of our branches are full service.

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.

8

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The
following table sets forth selected measures of our financial performance for the periods
indicated:

|                  | At and for the Years Ended December 31, |  |  
|----------------- | --------------------------------------- |  | -
|
|Net Income        |                                         |  | $
|Total Assets      |                                         |  | $
|Total Loans       |                                         |  | $
|Total Deposits    |                                         |  | $
|Retained Earnings |                                         |  | $

The following discussion describes
our results of operations for 2005 as compared to 2004 and 2004 compared to 2003 and also
analyzes our financial condition as of December 31, 2005 as compared to December 31, 2004.
Like most community banks, we derive most of our income from interest we receive on our
loans and investments. Our primary source of funds for making these loans and investments
is our deposits and advances from Federal Home Loan Bank (FHLB), 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 and
advances from FHLB. 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.

We have included a number of tables
to assist in our description of these measures. For example, the Average Balances,
Income and Expenses, and Rates table shows the average balance during 2005, 2004,
and 2003 of each category of our assets and liabilities, as well as the yield we earned or
the rate we paid with respect to each category. A review of this table shows that our
loans typically provide higher interest yields than do other types of interest earning
assets, which is why we intend to channel a substantial percentage of our earning assets
into our loan portfolio. Similarly, the Analysis of Changes in Net Interest
Income table helps demonstrate the impact of changing interest rates and changing
volume of assets and liabilities during the years shown. We also track the sensitivity of
our various categories of assets and liabilities to changes in interest rates, and we have
included a Interest Sensitivity Analysis Table to help explain this. Finally,
we have included a number of tables that provide detail about our investment securities,
our loans, our deposits and other borrowings.

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 Loans
and Allowance for Loan Losses sections we have included a detailed discussion of
this process, as well as several tables describing our allowance for loan losses and the
allocation of this allowance among our various categories of loans.

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 Noninterest Income and Expense section.

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

# Critical Accounting
Policies

We have adopted various accounting
policies which govern the application of accounting principles generally accepted in the
United States in the preparation of our financial statements. Our significant accounting
policies are described in Note 1 of the notes to consolidated financial statements.

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

We believe the allowance for loan
losses is the critical accounting policy that requires the most significant judgment and
estimates used in preparation of our consolidated financial statements. Some of the more
critical judgments supporting the amount of our allowance for loan losses include
judgments about the credit worthiness of borrowers,

9

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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.

Analysis of the Fiscal Years Ended
December 31, 2003 and 2004 and 2005

# Earnings Review

Overview. For the year ended December 31, 2005, our net income was $3.4 million, or
          $1.27 basic net income per common share, as compared to $1.4 million, or $.71
          basic net income per common share, for the year ended December 31, 2004, and
          $1.0 million, or $0.51 basic net income per common share, for the year ended
          December 31, 2003. All per share data for all periods has been adjusted to
          reflect the 3-for-2 stock split effected in the form of a 50% stock dividend
          that was declared in 2004. The improvement in net income in 2005 reflects our
          growth, with average earning assets increasing 55.4% to $298.5 million during
          2005 from $192.1 million during the same period of 2004. Return on average
          assets and return on average shareholders equity are key measures of
          earnings performance. Return on average assets for 2005 was 1.08% compared to
          0.70% in 2004 and 0.70% in 2003. Return on average shareholders equity for
          2005 was 11.37% verses 9.10% in 2004 and 7.05% in 2003. Our equity to assets
          ratio was 9.85% in 2005, 6.82% in 2004 and 9.01% in 2003.

We had total assets of $397.4 million
at December 31, 2005, an increase of 64.1% from $242.1 million at December 31, 2004. Our
total deposits increased to $310.8 million at December 31, 2005, up 53.0% from $203.2
million at December 31, 2004.

# Net Interest Income

General.  
          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. Our net interest income increased $5.5 million, or
          66.1%, to $13.7 million in 2005 from $8.3 million in 2004. Net interest income
          increased $2.3 million in 2004 from $6.0 million in 2003. 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 $159.3 million in 2004 to $251.3 million in 2005. In
          addition, average securities increased to $42.6 million in 2005 compared to
          $26.5 million in 2004.

Net interest spread, the difference
between the rate we earn on interest-earning assets and the rate we pay on
interest-bearing liabilities, was 4.13% for the year ended December 31, 2005, compared to
3.96% for the year ended December 31, 2004 and 4.12% for the year ended December 31, 2003.
Our net interest margin, which is net interest income divided by average interest-earning
assets, was 4.60% for the year ended December 31, 2005, 4.30% for the year ended December
31, 2004, and 4.51% for the year ended December 31, 2003.

10

---

Average Balances, Income and
Expenses and Rates. The following tables set forth, for the periods indicated,
information related to our average balance sheet and average yields on assets and average
rates paid on liabilities. We derived these yields or rates by dividing income or expense
by the average balance of the corresponding assets or liabilities. We derived average
balances from the daily balances throughout the periods indicated.

# Average Balances,
Income and Expenses, and Rates

|                    | For the year ended | For the year ended | For the year ended
|------------------- | ------------------ | ------------------ | ------------------
|
|
|
|
|Federal funds sold, |                    |                    |                   
|short term          |                    |                    |                   
|investments and     |                    |                    |                   
|trust preferred     |                    |                    |                   
|securities          |                    |                    | $                 
|                    |                    |                    |                   
|Investment          |                    |                    |                   
|securities          |                    |                    |                   
|                    |                    |                    |                   
|Loans (1)           |                    |                    |                   
|                    |                    |                    |                   
|Total earning       |                    |                    |                   
|assets              |                    |                    | $                 
|                    |                    |                    |                   
|Cash & Due          |                    |                    |                   
|from Banks          |                    |                    |                   
|Other Assets        |                    |                    |                   
|                    |                    |                    |                   
|Total Assets        |                    |                    | $                 
|                    |                    |                    |                   
|Interest-bearing    |                    |                    |                   
|deposits            |                    |                    |                   
|IBCA                |                    |                    |                   
|MMA                 |                    |                    |                   
|Savings             |                    |                    |                   
|CD's <$100,000      |                    |                    |                   
|CD's >$100,000      |                    |                    |                   
|IRA                 |                    |                    |                   
|                    |                    |                    |                   
|Total interest-     |                    |                    |                   
|bearing deposits    |                    |                    | $                 
|                    |                    |                    |                   
|Other borrowings    |                    |                    |                   
|                    |                    |                    |                   
|Total interest-     |                    |                    |                   
|bearing liabilities |                    |                    | $                 
|                    |                    |                    |                   
|Demand Deposits     |                    |                    |                   
|Other Liabilities   |                    |                    |                   
|                    |                    |                    |                   
|Total Liabilities   |                    |                    | $                 
|                    |                    |                    |                   
|Equity Capital      |                    |                    |                   
|                    |                    |                    |                   
|Total Liabilities   |                    |                    |                   
|and Equity          |                    |                    | $                 
|                    |                    |                    |                   
|Net interest spread |                    |                    |                   
|Net interest        |                    |                    |                   
|income/margin       |                    |                    |                   
|                    |                    |                    |                   

(1)     The
          effect of loans in nonaccrual status and fees collected is not significant to
          the computations. All loans and deposits are domestic.

11

---

Analysis of Changes in Net
Interest Income. The following tables set forth the impact of the varying levels of
earning assets and interest-bearing liabilities and the applicable rates have had on
changes in net interest income for the periods presented. The change in net interest
income is primarily due to the increases in volume of both loans and deposits and changes
in average rates.

# Analysis of Changes in
Net Interest Income

|                             | For the year ended December 31, | For the year ended December 31,
|---------------------------- | ------------------------------- | -------------------------------
|
|
|Federal funds sold and short |                                 |                                
|term investments and trust   |                                 |                                
|preferred securities         |                                 |                                
|                             |                                 |                                
|Investment securities        |                                 |                                
|Loans                        |                                 |                                
|                             |                                 |                                
|Total earning assets         |                                 |                                
|                             |                                 |                                
|Interest-bearing deposits    |                                 |                                
|                             |                                 |                                
|Other borrowings             |                                 |                                
|                             |                                 |                                
|Total interest-bearing       |                                 |                                
|Liabilities                  |                                 |                                
|                             |                                 |                                
|Net interest income          |                                 |                                
|                             |                                 |                                

| | (1) | Volume-rate changes have been allocated to each category proportionately based
               on the percentage of the total change.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------

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.

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

The following table summarizes the
amounts of interest-earning assets and interest-bearing liabilities outstanding at
December 31, 2005 that are expected to mature, prepay, or reprice in each of the future
time periods shown. Except as stated in the following tables, we determined the amount of
assets or liabilities that mature or reprice during a particular period in accordance with
the contractual terms of the asset or liability. We included adjustable rate loans in the
period in which interest rates are next scheduled to adjust rather than in the period in
which they are due, and we included fixed rate loans in the periods in which we anticipate
they will be repaid based on scheduled maturities. We included our savings accounts and
interest-bearing demand accounts (interest bearing checking and money market deposit
accounts), which are generally subject to immediate withdrawal, in the Three Months
or Less category, although our historical experience has proven these deposits to be
more stable over the course of a year.

12

---

# Interest Sensitivity
Analysis December 31, 2005

|                                   | Within three | After three but | After one but |             |  
|---------------------------------- | ------------ | --------------- | ------------- | ----------- | -
|
|
|Assets                             |              |                 |               |             |  
|Earning assets:                    |              |                 |               |             |  
|Federal funds sold and short term  |              |                 |               |             |  
|Investments                        |              |                 |               | 25,521,072  |  
|Investments, including FHLB & FRB  |              |                 |               | 16,723      |  
|Gross loans (1)                    |              |                 |               | 191,948,338 |  
|                                   |              |                 |               |             |  
|Total earning assets               |              |                 | $             | 217,486,132 |  
|                                   |              |                 |               |             |  
|Liabilities                        |              |                
|Interest-bearing liabilities       |              |                 |               |             |  
|Money market and interest checking |              |                 |               | 92,325,473  |  
|Regular savings deposits           |              |                 |               | 3,639,178   |  
|Time deposits < $100,000           |              |                 |               | 20,327,731  |  
|> $100,000                         |              |                 |               | 36,665,453  |  
|FHLB Advances                      |              |                 |               | 1,500,000   |  
|Other borrowings                   |              |                 | $             | -           |  
|Junior Subordinated                |              |                
|Debentures                         |              |                 | $             | -           |  
|                                   |              |                 |               |             |  
|Total interest-bearing             |              |                 |               |             |  
|liabilities                        |              |                 | $             | 154,457,835 |  
|                                   |              |                 |               |             |  
|Period gap                         |              |                 | $             | 63,028,298  |  
|Cumulative gap                     |              |                 | $             | 63,028,298  |  
|Ratio of cumulative gap to         |              |                 |               |             |  
|total earning assets               |              |                 |               | 16.46       | %

(1)       
          Non-accrual loans in the amount of $1.1 million are not included in the above
          table.

# Allowance for Possible
Loan Losses

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

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

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

The allocation of the allowance to
the respective loan segments is an approximation and not necessarily indicative of future
losses or future allocations. The entire allowance is available to absorb losses occurring
in the overall loan portfolio. In addition, the allowance is subject to examination and
adequacy testing by regulatory agencies, which may consider such factors as the
methodology used to determine adequacy and the size of the allowance relative to

13

---

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 December 31, 2005, the allowance
for possible loan losses was $4.4 million, or 1.40% of outstanding total loans, compared
to an allowance for possible loan losses of $2.4 million, or 1.26% of outstanding total
loans, at December 31, 2004. This increase is due to growth in the loan portfolio and
needs based on ongoing evaluations of credits.

# 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 $2.2 million for 2005, $1.3 million for 2004,
$713,000 for 2003. The increase in the provision for 2005 was the result of increased loan
growth and managements assessment of the adequacy of the reserve for possible loan
losses given the size, mix and quality of the current loan portfolio. Please see the
discussion below under Allowance for Possible Loan Losses for a description of
the factors we considered in determining the amount of the provision we expense each
period to maintain this allowance.

(graph loan loss reserves to total
loans)

# 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 December 31, 2005, there were no
loans accruing interest which were 90 days or more past due and we had no restructured
loans.

Non Performing Assets(Dollars in Thousands)

|                           | At December 31,
|-------------------------- | ---------------
|
|
|Commercial                 |                
|Real estate - construction |                
|Real estate - mortgage     |                
|Consumer                   |                
|                           |                
|Total                      |                
|                           |                

|                                                                | 
|--------------------------------------------------------------- | 
|Accruing loans which are contractually past due 90 days or more | 

|                           | 
|-------------------------- | 
|Commercial                 | 
|Real estate - construction | 
|Real estate - mortgage     | 
|Consumer                   | 
|                           | 
|Total                      | 
|                           | 

|                                |  |  |   |       |  
|------------------------------- |  |  | - | ----- | -
|Total nonperforming loans       |  |  | $ | 1,111 |  
|                                |  |  |   |       |  
|Other Real Estate Owned         |  |  |   | 63    |  
|Total nonaccrual loans to total |  |  |   |       |  
|Total Non Performing Assets     |  |  | $ | 1,174 |  
|                                |  |  |   |       |  
|Total nonaccrual loans to total |  | 
|loans                           |  |  |   | 0.36  | %
|Total nonaccrual loans to total |  | 
|assets                          |  |  |   | 0.28  | %
|Total nonperforming assets to   |  | 
|total assets                    |  |  |   | 0.30  | %

14

---

We had seven nonaccrual loans
totaling $1.1 million at December 31, 2005. One loan in the amount of $85,356 is a
commercial loan secured primarily by a SBA guaranty. There are two real estate
construction loans. One in the amount of $132,128 secured by a second real estate mortgage
and one in the amount of $60,461 secured by a first mortgage on real estate. We had two
real estate mortgage loans; one is in the amount of $759,821 primarily secured by a first
mortgage. The second loan in the amount of $34,749 is secured by a first real estate
mortgage. We had two consumer loans; one loan in the amount of $23,314 secured by two
mobile homes, and the second consumer loan in the amount $15,435 secured by a vehicle. We
had three nonaccrual loans totaling $76,826 at December 31, 2004. One loan in the amount
of $34,750 is a commercial loan secured by a first mortgage, one commercial loan in the
amount of $35,235 secured by a first mortgage and a commercial loan in the amount of
$6,841 secured by a vehicle. Interest income that would have been received for the years
ended December 31, 2005 and 2004 had nonaccrual loans been current in accordance with
their original terms amounted to $148,196 and $13,432 respectively. We had real estate
acquired through foreclosure totaling $62,967 at December 31, 2005 and we did not have any
real estate acquired through foreclosure during the periods ended December 3,1 2004
thorough 2001.

We do not include loans that are
current as to principal and interest in our nonperforming assets categories. However, we
will still classify a current loan as a potential problem loan if we develop serious
doubts about the borrowers future performance under the terms of the loan contract.
We consider the level of potential problem loans in our determination of the adequacy of
the allowance for loan losses. At December 31, 2005, we had classified loans totaling $3.8
million (substandard $3.4 million and special mention $423,600), that we have made a
specific allocation in the allowance for loan losses. Substandard assets consist primarily
of twenty-two loans with the largest amount to any one borrower being $646,226. The
special mention loans consist of three loans with the largest to one borrower being
$214,584. At December 31, 2004, we had classified loans totaling $6.0 million, with $3.9
million classified substandard and 2.1 million classified special mention. At December 31,
2003, we had classified loans totaling $2.1 million, all in the substandard category. 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 years ended December 31,
2005 to December 31, 2001.

Allowance for Loan
Losses(Dollars in Thousands)

|                                 | At December 31,
|-------------------------------- | ---------------
|
|
|Average total loans outstanding  |                
|Total loans outstanding at       |                
|period end                       |                
|                                 |                
|Total nonperforming loans        |                
|                                 |                
|Beginning balance of allowance   |                
|Loans charged off:               |                
|Real Estate                      |                
|Commercial                       |                
|Consumer                         |                
|                                 |                
|Total loans charged off:         |                
|Recoveries:                      |                
|Real Estate                      |                
|Commercial                       |                
|Consumer                         |                
|                                 |                
|Total recoveries:                |                
|                                 |                
|Net loans charged off            |                
|                                 |                
|Provision for loan losses        |                
|                                 |                
|Balance at period end            |                
|                                 |                
|Net charge-offs to average loans |                
|                                 |                
|Allowance as a percent of total  |                
|loans                            |                
|Nonperforming loans as a         |                
|percentage of allowance          |                
|Ratio of net charge-offs to      |                
|average total loans              |                
|outstanding during the period    |                

15

---

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 Lossesat December 31,

|                    | 2005 | 2004 | 2003 | 2002      | 2001
|------------------- | ---- | ---- | ---- | --------- | ----
|
|Commercial          |      |      | $    | 596,008   |     
|                    |      |      |      |           |     
|RE Construction     |      |      |      | 193,852   |     
|                    |      |      |      |           |     
|RE Mortgage         |      |      |      | 2,023,695 |     
|                    |      |      |      |           |     
|Consumer            |      |      |      | 101,773   |     
|                    |      |      |      |           |     
|Unallocated         |      |      |      | 1,448,959 |     
|                    |      |      |      |           |     
|Total allowance for |      |      |      |           |     
|for loan losses     |      |      | $    | 4,364,287 |     
|                    |      |      |      |           |     

# Noninterest Income and
Expense

Noninterest Income.
Noninterest income increased to $1.1 million for the year ended December 31, 2005, up 7.8%
from $1.0 million for the year ended December 31, 2004. Noninterest income increased 5.1%
from $986,834 in 2003 to $1.04 million in 2004. Service fees on deposit accounts, the
largest component of noninterest income, increased 2.5% to $549,689 in 2005 from $536,077
in 2004. Service fee income increased $45,383, or 9.2%, in 2004 from $490,694 in 2003.
Service fees on deposit accounts increased due to the growth in the number of deposit
accounts and increased fee-related activities of customers. The Bank purchased bank owned
life insurance in mid-2002 and income from cash value life insurance was $89,809 in 2005
and $161,544 in 2004 and 2003.

Mortgage loan referral fee income for
2005 was $249,757 compared to $134,865 in 2004 and $64,121 for 2003. This increase is
primarily due to our increased focus on the mortgage business in all of our markets.
Mortgage income generally is directly related to the rate environment; however, we
anticipate our referral fee income to be constant during 2006.

Other income increased 30.1% to
$217,947 in 2005 from $167,544 in 2004, and increased 23.2% from $135,945 in 2003. We
recorded a net gain on the sale of a loan in the amount of $14,610 in 2005. We recorded a
net loss of $3,935 on the sale of investment securities for 2005 compared to a net gain of
$37,395 in 2004 and $134,530 in 2003. This decrease is attributed to the sale of four
securities at a loss. These four securities were replaced with improved yields and less
maturity risk.

| | graph Noninterest income($ thousands) graph Noninterest expense ($ millions)
| | ----------------------------------------------------------------------------

Noninterest Expense.
Noninterest expense totaled $7.5 million for the year ended December 31, 2005 up from $5.7
million for 2004 and $4.7 million for the year ended December 31, 2003. As a percentage of
total assets, our total noninterest expenses decreased from 2.84% in 2003 and 2.35% in
2004 to 1.90% in 2005. While our total assets have grown at a 46.6% over 2003, 46.6% over
2004, and 64.1% over 2005, we have been able to manage our expenses while accommodating
our growth. The increase in noninterest expense reflects an increase in most expense
categories as a result of our growth to $397.4 million in total assets at the end of 2005
from $242.1 million at the end of 2004, and $165.1 million for the end of 2003.

Salary and wages expense increased by
$815,470 to $3.4 million for the year ended December 31, 2005. It also increased by
$481,518 to $2.6 million in 2004 and $606,577 to $2.1 million in 2003. Employee benefits
were $675,496 in 2005, $501,347 in 2004 and $400,579 in 2003. We had 66 full-time
equivalent employees at the end of 2005, an increase of 10 from the end of 2004 and an
increase of 24 from the end of 2003. Staffing increases are primarily due to the opening
of new branch offices in 2004 and 2005. In 2004, we added staff for the new branch office
in the Litchfield/Pawleys Island area of South Carolina and the second location on Hilton
Head Island, which

16

---

opened on January 3, 2005. Increases
in personnel costs are also due to normal compensation adjustments, higher costs
associated with group insurance coverage and certain incentive awards.

Advertising and public relations
expenses continue to be a major expense item as we develop our presence in the new
markets. In 2005 advertising and public relations expense increased $56,253 to $295,509
from $239,256 in 2004 and $168,138 in 2003. This increase is due primarily to the new
Wexford office on Hilton Head Island that opened in January of 2005 and special promotions
such as newspaper advertisements to attract deposits in all markets. Professional fees
increased $136,992 to $327,130 for 2005 compared to $190,138 in 2004 and $136,553 in 2003.
These fees are due to our growth, the regulatory fees associated with such growth and the
increased cost of accounting, auditing and legal services for a public company. Sarbanes
Oxley expenses accounted for approximately $90,000 of the increase in 2005.

Occupancy costs for the year ended
December 31, 2005, were $724,313, compared to $476,736 in 2004 and $362,202 in 2003. This
increase is the result of the opening of the Litchfield and Wexford offices and increases
on lease payments for most locations. As we continue to expand, we expect that occupancy
costs will increase.

Data processing fees increased in
2005 to $455,646 from $343,275 in 2004 and $308,568 in 2003. Data processing costs are
primarily related to the volume of loan and deposit accounts and associated transaction
activity. We believe data processing costs are consistent with our expectations.

We experienced a 25.6% increase in
other operating expenses in 2005 to $1.05 million, from $838,945 in 2004 and from $703,317
in 2003. These increases are primarily the result of increased operating expenses related
to the opening of the new branch offices in the Litchfield/Pawleys Island area of the
Grand Strand and the Wexford branch on Hilton Head Island, along with other expenses
associated with the expansion of loans and deposits. Specifically, furniture and equipment
increased $57,611, armored car expenses increased $19,432, dues and subscriptions
increased $21,371, travel increased $45,095, entertainment increased $14,721, ATM and
Debit card expenses increased $18,112, funding for the director deferred compensation plan
increased $37,082, collectively totaling $213,424, or 99% of the total increase of
$214,922 for the year ended December 31, 2005.

Income Taxes.Total income tax
expense included in the Consolidated Statements of Income was $1.8 million in 2005,
$845,060 in 2004 and $589,643 in 2003. Our effective tax rates were 34% for 2005 and 37% for 2004 and 2003.

# Financial Condition

Loans.    
          Loans are our largest component of earning assets and typically provide higher
          yields than our other types of earning assets. At December 31, 2005, loans
          represented 84.2% of average earning assets, representing an increase over the
          83.0% that they represented at the end of 2004. At December 31, 2005, net loans
          (gross loans less the allowance for loan losses and deferred loan fees) totaled
          $307.4 million, an increase of $118.4 million, or 63.0%, from December 31, 2004.
          Average gross loans increased 57.7% from $159.3 million with a yield of 6.54% in
          2004 to $251.3 million with a yield of 7.54% in 2005. Average gross loans
          increased from $116.5 million with a yield of 6.81% in 2003. The increase in
          yield on loans is due to the increasing interest rate environment in 2004 and
          2005. Variable rate loans make up approximately 60% of our loan portfolio
          compared to 40% in fixed rates. 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 Mortgage loans constitute the principal component
          of our loan portfolio. Mortgage loans represented 75.8%, 70.4%, and 66.0% of our
          portfolio at year end 2005, 2004 and 2003, 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.

17

---

The following table shows the
composition of our loan portfolio by category at December 31, for the years indicated.

Composition of Loan
Portfolio (Dollars in Thousands)

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

The following tables set forth the
maturity distribution, classified according to sensitivity to changes in interest rates,
for selected components of our loan portfolio as of December 31, 2005. The information in
this table is based on the contractual maturities of the individual loans, including loans
which may be subject to renewal at their contractual maturity. Renewal of these loans is
subject to review and credit approval, as well as modification of terms upon their
maturity. Actual repayments of loans may differ from maturities reflected above because
borrowers may have the right to prepay obligations with or without prepayment penalties.

# Loan Maturity Schedule
and Sensitivity to Changes in Interest Rates December 31, 2005

|                         |  | After one but |   |            
|------------------------ |  | ------------- | - | -----------
|
|
|Commercial               |  |               | $ | 27,198,707 
|Real estate mortgage     |  |               |   | 176,891,621
|Real estate construction |  |               |   | 23,466,409 
|Consumer                 |  |               |   | 1,827,013  
|                         |  |               |   |            
|Total                    |  |               |   | 229,383,750
|                         |  |               |   |            
|Fixed Interest Rate      |  |               | $ | 50,304,847 
|Variable Interest Rate   |  |               |   | 179,078,904
|                         |  |               |   |            
|Total                    |  |               | $ | 229,383,750
|                         |  |               |   |            

Investment Securities.Investment securities at December 31, 2005 averaged $42.6 million and at December 31,
2004 averaged $26.5 million, representing 14.3% of average earning assets in 2005 and
$13.8 million in 2004. At December 31, 2005, our total portfolio had a book value of $45.1
million, and a market value of $44.5 million, for an unrealized net loss of $1,084,803.
This compares to our market value of $36.2 million at December 31, 2004, and $11.9 million
at December 31, 2003.

# Investment SecuritiesAs
of December 31,

|                      | 2005 | 2004 | 2003
|--------------------- | ---- | ---- | ----
|U. S. Gov't. Agencies |      |      | $   
|Mortgage backed       |      |      |     
|Other                 |      |      |     
|                      |      |      |     
|Total                 |      |      | $   
|                      |      |      |     

At December 31, 2005, short term
investments totaled $25.5 million. At December 31, 2004, we had short-term investments of
$463,069. At December 31, 2003 we had short-term investments of $4.6 million. These funds
are generally invested in an earning capacity with maturities of six months or less in
federal funds.

Contractual maturities and yields on
our investment securities (all available for sale) at December 31, 2005 are set forth on
the following tables based on market values. Expected maturities may differ from
contractual maturities

18

---

because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties. Investment
securities are generally invested in U.S. Government Agency and mortgage backed securities
with an average life of six years or less.

# Funding Sources

Deposits and Other
Interest-Bearing Liabilities. Average total deposits were $248.0 million in 2005, up
48.7% from $166.8 million in 2004. Average interest-bearing deposits were $216.8 million
in 2005, up 55.2% from $139.7 million in 2004. These increases were primarily a result of
the continued expansion of the Company. Deposit growth was attributable to internal growth
and the generation of new deposit accounts due primarily to special promotions and
increased advertising. 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 $227.5 million at
December 31, 2005, an increase of 45.9% compared to $156.0 million at December 31, 2004.
We expect a stable base of deposits to continue to be our primary source of funding to
meet both our short-term and long-term liquidity needs. Core deposits as a percentage of
total deposits were approximately 73.2% at December 31, 2005 and 76.8% at December 31,
2004. Our loan-to-deposit ratio was 98.8% at December 31, 2005 versus 93.1% at December
31, 2004. The average loan-to-deposit ratio was 100.0% during 2005 and 94.3% during 2004.

The following table sets forth our
deposits by category as of December 31, of each respective year.

# Deposits by Category

|                        | December 31, 2005 | December 31, 2004 | December 31, 2003 | December 31, 2002 | December 31, 2001
|----------------------- | ----------------- | ----------------- | ----------------- | ----------------- | -----------------
|
|
|
|
|Demand deposit          |                   |                   | $                 | 31,152,603        |                  
|accounts                |                   |                   |                   |                   |                  
|Interest bearing        |                   |                   |                   | 22,235,452        |                  
|checking                |                   |                   |                   |                   |                  
|Money market            |                   |                   |                   | 70,090,021        |                  
|accounts                |                   |                   |                   |                   |                  
|Savings accounts        |                   |                   |                   | 3,639,178         |                  
|Time deposits <         |                   |                   |                   | 100,390,285       |                  
|$100,000                |                   |                   |                   |                   |                  
|Time deposits >$100,000 |                   |                   |                   | 83,386,672        |                  
|                        |                   |                   |                   |                   |                  
|Total     deposits      |                   |                   | $                 | 310,894,210       |                  
|                        |                   |                   |                   |                   |                  
|deposits                |                   |                   |                   |                   |                  

The following table sets forth our deposits
by category with the average balance and the average rate paid for each category. All of
our deposits are domestic.

Average
balances and rates(Dollars in thousands)

|                        | 2005 | 2004 | 2003 | 2002    | 2001
|----------------------- | ---- | ---- | ---- | ------- | ----
|
|Non interest bearing    |      |      |      |         |     
|demand                  |      |      | $    | 31,114  |     
|Interest bearing demand |      |      |      | 17,237  |     
|Money market            |      |      |      | 75,684  |     
|Savings                 |      |      |      | 3,587   |     
|Time deposits           |      |      | $    | 120,342 |     
|                        |      |      |      |         |     
|Total                   |      |      | $    | 247,963 |     
|                        |      |      |      |         |     

As of December 31, 2005, time
deposits greater than $100,000 that matured within three months were $36.7 million, those
over 3 months through 6 months were $11.0 million, those over 6 months through 12 months
were

19

---

$30.7 million and time deposits
greater than $100,000 that had a maturity greater than 12 months were $4.95 million.

Due to the seasonal nature of our
market areas, deposit growth is strong during the summer months and loan demand usually
reaches its peak during the winter months. Thus, we historically have a more favorable
liquidity position during the summer months. To meet loan demand and liquidity needs
during the winter months, we typically offer rate specials on deposits. Our deposit growth
during the summer months is invested in temporary investments and short-term securities.
Additionally, the Company has access to other funding sources including federal funds
purchased from correspondent banks and a line of credit with the Federal Home Loan Bank
(FHLB) in addition to a seasonal line of credit with the Federal Reserve Discount Window.

Borrowings.  During 2005, we had average short-term borrowings of $23.8 million compared to
          $16.8 million in 2004 and $7.7 million in 2003. Total borrowings outstanding at
          December 31, 2005 were $35.5 million, at December 31, 2004 were $16.5 million
          and at December 31, 2003 were $11.5 million. The maximum amount outstanding
          during any month-end period at December 31, 2005 was $35.5 million with an
          average rate of 4.21%, at December 31, 2004 was $21.5 million at an average rate
          of 2.36% and at December 31, 2003 was $11.5 million with an average rate of
          2.79%. These funds were obtained from the Federal Home Loan Bank to help fund
          our loan growth, except for $1.5 million that was obtained from Bank of America.
          This represents the Companys portion of the total amount advanced on a
          $7.2 million line of credit as of December 31, 2005 on the construction loan
          that was obtained by BFNM, LLC to fund the construction of an office building
          that will house the main office for the Bank. For more information concerning
          borrowings, refer to Notes 8 and 9 of the Notes to the Consolidated Financial
          Statements.

# Junior Subordinated Debt.

During 2005, we had average junior
subordinated debt of $9.5 million compared to $3.1 million in 2004 and none in 2003. Total
junior subordinated debt outstanding at December 31, 2005 was $10.3 million and at
December 31, 2004 was $5.2 million. The maximum amount outstanding during any month-end
period at December 31, 2005 was $10.3 million with an average rate of 5.60%. At December
31, 2004, the maximum outstanding during any month-end period was $5.2 million with an
average rate of 4.45%.

The trust preferred securities accrue
and pay distributions annually at a rate per annum equal to the three month LIBOR plus 270
and 190 basis points, respectively, which was 6.89%and 6.39% at December 31, 2005.
The distribution rate payable on these securities is cumulative and payable quarterly in
arrears. We have the right, subject to events of default, to defer payments of interest on
the trust preferred securities for a period not to exceed 20 consecutive quarterly
periods, provided that no extension period may extend beyond the maturity dates of May 27,
2034 and March 30, 2035, respectively. We have no current intention to exercise our right
to defer payments of interest on the trust preferred securities. We have the right to
redeem the trust preferred securities, in whole or in part, on or after May 27, 2009 and
March 30, 2010, respectively. We may also redeem the trust preferred securities prior to
such dates upon occurrence of specified conditions and the payment of a redemption
premium.

Debt issuance costs, net of
accumulated amortization, from the junior subordinated debentures totaled $45,740 at
December 31, 2005 and $23,333 at December 31, 2004. These costs are included in other
assets on the Consolidated Balance Sheets. Amortization of debt issuance costs from trust
preferred debt totaled $3,962 at December 31, 2005 and $1,667 at December 31, 2004, and is
reported in noninterest expenses on the Consolidated Statements of Income.

# Capital Standards and
Regulatory Matters

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%.

20

---

(Insert Capital graph)

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 December 31, 2005, our total
shareholders equity was $39.1 million ($35.3 million at the bank level). At December
31, 2005, our Tier 1 capital ratio was 16.0% (12.8% at the bank level), our total
risk-based capital ratio was 17.4% (14.0% at the bank level), and our Tier 1 leverage
ratio was 13.8% (11.0% at the bank level). The Bank was considered
well-capitalized and the holding company met or exceeded its applicable
regulatory capital requirements

# Liquidity Management

Liquidity represents the ability of a
company to convert assets into cash or cash equivalents without significant loss, and the
ability to raise additional funds by increasing liabilities. Liquidity management involves
monitoring our sources and uses of funds in order to meet our day-to-day cash flow
requirements while maximizing profits. Liquidity management is made more complicated
because different balance sheet components are subject to varying degrees of management
control. For example, the timing of maturities of our investment portfolio is fairly
predictable and subject to a high degree of control at the time investment decisions are
made. However, net deposit inflows and outflows are far less predictable and are not
subject to the same degree of control.

Our primary sources of liquidity are
deposits, scheduled repayments on our loans, and interest on and maturities of our
investments. We plan to meet our future cash needs through the liquidation of temporary
investments and the generation of deposits. All of our securities have been classified as
available for sale. Occasionally, we might sell investment securities in connection with
the management of our interest sensitivity gap or to manage cash availability. We may also
utilize our cash and due from banks, security repurchase agreements, and federal funds
sold to meet liquidity requirements as needed. In addition, we have the ability, on a
short-term basis, to purchase federal funds from other financial institutions. Presently,
we have made arrangements with commercial banks for short-term unsecured advances of up to
$16.4 million. We also have a line of credit with the FHLB to borrow up to 80% of our 1 to
4 family loans, resulting in an availability of funds of $12.6 million at December 31,
2005. The FHLB has approved borrowings up to 15% of the Banks total assets less
advances outstanding. The borrowings are available by pledging additional collateral and
purchasing FHLB stock. At December 31, 2005, we had borrowed $34.0 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.

# 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 December
31, 2005. However, our gap analysis is not a precise indicator of our interest sensitivity
position. The analysis presents only a static view of the timing of maturities and
repricing opportunities, without taking into consideration that changes in interest rates
do not affect all assets and liabilities equally. For example, rates paid on a substantial
portion of core deposits may change contractually within a relatively short time frame,
but we believe those rates are significantly less interest-sensitive than market-based
rates such as those paid on non-core deposits.

21

---

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

# Off-Balance Sheet Risk

Through the operations of our bank,
we have made contractual commitments to extend credit in the ordinary course of our
business activities. These commitments are legally binding agreements to lend money to our
customers at predetermined interest rates for a specified period of time. We evaluate each
customers credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by us upon extension of credit, is based on our credit
evaluation of the borrower. Collateral varies but may include accounts receivable,
inventory, property, plant and equipment, commercial and residential real estate. We
manage the credit risk on these commitments by subjecting them to normal underwriting and
risk management processes.

At December 31, 2005, the Bank had
issued commitments to extend credit of $37.5 million through various types of lending
arrangements, of which $34.9 million was at variable rates. The commitments expire over
the next 18 months. Past experience indicates that many of these commitments to extend
credit will expire unused. We believe that we have adequate sources of liquidity to fund
commitments that are drawn upon by the borrowers.

In addition to commitments to extend
credit, we also issue standby letters of credit which are assurances to a third party that
they will not suffer a loss if our customer fails to meet its contractual obligation to
the third party. Standby letters of credit totaled $8.3 million at December 31, 2005. Past
experience indicates that many of these standby letters of credit will expire unused.
However, through our various sources of liquidity, we believe that we will have the
necessary resources to meet these obligations should the need arise.

Except as disclosed in this report,
we are not involved in off-balance sheet contractual relationships, unconsolidated related
entities that have off-balance sheet arrangements or transactions that could result in
liquidity needs or other commitments or significantly impact earnings.

# 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, the
assets and liabilities of financial institutions such as our Company and Bank are
primarily monetary in nature. Therefore, interest rates have a more significant impact on
our performance than do the effects of changes in the general rate of inflation and
changes in prices. In addition, interest rates do not necessarily move with the same
magnitude as the prices of goods and services. 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.

22

---

# Report of Management

The
consolidated financial statements of Beach First National Bancshares, Inc., and other
financial information included in this summary Annual Report were prepared by management
responsible for the integrity of the information presented. The statements have been
prepared in conformity with generally accepted accounting principles appropriate in the
circumstances and include amounts that are based on managements best estimates and
judgment.

The
Company maintains accounting and control systems which are believed to provide reasonable
assurance that assets are safeguarded from loss or unauthorized use and produce records
adequate for preparation of financial information. Management recognizes the limits
inherent in any system of internal control as the cost of controls should not exceed the
benefits derived. Management believes the system provides an appropriate balance.

In
order to monitor compliance with its system of controls, the Company has employed an
internal auditor to perform internal audits of controls and compliance with systems and
controls. Audit reports are issued to the Audit Committee of the Board of Directors. The
independent accountants receive copies of these reports and the reports are available for
review by regulatory authorities.

The
Audit Committee of the Board of Directors meets as necessary with management, the internal
auditor, and the independent accountants to review audit scopes, audit reports, and fee
arrangements of the independent accountants, in order to evaluate managements
performance of its financial reporting responsibility. Both the internal auditor and
independent accountants have access to the Audit Committee without any management present
in the discussions. Independent accountants are recommended by the Audit Committee to the
Board of Directors for selection.

Elliott
Davis, LLC, our independent registered public accounting firm, is engaged to provide an
objective, independent review as to managements discharge of its responsibilities
relating to the fairness of reported operating results and financial condition. They have
an understanding of the Companys accounting and financial controls and conduct such
tests and related procedures as they deem appropriate to arrive at an opinion of the
fairness of the financial statements. Their opinion is included as a part of the
Companys 2005 Annual Report on Form 10-KSB.

Our
management is committed to, and has always maintained and enforced, a philosophy of high
ethical standards in the conduct of its business. The policies covering conflicts of
interest, community affairs, and other subjects, are uniformly applicable to all officers
and employees of our Company.

Beach First National
Bancshares, Inc.Myrtle Beach, South Carolina March 19, 2006

23

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Report of Independent
Registered Public Accounting Firm

Board of DirectorsBeach
First National Bancshares, Inc. Myrtle Beach, South Carolina

We
have audited the accompanying Consolidated Balance Sheets of Beach First National
Bancshares, Inc. (the Company) and Subsidiaries as of December 31, 2005 and 2004, and the
related Consolidated Statements of Income, Changes in Shareholders Equity and
Comprehensive Income and Cash Flows for each of the years in the three year period ended
December 31, 2005. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Beach First National
Bancshares, Inc. and Subsidiaries at December 31, 2005 and 2004, and the results of their
operations and cash flows for each of the years in the three year period ended December
31, 2005, in conformity with accounting principles generally accepted in the United States
of America.

/s/ Elliott DavisElliott
Davis, LLC Columbia, South CarolinaJanuary 11, 2006

24

---

BEACH FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

# Consolidated Balance
Sheets

|                                                             | December 31,
|------------------------------------------------------------ | ------------
|
|Assets                                                       |             
|Cash and due from banks                                      |             
|Federal funds sold and short term investments                |             
|Investment securities                                        |             
|Loans, net                                                   |             
|Federal Reserve Bank stock                                   |             
|Federal Home Loan Bank stock                                 |             
|Property and equipment, net                                  |             
|Cash value of life insurance                                 |             
|Other assets                                                 |             
|                                                             |             
|Total assets                                                 |             
|                                                             |             
|Liabilities and shareholders' equity                         |             
|Liabilities                                                  |             
|Deposits                                                     |             
|Non-interesting bearing                                      |             
|Interest bearing                                             |             
|                                                             |             
|Total deposits                                               |             
|                                                             |             
|Advances from Federal Home Loan Bank                         |             
|Other borrowings                                             |             
|Junior subordinated debentures                               |             
|Other liabilities                                            |             
|                                                             |             
|Total liabilities                                            |             
|                                                             |             
|Commitments and contingencies - Notes 11 and 15              |             
|                                                             |             
|Shareholders equity                                         |             
|Common stock, $1 par value, 10,000,000 shares authorized,    |             
|3,169,958 shares issued and outstanding at December 31, 2005 |             
|and 2,013,508 at December 31, 2004                           |             
|Paid-in capital                                              |             
|Retained earnings                                            |             
|Accumulated other comprehensive loss                         |             
|                                                             |             
|Total shareholders' equity                                   |             
|                                                             |             
|Total liabilities and shareholders' equity                   |             
|                                                             |             

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

25

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Consolidated
Statements of Income

|                                                    | For the years ended December 31,
|--------------------------------------------------- | --------------------------------
|
|Interest income                                     |                                 
|Loans and fees on loans                             |                                 
|Investment securities                               |                                 
|Federal funds sold and short term investments       |                                 
|Other                                               |                                 
|                                                    |                                 
|Total interest income                               |                                 
|Interest expense                                    |                                 
|Deposits                                            |                                 
|Advances from FHLB and federal funds purchased      |                                 
|Junior subordinated debentures                      |                                 
|                                                    |                                 
|Total interest expense                              |                                 
|Net interest income                                 |                                 
|                                                    |                                 
|Provision for loan losses                           |                                 
|                                                    |                                 
|Net interest income after provision for loan losses |                                 
|                                                    |                                 
|Noninterest income                                  |                                 
|Service fees on deposit accounts                    |                                 
|Gain on sale of loan                                |                                 
|Gain(loss) on sale of investment securities         |                                 
|Income from cash value life insurance               |                                 
|Mortgage loan referral fees                         |                                 
|Other income                                        |                                 
|                                                    |                                 
|Total noninterest income                            |                                 
|                                                    |                                 
|Noninterest expenses                                |                                 
|Salaries and wages                                  |                                 
|Employee benefits                                   |                                 
|Supplies and printing                               |                                 
|Advertising and public relations                    |                                 
|Professional fees                                   |                                 
|Depreciation and amortization                       |                                 
|Occupancy                                           |                                 
|Data processing fees                                |                                 
|Other operating expenses                            |                                 
|                                                    |                                 
|Total noninterest expenses                          |                                 
|                                                    |                                 
|Income before income taxes                          |                                 
|                                                    |                                 
|Income tax expense                                  |                                 
|                                                    |                                 
|Net income                                          |                                 
|                                                    |                                 
|Basic net income per common share                   |                                 
|                                                    |                                 
|Diluted net income per common share                 |                                 
|                                                    |                                 
|Weighted average common shares outstanding:         |                                 
|Basic                                               |                                 
|                                                    |                                 
|Diluted                                             |                                 
|                                                    |                                 

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

26

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# BEACH FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

# Consolidated
Statements of Changes in Shareholders Equity and Comprehensive Income

# For the years ended
December 31, 2005, 2004 and 2003

|                              |  |  |  |           | Accumulated |  
|----------------------------- |  |  |  | --------- | ----------- | -
|
|
|
|Balance,                      |  |  |  |           |             |  
|December 31, 2002             |  |  |  | 1,318,368 |             | $
|                              |  |  |  |           |             |  
|Net income                    |  |  |  | -         |             |  
|                              |  |  |  |           |             |  
|Other comprehensive,          |  |  |  |           |             |  
|income, net of taxes:         |  |  |  |           |             |  
|Unrealized loss on            |  |  |  |           |             |  
|investment securities         |  |  |  | -         |             |  
|Plus reclassification         |  |  |  |           |             |  
|adjustments for               |  |  |  |           |             |  
|gains included in             |  |  |  |           |             |  
|net income                    |  |  |  | -         |             |  
|                              |  |  |  |           |             |  
|Comprehensive income          |  |  |  | -         |             |  
|Exercise of stock options     |  |  |  | 5,400     |             |  
|                              |  |  |  |           |             |  
|Balance, December 31, 2003    |  |  |  | 1,323,768 |             |  
|                              |  |  |  |           |             |  
|Net income                    |  |  |  | -         |             |  
|                              |  |  |  |           |             |  
|Other comprehensive,          |  |  |  |           |             |  
|income, net of taxes:         |  |  |  |           |             |  
|Unrealized gain on            |  |  |  |           |             |  
|investment securities         |  |  |  | -         |             |  
|Plus reclassification         |  |  |  |           |             |  
|adjustments for               |  |  |  |           |             |  
|gains included in             |  |  |  |           |             |  
|net income                    |  |  |  | -         |             |  
|                              |  |  |  |           |             |  
|Comprehensive income          |  |  |  | -         |             |  
|Exercise of stock options     |  |  |  | 18,750    |             |  
|3-for-2 stock split           |  |  |  | 670,990   |             |  
|                              |  |  |  |           |             |  
|Balance, December 31, 2004    |  |  |  | 2,013,508 |             |  
|                              |  |  |  |           |             |  
|Net income                    |  |  |  | -         |             |  
|                              |  |  |  |           |             |  
|Other comprehensive,          |  |  |  |           |             |  
|income, net of taxes:         |  |  |  |           |             |  
|Unrealized loss on            |  |  |  |           |             |  
|investment securities         |  |  |  | -         |             |  
|Plus reclassification         |  |  |  |           |             |  
|adjustments for               |  |  |  |           |             |  
|losses included in            |  |  |  |           |             |  
|net income                    |  |  |  | -         |             |  
|                              |  |  |  |           |             |  
|Comprehensive income          |  |  |  | -         |             |  
|Exercise of stock options     |  |  |  | 6,450     |             |  
|Issuance of common stock, net |  |  |  | 1,150,000 |             |  
|                              |  |  |  |           |             |  
|Balance, December 31, 2005    |  |  |  | 3,169,958 |             | $
|                              |  |  |  |           |             |  

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

27

---

# Consolidated
Statements of Cash Flows

|                                                         | For the years ended December 31,
|-------------------------------------------------------- | --------------------------------
|
|
|
|Operating activities                                     |                                 
|Net income                                               |                                 
|Adjustments to reconcile net income to net               |                                 
|cash provided by operating activities:                   |                                 
|Depreciation and amortization                            |                                 
|Accretion of deferred loan fees                          |                                 
|Discount accretion and premium amortization              |                                 
|Deferred income taxes                                    |                                 
|Provision for loan losses                                |                                 
|Loss on sale of property and equipment                   |                                 
|Loss (gain) on sale of investment securities             |                                 
|Investment in Beach First National Trust                 |                                 
|Decrease (increase) in other assets                      |                                 
|Increase in other liabilities                            |                                 
|                                                         |                                 
|Net cash provided by operating activities                |                                 
|                                                         |                                 
|Investing activities                                     |                                 
|Proceeds from sale of investment securities              |                                 
|Purchase of investment securities                        |                                 
|Purchase of FHLB stock                                   |                                 
|Purchase of Federal Reserve stock                        |                                 
|Decrease (increase) in Federal funds sold and short term |                                 
|Investments                                              |                                 
|Increase in loans, net                                   |                                 
|Purchase of property and equipment                       |                                 
|Proceeds from sale of property and equipment             |                                 
|                                                         |                                 
|Net cash used by investing activities                    |                                 
|                                                         |                                 
|Financing activities                                     |                                 
|Advances from Federal Home Loan Bank                     |                                 
|Net increase in deposits                                 |                                 
|Advances from junior subordinated debentures             |                                 
|Proceeds from exercise of stock options                  |                                 
|Cash paid in lieu of fractional shares                   |                                 
|Proceeds from stock issuance, net                        |                                 
|Proceeds from other borrowings                           |                                 
|                                                         |                                 
|Net cash provided by financing activities                |                                 
|                                                         |                                 
|Net (decrease) increase in cash                          |                                 
|                                                         |                                 
|Cash and cash equivalents at beginning of year           |                                 
|                                                         |                                 
|Cash and cash equivalents at end of year                 |                                 
|                                                         |                                 
|Cash paid for                                            |                                 
|Interest                                                 |                                 
|                                                         |                                 
|Income taxes                                             |                                 
|                                                         |                                 

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

28

---

# NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES

Beach First National Bancshares,
Inc.(the Company) is organized under the laws of the State of South
Carolina for the purpose of operating as a bank holding company for Beach First National
Bank (the Bank), Beach First National Trust (the Trust), Beach
First National Trust II (the Trust II), and BFNM, LLC (the LLC).
The Bank provides full commercial banking services to customers and is subject to
regulation by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit
Insurance Corporation. The Company is subject to regulation by the Federal Reserve Board.
The Trust and the Trust II are special purpose subsidiaries organized for the sole purpose
of issuing trust preferred securities.

In 2005, the Company formed a limited
liability corporation with Nelson Mullins Riley & Scarborough, LLP (Nelson Mullins)
known as BFNM, LLC. The purpose of the LLC is to construct and own an office building in
Myrtle Beach, South Carolina. Upon completion, the Company will own two-thirds of the LLC
and Nelson Mullins will own one-third.

Basis of presentation
The consolidated financial statements include the accounts of the Company, the
Bank, and the LLC. All significant intercompany accounts and transactions have been
eliminated in consolidation. The accounting and reporting policies of the Company conform
to accounting principles generally accepted in the United States of America and to general
practices in the banking industry. In accordance with current accounting guidance, the
Trust and Trust II have not been consolidated in these financial statements. The Company
uses the accrual basis of accounting.

Estimates The
preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities as of the date of the consolidated financial
statements and the reported amount of income and expenses during the reporting periods.
Actual results could differ from those estimates.

Concentrations of credit
risk  Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of loans receivable, investment
securities, federal funds sold and amounts due from banks.

The Company makes loans to
individuals and small businesses for various personal and commercial purposes primarily
along the coastal regions of South Carolina and predominately center on the Metro regions
of Myrtle Beach and Hilton Head Island, South Carolina. At December 31, 2005, the majority
of the total loan portfolio was to borrowers from within this region.

The Companys loan portfolio is
not concentrated in loans to any single borrower or a relatively small number of
borrowers. Additionally, management is not aware of any concentrations of loans to groups
of borrowers or industries that would be similarly affected by economic conditions except
for loans for the acquisition of land and loans for the development of land. This
concentration totaled $93.6 million at December 31, 2005, representing 239.2% of total
equity and 30.4% of net loans receivable. At December 31, 2004, this was not considered a
concentration.

The Company has identified one more
concentration of credit risk that it is monitoring. This concentration is for loans for
commercial real estate, which totaled $90.8 million at December 31, 2005, representing
233.0% of total equity and 29.5% of net loans receivable. At December 31, 2004, this
concentration totaled $68.9 million, representing 422.1% of total equity and 36.1% of net
loans receivable.

In addition to monitoring potential
concentrations of loans to particular borrowers or groups of borrowers, industries and
geographic regions, management monitors exposure to credit risk from concentrations of
lending products and practices such as loans that subject borrowers to substantial payment
increases (e.g. principal deferral periods, loans with initial interest-only periods,
etc), and loans with high loan-to-value ratios. Management has determined that there is no
concentration of credit risk associated with its lending policies or practices.

29

---

Additionally, there are industry
practices that could subject the Company to increased credit risk should economic
conditions change over the course of a loans life. For example, the Company makes
variable rate loans and fixed rate principal-amortizing loans with maturities prior to the
loan being fully paid (i.e. balloon payment loans). These loans are underwritten and
monitored to manage the associated risks. Therefore, management believes that these
particular practices do not subject the Company to unusual credit risk.

The Companys investment
portfolio consists principally of obligations of the United States and its agencies or its
corporations. In the opinion of management, there is no concentration of credit risk in
its investment portfolio. The Company places its deposits and correspondent accounts with
and sells its federal funds to high quality institutions. Management believes credit risk
associated with correspondent accounts is not significant.

Cash and cash equivalents
For purposes of the statement of cash flows, cash and cash equivalents are
defined as those amounts included in the balance sheet caption Cash and due from
banks. Cash and cash equivalents have an original maturity of three months or less.

Investment securities
The Company accounts for investment securities in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Gains or losses on the disposition of securities are
based on the difference between the net proceeds and the adjusted carrying amount of the
securities sold, using the specific identification method. The statement requires
investments in equity and debt securities to be classified into three categories:

| | 1. | Available for sale: These are securities which are
               not classified as either held to maturity or as trading securities. These
               securities are reported at fair market value. Unrealized gains and losses are
               reported, net of income taxes, as separate components of shareholders
               equity (accumulated other comprehensive income).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Held to maturity: These are investment securities
               which the Company has the ability and intent to hold until maturity. These
               securities are stated at cost, adjusted for amortization of premiums and the
               accretion of discounts. The Company currently has no held to maturity
               securities.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Trading: These are securities which are bought and
               held principally for the purpose of selling in the near future. Trading
               securities are reported at fair market value, and related unrealized gains and
               losses are recognized in the statement of income. The Company has no trading
               securities.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other investments The Bank, as a member institution, is required to own certain stock investments in the
Federal Home Loan Bank of Atlanta and the Federal Reserve Bank. The stock is generally
pledged against any borrowings from these institutions. No ready market exists for the
stocks and they have no quoted market value. However, redemption of these stocks has
historically been at par value.

Loans, interest and fee income
on loans Loans are stated at the principal balance outstanding. Unamortized
loan fees and the allowance for loan losses are deducted from total loans in the balance
sheet. Interest income is recognized over the term of the loan based on the principal
amount outstanding.

Points on real estate loans are taken
into income to the extent they represent the direct cost of initiating a loan. The amount
in excess of direct costs is deferred and amortized over the expected life of the loan.

Loans are generally placed on
non-accrual status when principal or interest becomes contractually ninety days past due,
or when payment in full is not anticipated. When a loan is placed on non-accrual status,
interest accrued but not received is generally reversed against interest income. If
collectibility is in doubt, cash receipts on non-accrual loans are not recorded as
interest income, but are used to reduce principal.

Allowance for loan losses
The provision for loan losses charged to operating expenses reflects the amount
deemed appropriate by management to establish an adequate allowance to meet the present
and foreseeable risk characteristics of the current loan portfolio. Managements
judgment is based on periodic and regular evaluation of individual loans, the overall risk
characteristics of the various portfolio segments,

30

---

past experience with losses and
prevailing and anticipated economic conditions. Loans which are determined to be
uncollectible are charged against the allowance. Provisions for loan losses and recoveries
on loans previously charged off are added to the allowance. Management considers the
year-end allowance appropriate and adequate to cover probable losses in the loan
portfolio; however, managements judgment is based upon a number of assumptions about
future events, which are believed to be reasonable, but which may or may not prove valid.
Thus, there can be no assurance that charge-offs in future periods will not exceed the
allowance for loan losses or that additional increases in the allowance for loan losses
will not be required.

The Company accounts for impaired
loans in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a
Loan. This standard requires that all lenders value loans at the loans fair
value if it is probable that the lender will be unable to collect all amounts due
according to the terms of the loan agreement. Fair value may be determined based upon the
present value of expected cash flows, market price of the loan, if available, or value of
the underlying collateral. Expected cash flows are required to be discounted at the
loans effective interest rate. SFAS No. 114 was amended by SFAS No. 118 to allow a
lender to use existing methods for recognizing interest income on an impaired loan and by
requiring additional disclosures about how a creditor recognizes interest income on an
impaired loan.

Under SFAS No. 114, as amended by
SFAS No. 118, when the ultimate collectibility of an impaired loans principal is in
doubt, wholly or partially, all cash receipts are applied to principal. Once the reported
principal balance has been reduced to zero, future cash receipts are applied to interest
income, to the extent that any interest has been foregone. Further cash receipts are
recorded as recoveries of any amounts previously charged off. When this doubt does not
exist, cash receipts are applied under the contractual terms of the loan agreement first
to interest income then to principal.

A loan is also considered impaired if
its terms are modified in a troubled debt restructuring. For these accruing impaired
loans, cash receipts are typically applied to principal and interest receivable in
accordance with the terms of the restructured loan agreement. Interest income is
recognized on these loans using the accrual method of accounting.

Real estate acquired in
settlement of loans Real estate acquired through foreclosure is initially
recorded at the lower of cost or estimated fair value. Subsequent to the date of
acquisition, it is carried at the lower of cost or fair value, adjusted for net selling
costs. Fair values of real estate owned are reviewed regularly and writedowns are recorded
when it is determined that the carrying value of real estate exceeds the fair value less
estimated costs to sell. Costs relating to the development and improvement of such
property are capitalized, whereas those costs relating to holding the property are charged
to expense.

Property and equipment
Buildings and furniture and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. Maintenance and repairs are charged to operations,
while major improvements are capitalized. Upon retirement, sale or other disposition of
property and equipment, the cost and accumulated depreciation are eliminated from the
accounts, and gain or loss is included in net income.

Income taxes The
consolidated financial statements have been prepared on the accrual basis. When income and
expenses are recognized in different periods for financial reporting purposes and for
purposes of computing income taxes currently payable, deferred taxes are provided on such
temporary differences. The Company accounts for income taxes in accordance with SFAS No.
109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the expected future tax consequences of events that have
been recognized in the consolidated financial statements or tax return. Deferred tax
assets and liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be
realized or settled.

Advertising and public
relations expense Advertising, promotional and other business development
costs are generally expensed as incurred. External costs incurred in producing media
advertising are expensed the first time the advertising takes place. External costs
relating to direct mailing costs are expensed in the period in which the direct mailings
are sent.

31

---

Earnings per
share  basic is computed by dividing net income by the weighted
average number of common shares outstanding. Earnings per share  diluted is computed
by dividing net income by the weighted average number of common shares outstanding and
dilutive common share equivalents using the treasury stock method. All share amounts have
been adjusted for the 3-for-2 stock split recorded in 2004. Dilutive common share
equivalents include common shares issuable upon exercise of outstanding stock options.

|                                            | For the years ended December 31,
|------------------------------------------- | --------------------------------
|
|Basic earnings per share:                   |                                 
|Net income available to common shareholders |                                 
|                                            |                                 
|Average common shares outstanding - basic   |                                 
|                                            |                                 
|Basic earnings per share                    |                                 
|                                            |                                 
|Diluted earnings per share:                 |                                 
|Net income available to common shareholders |                                 
|                                            |                                 
|Average common shares outstanding - basic   |                                 
|                                            |                                 
|Incremental shares from assumed conversion  |                                 
|of stock options                            |                                 
|                                            |                                 
|Average common shares outstanding - diluted |                                 
|                                            |                                 
|Diluted earnings per share                  |                                 
|                                            |                                 

Stock Based Compensation
The Company has a stock-based employee compensation plan which is further
described in Note 17. The Company accounts for the plan under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all stock options
granted under these plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates the effect
on net income and net income per common share as if the Company had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.

| |  | For the years ended December 31,
| |  | --------------------------------
|
|
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 

The Financial Accounting Standards
Board recently published Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)).
SFAS No. 123(R), which is effective on January 1, 2006, will require that the fair value
of share-based payments to

32

---

employees, including stock options,
be recognized as compensation expense in the statement of income in the financial
statements. Accordingly, the Company will implement the revised standard on January 1,
2006. Currently, the Company accounts for its share-based payment transactions under the
provisions of APB No. 25, under which it has not recognized any compensation expense for
its stock option grants and related accounting interpretations, including FASB
Interpretation Number 44, Accounting for Certain Transactions Involving Stock
Compensation (FIN No. 44) in accounting for stock options.

On December 14, 2005, the Board of
Directors approved accelerating the vesting of 117,000 unvested stock options. The
accelerated vesting was effective as of December 14, 2005. All of the other terms and
conditions applicable to the outstanding stock options remained unchanged.

The decision to accelerate vesting of
these options will avoid recognition of pre-tax compensation expense by the Company upon
the adoption of SFAS 123(R). In the Companys view, the future compensation expense
could outweigh the incentive and retention value associated with the stock options. The
future pre-tax compensation expense that will be avoided, based upon the effective date of
January 1, 2006, is expected to be approximately $119,000 and $137,000 in fiscal years
2006 and 2007, respectively. The Company believes that the acceleration of vesting stock
options meets the criteria for variable accounting under FIN No. 44. Based upon past
experience, the Company believes the grantees of these stock options will remain as a
director or employee of the Company.

Reclassifications Certain previously reported amounts have been reclassified to conform to the current
year presentation. Such changes had no effect on previously reported net income or
shareholders equity.

Recently Issued Accounting
PronouncementsThe following is a summary of recent authoritative pronouncements
that affect accounting, reporting, and disclosure of financial information by the Company:

As discussed previously, the FASB
issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised
2004), Share-Based Payment (SFAS No. 123(R)). SFAS No. 123(R) will
require companies to measure all employee stock-based compensation awards using a fair
value method and record such expense in its financial statements. In addition, the
adoption of SFAS No. 123(R) requires additional accounting and disclosures related to the
income tax and cash flow effects resulting from share-based payment arrangements. SFAS No.
123(R) is effective beginning as of the first annual reporting period beginning after
December 15, 2005. SFAS No. 123(R) allows for adoption using either the modified
prospective or modified retrospective methods. As of December 31, 2005, all options
granted were fully vested. The Company anticipates issuing additional options in the
future but does not expect these options to have a material impact on financial position
or results of operations upon adoption.

In April 2005, the Securities and
Exchange Commissions Office of the Chief Accountant and its Division of Corporation
Finance issued Staff Accounting Bulletin (SAB) No. 107 to provide guidance
regarding the application of SFAS No. 123(R). SAB No. 107 provides interpretive guidance
related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations,
as well as the staffs views regarding the valuation of share-based payment
arrangements for public companies. SAB No. 107 also reminds public companies of the
importance of including disclosures within filings made with the SEC relating to the
accounting for share-based payment transactions, particularly during the transition to
SFAS No. 123(R).

In December 2004, the FASB issued
SFAS No. 153, Exchanges of Nonmonetary Assets  an amendment of APB Opinion No.
29. The standard is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged and eliminates the
exception under ABP Opinion No. 29 for an exchange of similar productive assets and
replaces it with an exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the exchange. The
standard is effective for nonmonetary exchanges occurring in fiscal periods beginning
after June 15, 2005. The adoption of SFAS 153 is not expected to have a material impact on
the Companys financial position or results of operations.

In May 2005,  the FASB issued SFAS No.  154,  "Accounting  Changes and Error  Corrections   a  replacement  of APB
Opinion No. 20 and FASB  Statement  No. 3". SFAS No. 154  establishes  retrospective

33

---

application as the required method
for reporting a change in accounting principle, unless it is impracticable, in which case
the changes should be applied to the latest practicable date presented. SFAS No. 154 also
requires that a correction of an error be reported as a prior period adjustment by
restating prior period financial statements. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December 15, 2005.

In March 2004, the FASB issued
Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments. This
issue addresses the meaning of other-than-temporary impairment and its application to
investments classified as either available for sale or held to maturity under SFAS No. 115
and it also provides guidance on quantitative and qualitative disclosures. The disclosure
requirements in paragraph 21 of this Issue were effective for annual financial statements
for fiscal years ending after December 15, 2003 and were adopted by the Company effective
December 31, 2003.

The recognition and measurement
guidance in paragraphs 6-20 of this Issue was to be applied to other-than-temporary
impairment evaluations in reporting periods beginning after June 15, 2004, but was delayed
by FASB action in October 2004 through the issuance of a proposed FASB Staff Position
(FSP) on the issue. In July 2005, the FASB issued FSP FAS 115-1 and FAS
124-1The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments. This final guidance eliminated paragraphs 10-18 of EITF-03-1
(paragraphs 19-20 have no material impact on the financial position or results of
operations of the Company) and will be effective for other-than-temporary impairment
analysis conducted in periods beginning after December 15, 2005. The Company has evaluated
the impact that the adoption of FSP FAS 115-1 and FAS 124-1 and has concluded that the
adoption will not have a material impact on financial position and results of operations
upon adoption.

# Recently Issued
Accounting Pronouncements

In December 2005, the FASB issued FSP
SOP 94-6-1, Terms of Loan Products that May Give Rise to a Concentration of Credit
Risk. The disclosure guidance in this FSP is effective for interim and annual
periods ending after December 19, 2005. The FSP states that the terms of certain loan
products may increase a reporting entitys exposure to credit risk and thereby may
result in a concentration of credit risk as that term is used in SFAS No. 107, either as
an individual product type or as a group of products with similar features. SFAS No. 107
requires disclosures about each significant concentration, including information
about the (shared) activity, region, or economic characteristic that identifies the
concentration. The FSP suggests possible shared characteristics on which significant
concentrations may be determined which include, but are not limited to: borrowers subject
to significant payment increases, loans with terms that permit negative amortization and
loans with high loan-to-value ratios.

This FSP requires entities to provide
the disclosures required by SFAS No. 107 for loan products that are determined to
represent a concentration of credit risk in accordance with the guidance of this FSP for
all periods presented. The Company adopted this disclosure standard effective December 31,
2005.

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

# NOTE 2 
RESTRICTIONS ON CASH AND DUE FROM BANKS

The Bank is required to maintain
average reserve balances, computed by applying prescribed percentages to its various types
of deposits, either at the bank or on deposit with the Federal Reserve Bank. At December
31, 2005 and 2004 these required reserves were met by vault cash.

34

---

# NOTE 3  INVESTMENT
SECURITIES

The amortized costs and fair value of
available for sale investment securities are as follows:

|                 | December 31, 2005
|---------------- | -----------------
|
|
|Federal agencies |                  
|Mortgage-backed  |                  
|                 |                  
|Total securities |                  
|                 |                  

|                 | December 31, 2004
|---------------- | -----------------
|
|
|Federal agencies |                  
|Mortgage-backed  |                  
|                 |                  
|Total securities |                  
|                 |                  

The amortized costs and fair values
of investment securities at December 31, 2005, by contractual maturity, are shown in the
following chart. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage-backed securities are presented as a separate line since
pay downs are expected before contractual maturity dates.

| |  | Amortized cost | Fair value                           
| |  | -------------- | -------------------------------------
|
| |  |                | Due after one year through five years
| |  |                | Due after five through ten years     
| |  |                |                                      
| |  |                | Sub-total                            
| |  |                |                                      
| |  |                | Mortgage-backed                      
| |  |                |                                      
| |  |                | Total securities                     
| |  |                |                                      

The following table shows gross
unrealized losses and fair value, aggregated by investment category, and length of time
that individual securities have been in a continuous unrealized loss position, at December
31, 2005.

|                           | Less than 12 months | 12 months or More | Total
|-------------------------- | ------------------- | ----------------- | -----
|
|
|
|Federal agencies           |                     |                   | $    
|Mortgage backed securities |                     |                   |      
|                           |                     |                   |      
|Total                      |                     |                   | $    
|                           |                     |                   |      

Securities classified as
available-for-sale are recorded at fair market value. Approximately 47.22% of the
unrealized losses, or fifteen individual securities, consisted of securities in a
continuous loss position for twelve months or more. The Company has the ability and intent
to hold these securities until such time as the value recovers or the securities mature.
The Company believes, based on industry analyst reports and credit ratings, that the
deterioration in value is attributable to changes in market interest rates and is not in
the credit quality of the issuer and therefore, these losses are not considered
other-than-temporary.

35

---

NOTE 3  INVESTMENT
SECURITIES  continued

The amortized cost and fair value of
securities pledged as collateral for public funds and other purposes as of December 31,
2005 and 2004 were $38,741,006 and $37,740,753 and $30,219,563 and $29,949,946,
respectively.

For the years ended December 31,
2005, 2004 and 2003, proceeds from sales of securities available for sale amounted to
$6,148,824, $5,034,461, and $8,021,325, respectively. Gross realized gains (losses)
amounted to $(3,935), $37,395, and $134,530, respectively.

# NOTE 4  LOANS

The composition of net loans by major
loan category is presented below:

|                           | December 31,
|-------------------------- | ------------
|
|
|Commercial                 |             
|Real estate - construction |             
|Real estate - mortgage     |             
|Consumer                   |             
|                           |             
|                           |             
|                           |             
|Less:                      |             
|Allowance for loan losses  |             
|Deferred loan fees         |             
|                           |             
|                           |             
|                           |             
|Loans, net                 |             
|                           |             

Impaired loans which consisted
entirely of nonaccrual loans totaled $1,111,264 and $76,826 at December 31, 2005 and 2004,
respectively, which had the effect of reducing net income $148,196 in 2005 and $13,432 in
2004.

# NOTE 5  ALLOWANCE
FOR LOAN LOSSES

The allowance for loan losses is
available to absorb future loan charge-offs. The allowance is increased by provisions
charged to operating expenses and by recoveries of loans which were previously
written-off. The allowance is decreased by the aggregate loan balances, if any, which were
deemed uncollectible during the year.

Activity within the allowance for
loan losses account follows:

|                                       | For the years ended December 31,
|-------------------------------------- | --------------------------------
|
|
|Balance, beginning of year             |                                 
|Recoveries of loans previously charged |                                 
|against the allowance                  |                                 
|Provision for loan losses              |                                 
|Loans charged against the allowance    |                                 
|                                       |                                 
|Balance, end of year                   |                                 
|                                       |                                 

36

---

# NOTE 6  PROPERTY
AND EQUIPMENT

Property and equipment are stated at
cost less accumulated depreciation. Components of property and equipment included in the
consolidated balance sheets are as follows:

|                             | December 31,
|---------------------------- | ------------
|
|Land                         |             
|Buildings and improvements   |             
|Furniture and equipment      |             
|Software                     |             
|Construction in progress     |             
|                             |             
|                             |             
|Accumulated depreciation     |             
|                             |             
|Total property and equipment |             
|                             |             

The majority of the construction in
process relates to the construction of the BFNM, LLC building (see Note 9).

Depreciation expense for the years
ended December 31, 2005, 2004, and 2003 amounted to $539,406, $446,158, and $428,609,
respectively. Depreciation is charged to operations over the estimated useful lives of the
assets. The estimated useful lives and methods of depreciation for the principal items
follow:

|Type of Asset              | Life in Years | Depreciation Method
|-------------------------- | ------------- | -------------------
|
|
|Software                   |               |                    
|Furniture and equipment    |               |                    
|Buildings and improvements |               |                    

The Bank has entered into
non-cancelable operating leases related to land and buildings. At December 31, 2005,
future minimum payments under non-cancelable operating leases with initial or remaining
terms of one year or more are as follows:

|           | 
|---------- | 
|2006       | 
|2007       | 
|2008       | 
|2009       | 
|2010       | 
|Thereafter | 
|           | 
|           | 
|           | 

The Bank has entered into six
separate lease agreements for its banking locations. These lease agreements have various
initial lease terms and expire on various dates through 2022. The lease agreements
generally provide that the Bank is responsible for ongoing repairs and maintenance,
insurance and real estate taxes. The leases also provide for renewal options and certain
scheduled increases in monthly lease payments. Total rental expense amounted to $508,250,
$293,098 and $205,412 for the years ended December 31, 2005, 2004, and 2003.

37

---

# NOTE 7  DEPOSITS

The following is a detail of the
deposit accounts:

|                                   | December 31,
|---------------------------------- | ------------
|
|Non-interest bearing               |             
|Interest bearing:                  |             
|Interest bearing checking accounts |             
|Money market accounts              |             
|Savings                            |             
|Time, less than $100,000           |             
|Time, $100,000 and over            |             
|                                   |             
|Total deposits                     |             
|                                   |             

At December 31, 2005 and 2004,
$23,748,000 and $3,957,000 of time deposits less than $100,000 consisted of brokered
deposits. Interest expense on time deposits greater than $100,000 was $1,880,101 in 2005,
$866,990 in 2004, and $776,857 in 2003.

At December 31, 2005 the scheduled
maturities of time deposits are as follows:

| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 

# NOTE 8  ADVANCES
FROM FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan
Bank (FHLB) at December 31 are summarized below:

|FHLB              | Current | Maturity |      |   | 
|----------------- | ------- | -------- | ---- | - | 
|
|CIP/EDP           |         |          | 1.88 | % | 
|CIP/EDP           |         |          | 3.69 | % | 
|Convertible       |         |          | 1.86 | % | 
|Convertible       |         |          | 3.87 | % | 
|Convertible       |         |          | 4.51 | % | 
|Convertible       |         |          | 3.44 | % | 
|Convertible       |         |          | 3.68 | % | 
|Convertible       |         |          | 4.06 | % | 
|Fixed Rate Hybrid |         |          | 4.76 | % | 
|Fixed Rate Credit |         |          | 1.93 | % | 
|Fixed Rate Credit |         |          | 2.25 | % | 
|                  |         |          |      |   | 
|                  |         |          |      |   | 
|                  |         |          |      |   | 

The advances were collateralized by
one to four family residential mortgage loans, U.S. agency securities and FHLB stock.
Additional borrowings are available by pledging additional collateral and purchasing
additional stock in the FHLB.

# NOTE 9  OTHER
BORROWINGS

In June 2005, the LLC obtained a loan
from a bank for the construction of a building that will serve as the Companys
corporate office. The loan allows for total available proceeds of $7,235,000 to be
advanced as construction is completed. The loan requires monthly payments of accrued
interest during the twelve-month construction period equal to LIBOR plus 1.40%, followed
by 107 installments of principal and interest based on a fifteen year amortization, with
all remaining principal and interest due on June 15, 2015. The outstanding balance on the
loan at December 31, 2005 was $1,504,009.

38

---

# NOTE 10  JUNIOR
SUBORDINATED DEBENTURES

On May 27, 2004, and March 30, 2005,
Beach First National Trusts (the Trust) and (Trust II),
non-consolidated subsidiaries of the Company, issued and sold floating rate capital
securities of the trusts, which are reported on the Consolidated Balance Sheets as junior
subordinated debentures. Each issuance generated proceeds of $5.0 million. The Trusts
loaned these proceeds to the Company to use for general corporate purposes, primarily to
provide capital to the Bank. The debentures qualify as Tier 1 capital under Federal
Reserve Board guidelines.

During 2005, the average junior
subordinated debt was $9.5 million compared to $3.1 million in 2004. Total junior
subordinated debt outstanding at December 31, 2005 and 2004 was $10.3 million and $5.2
million, respectively. The maximum amount outstanding during any month-end period in 2005
was $10.3 million with an average rate of 5.60%. The maximum amount outstanding during any
month-end period in 2004 was $5.2 million with an average rate of 5.60%.

The trust preferred securities accrue
and pay distributions annually at a rate per annum equal to the three month LIBOR plus 270
and 190 basis points, respectively, which was 6.89%and 6.39% at December 31,
2005.  The distribution rate payable on these securities is cumulative and payable
quarterly in arrears.  We have the right, subject to events of default, to defer
payments of interest on the trust preferred securities for a period not to exceed 20
consecutive quarterly periods, provided that no extension period may extend beyond the
maturity dates of May 27, 2034 and March 30, 2035, respectively.  We have no current
intention to exercise our right to defer payments of interest on the trust preferred
securities.  We have the right to redeem the trust preferred securities, in whole or
in part, on or after May 27, 2009 and March 30, 2010, respectively.  We may also
redeem the trust preferred securities prior to such dates upon occurrence of specified
conditions and the payment of a redemption premium.

Debt issuance costs, net of
accumulated amortization, from the junior subordinated debentures totaled $45,740 and
$23,333 at December 31, 2005 and 2004, respectively, and are included in other assets on
our Consolidated Balance Sheets.  Amortization of debt issuance costs from trust
preferred debt totaled $3,962 and $1,667 for the years ended December 31, 2005 and 2004,
respectively, and is reported in noninterest expense on the Consolidated Statements of
Income.

# NOTE 11  UNUSED
LINES OF CREDIT

At December 31, 2005, the Bank had
$16,400,000 of lines of credit to purchase federal funds from unrelated banks. These lines
of credit are available on a one to fourteen day basis for general corporate purposes of
the Bank. All of the lenders have reserved the right to withdraw these lines at their
option.

At December 31, 2005, the Bank had
the ability to borrow an additional $12.6 million from the FHLB secured by a blanket lien
on one to four family first mortgage loans. In addition, U.S. government agency securities
with a book value of $8,500,000 and a market value of $8,200,000, respectively, are
pledged to secure the borrowing. FHLB has approved borrowings up to 15% of the banks
total assets less advances outstanding. The borrowings are available by pledging
collateral and purchasing additional stock in the FHLB.

# NOTE 12 
COMMITMENTS AND CONTINGENCIES

The Company is party to litigation
and claims arising in the normal course of business. As of December 31, 2005, there
is no litigation pending.

Refer to Note 15 concerning financial
instruments with off balance sheet risk.

39

---

# NOTE 13  INCOME
TAXES

The following summary of the
provision for income taxes includes tax deferrals which arise from temporary differences
in the recognition of certain items of revenue and expense for tax and financial reporting
purposes for the years ended December 31:

|                               | 2005 | 2004 | 2003
|------------------------------ | ---- | ---- | ----
|Income taxes currently payable |      |      |     
|Federal                        |      |      | $   
|State                          |      |      |     
|                               |      |      |     
|                               |      |      |     
|                               |      |      |     
|Deferred taxes                 |      |      |     
|Allowance for loan losses      |      |      |     
|Depreciation                   |      |      |     
|Loan origination fees          |      |      |     
|Deferred compensation          |      |      |     
|Other                          |      |      |     
|                               |      |      |     
|                               |      |      |     
|                               |      |      |     
|Income tax expense             |      |      | $   
|                               |      |      |     

The income tax effect of cumulative
temporary differences at December 31, are as follows:

|                                         | Deferred tax asset (liability)
|---------------------------------------- | ------------------------------
|
|
|Allowance for loan losses                |                               
|Unrealized loss on investment securities |                               
|Depreciation                             |                               
|Loan origination fees                    |                               
|Deferred compensation                    |                               
|Other                                    |                               
|                                         |                               
|Net deferred tax asset                   |                               
|                                         |                               

The net deferred tax asset is
reported in other assets in the Consolidated Balance Sheets at December 31, 2005 and 2004.
The recognition of a net deferred tax asset is dependent upon a more likely than
not expectation of the realization of the deferred tax asset, based upon the
analysis of the available evidence. A valuation allowance is required to sufficiently
reduce the deferred tax asset to the amount that is expected to be realized through future
realization of profits on a more likely than not basis. The analysis of
available evidence is performed on an ongoing basis utilizing the more likely than
not criteria to determine the amount, if any, of the deferred tax asset to be
realized. Adjustments to the valuation allowance are made accordingly. There can be no
assurance that the Company will recognize additional portions of the deferred tax asset in
future periods or that additional valuation allowances may not be recorded in the future
periods.

The provision for income taxes is
reconciled to the amount of income tax computed at the federal statutory rate on income
before income taxes for the years ended December 31, as follows:

|                              | 2005 | 2004 | 2003
|----------------------------- | ---- | ---- | ----
|
|
|Tax expense at statutory rate |      |      | $   
|Increase (decrease) in taxes  |      |      |     
|Resulting from:               |      |      |     
|State bank tax (net of        |      |      |     
|federal benefit)              |      |      |     
|Other                         |      |      |     
|                              |      |      |     
|Tax provision                 |      |      | $   
|                              |      |      |     

40

---

# NOTE 14  RELATED
PARTY TRANSACTIONS

Certain directors, executive officers
and companies with which they are affiliated, are customers of and have banking
transactions with the Bank in the ordinary course of business. These loans were made on
substantially the same terms, including interest rates and collateral, as those prevailing
at the time for comparable arms-length transactions.

A summary of loan transactions with
directors, including their affiliates, and executive officers follows:

|                           | For the years ended December 31,
|-------------------------- | --------------------------------
|
|
|Balance, beginning of year |                                 
|New loans                  |                                 
|Less loan payments         |                                 
|                           |                                 
|Balance, end of year       |                                 
|                           |                                 

Deposits by directors, including
their affiliates and executive officers, at December 31, 2005 and 2004 approximated
$19,778,967 and $9,096,272, respectively.

# NOTE 15  FINANCIAL
INSTRUMENTS WITH OFF BALANCE SHEET RISK

In the ordinary course of business,
and to meet the financing needs of its customers, the Company is a party to various
financial instruments with off balance sheet risk. These financial instruments, which
include commitments to extend credit and standby letters of credit, involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts recognized in
the balance sheets. The contract amount of those instruments reflects the extent of
involvement the Company has in particular classes of financial instruments.

The Companys exposure to credit
loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by the
contractual amounts of those instruments.

The Company uses the same credit
policies in making commitments and conditional obligations as it does for on balance sheet
instruments.

Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any material
condition established in the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require the payment of a fee. At December 31, 2005,
unfunded commitments to extend credit were $37,522,841 of which $2,613,899 were at fixed
rates, and $34,908,942 were at variable rates. The Company evaluates each customers
credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on managements credit
evaluation of the borrower. Collateral varies but may include accounts receivable,
inventory, property, plant and equipment, commercial and residential real estate.

At December 31, 2005, there were
commitments totaling $8,329,433 for letters of credit. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan facilities to
customers. Collateral varies but may include accounts receivable, inventory, equipment,
marketable securities and property. Since most of the letters of credit are expected to
expire without being drawn upon, they do not necessarily represent future cash
requirements.

41

---

# NOTE 16  EMPLOYEE
BENEFIT PLAN

The Company sponsors the Beach First
National Bank Profit Sharing and 401(k) Plan for the benefit of all eligible employees.
The Company contributes to the Plan annually upon approval by the Board of Directors.
Contributions made to the Plan in 2005, 2004, and 2003 amounted to $117,497, $81,464, and
$65,543, respectively.

Supplemental benefits have been
approved by the Board of Directors for the directors and certain executive officers of
Beach First National Bank. These benefits are not qualified under the Internal Revenue
Code and they are not funded. However, certain funding is provided informally and
indirectly by life insurance policies. The cash surrender value of the life insurance
policies are recorded as a separate line item in the accompanying balances sheets at
$3,301,417 and $3,230,950 at December 31, 2005 and 2004, respectively. Income earned on
these policies is reflected as a separate line item in the Consolidated Statements of
Income. The Company recorded expense related to these benefits of $158,578 in 2005,
$107,939 in 2004 and $76,650 in 2003.

# NOTE 17  STOCK
OPTION PLANS

The Company sponsors a qualified
stock option plan for the benefit of the directors, officers and employees. The Board may
grant up to 402,702 incentive stock options, adjusted for the stock split, at an option
price per share not less than the fair market value on the date of grant. As discussed in
Note 1, the Company fully vested all options on December 14, 2005 that had been granted,
including an additional 117,000 options issued to directors on the same date.

The fair value of the option grant is
estimated on the date of grant using the Black-Scholes option pricing model. For the year
ended December 31, 2005, the risk free rate used ranged from 4.04% to 6.74%, the expected
life was 10 years, volatility ranged from 29.02% to 35.38% and the assumed dividend rate
was zero. For the year ended December 31, 2004, the risk free interest rate used ranged
from 4.04% to 4.76%, the expected option life was 9.74 years, volatility ranged from
29.02% to 30.20% and the assumed dividend rate was zero. For the year ended December 31,
2003, the risk free interest rate used ranged from 3.94% to 4.21%, the expected option
life was 10 years, volatility was 22.32% and the assumed dividend rate was zero.

A summary of the status of the plan
as of December 31, 2005, 2004 and 2003 and changes during the years ending on those dates
is presented below:

|                       | 2005 | 2004 | 2003
|---------------------- | ---- | ---- | ----
|
|
|
|Outstanding at         |      |      |     
|beginning of year      |      |      |     
|Granted                |      |      |     
|Exercised              |      |      |     
|Forfeited or expired   |      |      |     
|                       |      |      |     
|Outstanding at end     |      |      |     
|of year                |      |      |     
|                       |      |      |     
|Options exercisable at |      |      |     
|year-end               |      |      |     
|                       |      |      |     
|Shares available for   |      |      |     
|grant                  |      |      |     
|                       |      |      |     

# NOTE 18 
SHAREHOLDERS EQUITY

Stock Offering  On June
14, 2005, the Company closed on a secondary stock offering whereby 1,150,000 shares of the
Companys stock was issued at $18.75 per share. Net proceeds after deducting
underwriter discounts and expenses were $19.9 million. Proceeds from the offering will be
used to support the growth of the Company.

42

---

Cash Dividends  There
are no current plans to initiate payment of cash dividends and future dividend policy will
depend on the Banks and the Companys earnings, capital requirements, financial
condition and other factors considered relevant by the Companys Board of Directors.
The Bank is restricted in its ability to pay dividends under the national banking laws and
regulations of the Office of the Comptroller of the Currency. Generally, these
restrictions require the Bank to pay dividends derived solely from net profits. Moreover,
OCC prior approval is required if dividends declared in any calendar year exceed the
Banks net profit for that year combined with its retained net profits for the
preceding two years.

Stock Dividends  In
April 2004, the Company announced a 3-for-2 stock split effected in the form of a 50%
stock dividend to shareholders of record of May 12, 2004. The dividend was paid on June 2,
2004. All earnings per share amounts for all periods have been adjusted to reflect the
3-for-2 split.

# NOTE 19 
REGULATORY MATTERS

The Bank is subject to various
regulatory capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators that, if undertaken, could have a direct material
effect on the Banks financial statements.

Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank mustmeet specific
capital guidelines that involve quantitative measures of the Banks assets,
liabilities, and certain off balance sheet items as calculated under regulatory accounting
practices. The Banks capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and other
factors.

Quantitative measures established by
regulation to ensure capital adequacy require the Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets,
and of Tier 1 capital to average assets. Management believes, as of December 31, 2005,
that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2005, the most
recent notification of the Office of the Comptroller of the Currency categorized the Bank
as well capitalized under the regulatory framework for prompt corrective action. There are
no conditions or events since that notification that management believes have changed the
institutions category.

The Companys actual capital
amounts and ratios are presented as follows:

|                           |  |  |   |        | To be well capitalized
|-------------------------- |  |  | - | ------ | ----------------------
|
|
|
|
|
|As of December 31, 2005    |  |  |   |        |                       
|Total Capital (to risk     |  |  |   |        |                       
|weighted assets)           |  |  | $ | 54,345 |                       
|Tier 1 Capital (to risk    |  |  |   |        |                       
|weighted assets)           |  |  |   | 49,981 |                       
|Tier 1 Capital (to average |  |  |   |        |                       
|assets)                    |  |  |   | 49,981 |                       
|                           |  |  |   |        |                       
|As of December 31, 2004    |  |  |   |        |                       
|Total Capital (to risk     |  |  |   |        |                       
|weighted assets)           |  |  | $ | 23,926 |                       
|Tier 1 Capital (to risk    |  |  |   |        |                       
|weighted assets)           |  |  |   | 20,587 |                       
|Tier 1 Capital (to average |  |  |   |        |                       
|assets)                    |  |  |   | 20,587 |                       

43

---

The Banks actual capital
amounts and ratios and minimum regulatory amounts and ratios are presented as follows:

|                           |  |  |   |        | To be well capitalized
|-------------------------- |  |  | - | ------ | ----------------------
|
|
|
|
|
|As of December 31, 2005    |  |  |   |        |                       
|Total Capital (to risk     |  |  |   |        |                       
|weighted assets)           |  |  | $ | 43,517 |                       
|Tier 1 Capital (to risk    |  |  |   |        |                       
|weighted assets)           |  |  |   | 39,637 |                       
|Tier 1 Capital (to average |  |  |   |        |                       
|assets)                    |  |  |   | 39,637 |                       
|                           |  |  |   |        |                       
|As of December 31, 2004    |  |  |   |        |                       
|Total Capital (to risk     |  |  |   |        |                       
|weighted assets)           |  |  | $ | 19,467 |                       
|Tier 1 Capital (to risk    |  |  |   |        |                       
|weighted assets)           |  |  |   | 17,045 |                       
|Tier 1 Capital (to average |  |  |   |        |                       
|assets)                    |  |  |   | 17,045 |                       

# NOTE 20  FAIR
VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, Disclosures about
Fair Value of Financial Instruments requires disclosure of fair value information,
whether or not recognized in the balance sheets, when it is practical to estimate the fair
value. SFAS No. 107 defines a financial instrument as cash, evidence of an ownership
interest in an entity or contractual obligations which require the exchange of cash or
other financial instruments. Certain items are specifically excluded from the disclosure
requirements, including the Companys common stock, premises and equipment and other
assets and liabilities.

Fair value approximates carrying
value for the following financial instruments due to the short-term nature of the
instrument: cash and due from banks, federal funds sold and short term investments, demand
deposit accounts, and interest-bearing accounts with no fixed maturity date. Securities
are valued using quoted market prices. Fair value for the Companys off-balance sheet
financial instruments is based on the discounted present value of the estimated future
cash flows. Fair value for fixed rate loans maturing after one year is based on the
discounted present value of the estimated future cash flows. Discount rates used in these
computations approximate the rates currently offered for similar loans of comparable terms
and credit quality.

Fair value for Certificate of deposit
accounts are valued by discounting at rates currently available on similar account types.
Fair value for advances from the FHLB are based on discounted cash flows using the
Companys current incremental borrowing rate. Fair value for junior subordinated
debentures approximates their carrying value since the debentures were issued at a
floating rate. Fair value for other borrowings approximates their carrying value since the
borrowings bear a floating rate.

The Company has used
managements best estimate of fair value based on the above assumptions. Thus, the
fair values presented may not be the amounts which could be realized in an immediate sale
or settlement of the instrument. In addition, any income taxes or other expenses which
would be incurred in an actual sale or settlement are not taken into consideration in the
fair value presented.

44

---

The estimated fair values of the
Companys financial instruments are as follows:

|                                     | December 31,
|------------------------------------ | ------------
|
|
|
|Financial Assets:                    |             
|Cash and due from banks              |             
|Federal funds sold and short term    |             
|investments                          |             
|Investment securities                |             
|Loans, net                           |             
|Federal Reserve Bank stock           |             
|Federal Home Bank Loan Bank stock    |             
|                                     |             
|Financial Liabilities:               |             
|Deposits                             |             
|Advances from Federal Home Loan Bank |             
|Other borrowings                     |             
|Junior subordinated debt             |             

# Financial Instruments with Off-Balance Sheet Risks:

|                             | Notional | Fair | Notional | Fair      
|---------------------------- | -------- | ---- | -------- | ----------
|
|Commitments to extend credit |          |      |          | 37,522,840
|Standby letters of credit    |          |      |          | 8,329,433 

45

---

# NOTE 21  PARENT
COMPANY FINANCIAL INFORMATION

Following is condensed financial
information of Beach First National Bancshares, Inc. (parent company only):

# Condensed Balance
Sheets

|                                           | December 31,
|------------------------------------------ | ------------
|
|Assets                                     |             
|Cash                                       |             
|Due from Bank subsidiaries                 |             
|Investment in Bank subsidiaries            |             
|Investment in Beach First National Trusts  |             
|Securities available for sale              |             
|Land                                       |             
|Construction in process                    |             
|Other assets                               |             
|                                           |             
|Total assets                               |             
|                                           |             
|Liabilities and Shareholders Equity       |             
|Accounts payable                           |             
|Due to Bank subsidiaries                   |             
|Other borrowings                           |             
|Junior subordinated debentures             |             
|Shareholders' equity                       |             
|                                           |             
|Total liabilities and shareholders' equity |             
|                                           |             

# Condensed Statements
of Income

|                                      | For the years ended December 31,
|------------------------------------- | --------------------------------
|
|Income                                |                                 
|                                      |                                 
|Expenses                              |                                 
|Interest                              |                                 
|Amortization                          |                                 
|Other expenses                        |                                 
|                                      |                                 
|Total expenses                        |                                 
|                                      |                                 
|Income before equity in undistributed |                                 
|net income (loss)of subsidiaries      |                                 
|Equity in undistributed net income of |                                 
|subsidiaries                          |                                 
|                                      |                                 
|Net income                            |                                 
|                                      |                                 

46

---

# NOTE 21  PARENT
COMPANY FINANCIAL INFORMATION

# Condensed Statements
of Cash Flows

|                                                         | For the years ended December 31,
|-------------------------------------------------------- | --------------------------------
|
|Operating activities                                     |                                 
|Net income                                               |                                 
|Adjustments to reconcile net income to net cash          |                                 
|provided by (used in) operating activities:              |                                 
|Equity in undistributed net income of                    |                                 
|the bank subsidiaries                                    |                                 
|Amortization                                             |                                 
|Decrease (increase) in due from Bank                     |                                 
|(Increase) decrease in other assets                      |                                 
|Increase (decrease) in accounts payable                  |                                 
|                                                         |                                 
|Net cash provided by (used for) operating activities     |                                 
|                                                         |                                 
|Investing activities                                     |                                 
|Additional investment in bank                            |                                 
|Investment in Beach First National Trusts                |                                 
|Commissions paid on trust preferred securities           |                                 
|Proceeds from sale of securities available for sale      |                                 
|Purchase of premises and equipment                       |                                 
|                                                         |                                 
|Net cash provided (used for) investing activities        |                                 
|                                                         |                                 
|Financing activities                                     |                                 
|Proceeds from issuance of junior subordinated debentures |                                 
|Increase in other borrowings                             |                                 
|Proceeds from exercise of stock options                  |                                 
|Cash in lieu of stock dividend                           |                                 
|Proceeds from stock issuance, net                        |                                 
|                                                         |                                 
|Net cash provided by financing activities                |                                 
|                                                         |                                 
|Net increase in cash and cash equivalents                |                                 
|                                                         |                                 
|CASH AND CASH EQUIVALENTS,                               |                                 
|BEGINNING OF YEAR                                        |                                 
|                                                         |                                 
|CASH AND CASH EQUIVALENTS, END OF YEAR                   |                                 
|                                                         |                                 

---

# NOTE 22  QUARTERLY
DATA (UNAUDITED)

|                          | December 31, |  |   |      
|------------------------- | ------------ |  | - | -----
|
|
|
|
|Interest income           |              |  | $ | 6,331
|Interest expense          |              |  |   | 2,409
|                          |              |  |   |      
|Net interest income       |              |  |   | 3,922
|Provision for loan losses |              |  |   | 541  
|Net interest income after |              | 
|provision for loan losses |              |  |   | 3,381
|                          |              |  |   |      
|Noninterest income        |              |  |   | 294  
|Noninterest expenses      |              |  |   | 1,889
|                          |              |  |   |      
|Income before taxes       |              |  |   | 1,786
|Income tax expense        |              |  |   | 559  
|                          |              |  |   |      
|Net Income                |              |  | $ | 1,227
|                          |              |  |   |      
|Earnings per share:       |              |  |   |      
|Basic                     |              |  | $ | 0.40 
|Diluted                   |              |  | $ | 0.30 

48

---

# Corporate Information

Annual Meeting of
Shareholders The Annual Meeting of Shareholders of
Beach First National Bancshares, Inc. will be held at the Myrtle Beach Convention Center,
2101 Oak Street, Myrtle Beach, South Carolina on Wednesday, April 19, 2006, at 2 p.m.

Stock Information The Companys stock trades on
the NASDAQ National Market® under the symbol BFNB. As of March 3, 2006,
the Company had approximately 1,383 stockholders and 3,169,958 shares of common stock
outstanding. This does not reflect the number of persons or entities who hold stock in
nominee or street name. For information contact:

| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 

The table below reflects the high and
low bid stock prices as quoted on the NASDAQ National Market during the periods indicated.
The quotations reflect inter-dealer prices without retail mark-up, mark-down, or
commissions, and may not represent actual transactions.

| |  | High Bid | Low Bid        
| |  | -------- | ---------------
| |  |          | Year end 2005: 
| |  |          | First Quarter* 
| |  |          | Second Quarter*
| |  |          | Third Quarter  
| |  |          | Fourth Quarter 
| |  |          |                
| |  |          | Year end 2004: 
| |  |          | First Quarter* 
| |  |          | Second Quarter*
| |  |          | Third Quarter  
| |  |          | Fourth Quarter*
| |  |          |                
| |  |          | Year end 2003: 
| |  |          | First Quarter* 
| |  |          | Second Quarter*
| |  |          | Third Quarter* 
| |  |          | Fourth Quarter*

________________
*For the periods indicated, the table shows the reported high and low bid information (adjusted
for stock splits) on the OTC Bulletin Board.  The prices are quotations, which reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent actual
transactions.

To date, we have not paid any cash
dividends on our common stock, and currently have no plans to do so. Our ability to pay
cash dividends is dependent upon receiving cash dividends from our bank. Federal banking
regulations restrict the amount of cash dividends that can be paid to our Company from the
bank.

Form 10-KSB Copies of the Companys Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2005, as filed with the
Securities and Exchange Commission, will be furnished at no charge to shareholders upon

49

---

written request to Richard N. Burch,
Executive Vice President and Chief Financial Officer, at the Corporate Office address, or
via e-mail (dburch@beachfirst.com).

Forward Looking Statement Certain statements in this Report
contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, such as statements relating to future plans and
expectations, and are thus prospective. Such forward-looking statements are subject to
risks, uncertainties, and other factors, such as a downturn in the economy, which could
cause actual results to differ materially from future results expressed or implied by such
forward-looking statements.

Although we believe that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove to be inaccurate. Therefore, we can give no assurance that the
results contemplated in the forward-looking statements will be realized. The inclusion of
this forward-looking information should not be construed as a representation by our
Company or any person that the future events, plans, or expectations contemplated by our
Company will be achieved. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events, or
otherwise.

|                               | 
|------------------------------ | 
|Registrar and Transfer Agent   | 
|First Citizens Bank            | 
|Corporate Trust Division-DAC61 | 
|P.O. Box 29522                 | 
|Raleigh, NC 27626-0522         | 
|Toll-free: 1.877.685.0576      | 
|                               | 
|Banking Offices                | 
|Corporate Office               | 
|1550 Oak Street                | 
|Myrtle Beach, SC 29577         | 
|843.626.2265                   | 
|                               | 
|Surfside Beach                 | 
|3064 Dick Pond Road            | 
|Surfside Beach, SC 29588       | 
|843.294.6000                   | 
|                               | 
|Hilton Head Island             | 
|Village at Wexford, Ste. F-4   | 
|1000 William Hilton Parkway    | 
|Hilton Head Island, SC 29928   | 
|843.842.3232                   | 

Member FDIC logoEqual Housing
logo

50

---

Staff

|                           |  |  |                            
|-------------------------- |  |  | ---------------------------
|Staff                      |  |  | Human Resources            
|Executive Officers         |  |  |                            
|Walter E. Standish, III    |  |  | Lorie Y. Runion            
|President                  |  |  | Vice President             
|Chief Executive Officer    |  |  | Director of Human Resources
|Richard N. Burch           |  |  | Information Technology     
|Executive Vice President   |  |  | and Facilities             
|Chief Financial Officer    |  |  |                            
|                           |  |  |                            
|                           |  |  |                            
|M. Katharine Huntley       |  |  | William E. Hinson          
|(Katie)                    |  |  | Vice President             
|Executive Vice President   |  |  | Information Technology     
|Chief Credit Officer       |  |  | and Facilities             
|                           |  |  |                            
|Julien E. Springs          |  |  | Loan Operations            
|Executive Vice President   |  |  | Linda S. Dickinson         
|Business Development       |  |  | Vice President             
|Officer                    |  |  | Loan Operations Manager    
|                           |  |  |                            
|                           |  |  |                            
|Departments                |  |  | John D. Brown, Jr.         
|                           |  |  | Vice President             
|                           |  |  | Loan Administration        
|                           |  |  |                            
|Accounting                 |  |  |                            
|Melissa Downs-High         |  |  | Veronica Gilbert           
|Assistant Vice President   |  |  | Sheila King                
|Comptroller                |  |  | Jennie Shaw                
|                           |  |  | Sharon Vane                
|Joey Housand               |  |  |                            
|Accounting Manager         |  |  | Marketing                  
|                           |  |  | Barbara W. Marshall        
|Kathy Doane                |  |  | Vice President             
|                           |  |  | Director of Marketing      
|Audit                      |  |  | Christi Wickliffe-Bessinger
|Lori G. Church, CPA,       |  |  |                            
|CIA, CBA                   |  |  |                            
|Vice President             |  |  | Branches                   
|Director of Internal Audit |  |  | Barbara H. Abrams          
|                           |  |  | Vice President             
|                           |  |  | Branch Manager             
|Deposit Operations         |  |  | Carolyn T. Swanson         
|                           |  |  | Vice President             
|                           |  |  | Relationship Manager       
|                           |  |  |                            
|Tiffany P. Suggs           |  |  | Jason F. Atkinson          
|Vice President             |  |  | Assistant Vice President   
|Deposit Operations Manager |  |  | Commercial Relationship    
|                           |  |  | Manager                    
|Yolonda Bryant             |  |  |                            
|Amy Stubbs                 |  |  |                            
|Rebecca Zyla               |  |  |                            
|                           |  |  |                            
|Deborah J. Myers           |  |  |                            
|Assistant Vice President   |  |  |                            
|Electronic Banking         |  |  |                            
|                           |  |  |                            
|Audra Barnett              |  |  |                            

Equal Employment
Opportunity Beach First is an equal opportunity employer. It is the banks policy to grant equal employment opportunity
(EEO) to all qualified persons without regard to race, color, sex, religion, age, national
origin, physical or mental disability, veterans status, or any other characteristics
protected by applicable law (Protected Characteristics). The bank provides
equal opportunities in

---

employment, promotion, wages, benefits, and all other privileges,
terms, and conditions of employment. This policy has the support of the highest levels of
management. Unfavorable speech or actions by employees regarding the Protected
Characteristics of other employees, agents, contractors, vendors, customers, or others
having an affiliation with the Bank will not be tolerated. All employees and managers are
expected to comply with our equal employment opportunity policy.

(family friendly logo) Beach First
is a South Carolina Family Friendly Workplace.

---

(inside back cover)

|                                 |  | 
|-------------------------------- |  | 
|Board of Directors               |  | 
|Michael Bert Anderson (photo)    |  | 
|Managing Owner                   |  | 
|Patricia Resorts                 |  | 
|                                 |  | 
|Bart Buie  (photo)               |  | 
|Certified Public Accountant      |  | 
|Bartlett Buie, CPA, P.A          |  | 
|                                 |  | 
|Raymond E. Cleary, III, DDS      |  | 
|Chairman of the Board (photo)    |  | 
|Beach First National Bancshares, |  | 
|Inc.                             |  | 
|Dentist                          |  | 
|Glenn's Bay Dentists at Surfside |  | 
|                                 |  | 
|E. Thomas Fulmer (photo)         |  | 
|Owner                            |  | 
|Beachcomber Realty               |  | 
|                                 |  | 
|Michael D. Harrington (photo)    |  | 
|General Contractor               |  | 
|Harrington Construction Company, |  | 
|Company, Inc.                    |  | 

|                            |  | 
|--------------------------- |  | 
|Business Development Boards |  | 

|                             |  |  |                             
|---------------------------- |  |  | ----------------------------
|North Strand                 |  |  | Hilton Head Island          
|J. Michael Campbell          |  |  | William D. Bedor, CPA       
|Sales Representative         |  |  | Managing Director           
|Blanchard Machinery          |  |  | Bedor and Associates, PA,   
|                             |  |  |                             
|Roger P. Roy                 |  |  | Christopher L. Corkern      
|Attorney                     |  |  | Financial Planner           
|Cook & Roy, LLC              |  |  | Prudential Financial        
|                             |  |  |                             
|Linda Hope Taylor            |  |  | Richard W. Dugan            
|Owner                        |  |  | Retired Busines Owner/      
|Hope Taylor & Company        |  |  | Investor                    
|                             |  |  |                             
|Mickey Thompson              |  |  | William H. Harris           
|Owner, Marine Service Center |  |  | Retired University President
|of Little River              |  |  |                             
|                             |  |  |                             
|Joey Todd                    |  |  | Dennis Sexton               
|Owner,                       |  |  | President, Denise Sexton    
|Atlantic Heating and Cooling |  |  | Homebuilders                
|                             |  |  |                             
|                             |  |  | Jeff Wilson                 
|                             |  |  | President, Pinnacle         
|                             |  |  | Southeastern, Inc.          
|                             |  |  |                             
|                             |  |  |                             
|                             |  |  |