Beach First National Bancshares (BFNB) 10QSB 2004 Q3 Quarterly report (small business)

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

FORM 10-QSB

[X]	QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarter ended:  September 30, 2004

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

Commission file number:  000-22503

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

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

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

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

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

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

        State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

        On November 1, 2004, 2,013,008 shares of the issuer’s common stock, par value $1.00 per share, were issued and outstanding.

PART I
FINANCIAL INFORMATION
Item 1.   Financial Statements.

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

	September 30,					December 31,
	2004		2003			2003
	(unaudited)		(unaudited)			(audited)
ASSETS
Cash and due from banks	$	3,678,206	$	4,363,595		$	4,886,682
Federal funds sold and short term investments		4,209,000		3,277,756			4,598,520
Investment securities available for sale		36,386,786		12,228,511			11,918,074
Loans, net		171,898,625		128,541,354			133,851,712
Federal Reserve Bank stock		309,000		309,000			309,000
Federal Home Loan Bank stock		925,000		575,000			575,000
Premises and equipment, net		4,512,169		4,373,662			4,477,943
Cash value life insurance		3,192,355		3,037,975			3,076,570
Investment in BFNB Trust		155,000		-			-
Other assets		1,618,244		1,662,069			1,399,535
Total assets	$	226,884,385	$	158,368,922		$	165,093,036
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits
Noninterest bearing deposits	$	29,164,845	$	25,542,423		$	23,454,124
Interest bearing deposits		158,997,990		105,662,578			114,645,442
Total deposits		188,162,835		131,205,001			138,099,566
Other borrowings		16,500,000		11,500,000			11,500,000
Junior subordinated debentures		5,155,000		-			-
Other liabilities		969,205		1,331,889			760,577
Total liabilities		210,787,040		144,036,890			150,360,143
SHAREHOLDERS’ EQUITY:
Common stock, $1 par value; 10,000,000 shares authorized;
shares issued and outstanding - 2,013,008 at September 30,
2004, 1,318,368 at September 30, 2003 and 1,323,768 at
December 31, 2003		2,013,008		1,318,368			1,323,768
Paid-in capital		11,332,816		11,787,899			11,837,299
Retained earnings		2,740,025		1,393,352			1,718,321
Accumulated other comprehensive income (loss)		11,496		(167,587	)		(146,495	)
Total shareholders' equity		16,097,345		14,332,032			14,732,893
Total liabilities and shareholders' equity	$	226,884,385	$	158,368,922		$	165,093,036

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

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Beach First National Bancshares, Inc. and Subsidiary
Myrtle Beach, South Carolina
Consolidated Statements of Operations
(Unaudited)

	Nine Months Ended				Three Months Ended
	September 30,				September 30,
	2004		2003		2004		2003
INTEREST INCOME
Interest and fees on loans	$	7,335,800	$	5,752,885	$	2,739,856	$	2,125,266
Investment securities		700,841		386,932		314,411		130,495
Fed funds sold and short term investments		75,265		36,940		46,350		11,762
Dividends on long-term investments		2,240		-		1,656		-
Total interest income		8,114,146		6,176,757		3,102,273		2,267,523
INTEREST EXPENSE
Deposits		1,917,648		1,732,938		774,286		568,939
Short-term borrowings		283,057		143,197		100,776		49,798
Long-term borrowings-junior subordinated debt		75,255		-		55,819		-
Total interest expense		2,275,960		1,876,135		930,881		618,737
Net interest income		5,838,186		4,300,622		2,171,392		1,648,786
PROVISION FOR POSSIBLE LOAN
LOSSES		838,000		566,000		330,000		275,000
Net interest income after provision
for possible loan losses		5,000,186		3,734,622		1,841,392		1,373,786
NONINTEREST INCOME
Service fees on deposit accounts		392,118		364,145		128,181		117,247
Gain (loss) on sale of investment securities		37,395		134,703		37,400		(108	)
Income from cash value life insurance		121,158		121,158		40,386		40,386
Other income		218,966		148,199		89,118		29,269
Total noninterest income		769,637		768,205		295,085		186,794
NONINTEREST EXPENSES
Salaries and wages		1,840,553		1,514,336		671,425		530,882
Employee benefits		360,631		290,330		123,162		92,758
Supplies and printing		63,738		77,505		27,165		20,236
Advertising and public relations		188,719		118,141		72,655		40,826
Professional fees		148,133		92,355		55,200		31,220
Depreciation and amortization		328,041		317,272		110,918		106,055
Occupancy		348,179		264,074		137,571		91,793
Data processing fees		261,595		226,572		93,501		81,437
Other operating expenses		596,892		523,801		232,093		143,064
Total noninterest expenses		4,136,481		3,424,386		1,523,690		1,138,271
Income before income taxes		1,633,342		1,078,441		612,787		422,309
INCOME TAX EXPENSE		611,333		394,479		229,010		151,830
Net income	$	1,022,009	$	683,962	$	383,777	$	270,479
BASIC NET INCOME PER COMMON SHARE	$	.51	$	.35	$	.19	$	.14
DILUTED NET INCOME PER COMMON SHARE	$	.49	$	.34	$	.18	$	.13

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

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Beach First National Bancshares, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)

									Accumulated
									Other			Total
	Common stock				Paid-in		Retained		Comprehensive			Shareholders’
	Shares		Amount		Capital		Earnings		Income			Equity
BALANCE, DECEMBER 31, 2002		1,318,368	$	1,318,368	$	11,787,899	$	709,390	$	112,711		$	13,928,368
Net income		-		-		-		683,962		-			683,962
Other comprehensive income, net of taxes:
Unrealized loss on investment securities		-		-		-		-		(195,435	)		(195,435	)
Less reclassification adjustments for losses
included in net income		-		-		-		-		(84,863	)		(84,863	)
Comprehensive income		-		-		-		-		-			403,664
BALANCE, SEPTEMBER 30, 2003		1,318,368	$	1,318,368	$	11,787,899	$	1,393,352	$	(167,587	)	$	14,332,032

											Accumulated
											Other			Total
	Common stock				Paid-in			Retained			Comprehensive			Shareholders’
	Shares		Amount		Capital			Earnings			Income			Equity
BALANCE, DECEMBER 31, 2003		1,323,768	$	1,323,768	$	11,837,299		$	1,718,321		$	(146,495	)	$	14,732,893
Net income		-		-		-			1,022,009			-			1,022,009
Other comprehensive income, net of taxes:
Unrealized loss on investment securities		-		-		-			-			181,550			181,550
Less reclassification adjustments for gains
included in net income		-		-		-			-			(23,559	)		(23,559	)
Comprehensive income															1,180,000
Exercise of stock options		18,250		18,250		166,507									184,757
Stock dividend		670,990		670,990		(670,990	)		(305	)		.			(305	)
BALANCE, SEPTEMBER 30, 2004		2,013,008	$	2,013,008	$	11,332,816		$	2,740,025		$	11,496		$	16,097,345

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

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

	Nine Months Ended
	September 30,
	2004			2003
OPERATING ACTIVITIES
Net income	$	1,022,009		$	683,962
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred income taxes		-			377,934
Provisions for loan losses		838,000			566,000
Accretion of deferred loan fees		(321,359	)		(262,426	)
Depreciation and amortization		357,243			317,272
Gain (Loss) on sale of investment securities		37,395			134,960
Discount accretion and premium amortization		152,913			-
Increase (decrease) in other assets		(354,143	)		(697,096	)
Increase (decrease) in other liabilities		208,628			277,329
Net cash provided (used) by operating activities		1,940,686			(1,397,935	)
INVESTING ACTIVITIES
Purchase of investment securities		(29,755,825	)		(14,128,927	)
Proceeds from sale or call of investment securities		5,254,499			9,037,440
Purchase of FHLB Stock		(350,000	)		(144,300	)
Purchase of Federal Reserve Bank Stock		-			(375,000	)
Purchase of BFNB Trust Stock		(155,000	)		-
Decrease (increase) in Federal funds sold & short term investments		389,520			2,151,458
Increase in loans, net		(38,563,554	)		(37,082,780	)
Purchase of life insurance contracts		(115,785	)		(115,785	)
Purchase of premises and equipment		(256,036	)		(113,164	)
Net cash used in investing activities		(63,552,181	)		(40,771,058	)
FINANCING ACTIVITIES
Increase in Federal funds purchased & borrowings		5,000,000			7,500,000
Investment in BFNB Trust		5,155,000			-
Exercise of stock options		184,750			-
Net increase in deposits		50,063,269			31,779,104
Net cash provided by financing activities		60,403,019			39,279,104
Net decrease in cash and cash equivalents		(1,208,476	)		(94,019	)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD	$	4,886,682		$	4,457,614
CASH AND CASH EQUIVALENTS, END OF
PERIOD	$	3,678,206		$	4,363,595
CASH PAID FOR
Income taxes	$	611,333		$	394,478
Interest	$	2,275,960		$	1,886,841

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

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

1.   Basis of Presentation

The accompanying unaudited consolidated financial statements for Beach First National Bancshares, Inc. (“Company”) were prepared in accordance with instructions for Form 10-QSB and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles. All adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for fair presentation of the interim consolidated financial statements have been included. The results of operations for the nine month periods ended September 30, 2004 and 2003 are not necessarily indicative of the results that may be expected for the entire year. These consolidated financial statements do not include all disclosures required by generally accepted accounting principles and should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2003.

2.   Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiary, Beach First National Bank. All significant inter-company items and transactions have been eliminated in consolidation.

3.   Earnings Per Share

The Company calculates earnings per share in accordance with SFAS No. 128, “Earnings Per Share.” SFAS No. 128 specifies the computation, presentation and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market.

This standard specifies computation and presentation requirements for both basic EPS and, for entities with complex capital structures, diluted EPS. Basic earnings per share are computed by dividing net income by the weighted average common shares outstanding. Diluted earnings per share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. The dilutive effect of options outstanding under the Company’s stock option plan is reflected in diluted earnings per share by application of the treasury stock method.

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

For the Nine Months Ended
September 30, 2004

	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Basic EPS	$	1,022,009		2,013,008	$	0.51
Effect of Diluted Securities:
Stock options		-		70,136
Diluted EPS	$	1,022,009		2,083,144	$	0.49

For the Nine Months Ended
September 30, 2003

	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Basic EPS	$	683,962		1,977,552	$	0.35
Effect of Diluted Securities:
Stock options		-		31,304
Diluted EPS	$	683,962		2,008,856	$	0.34

For the Three Months Ended
September 30, 2004

	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Basic EPS	$	383,777		2,013,008	$	0.19
Effect of Diluted Securities:
Stock options		-		81,222
Diluted EPS	$	383,777		2,094,230	$	0.18

For the Three Months Ended
September 30, 2003

	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Basic EPS	$	270,479		1,977,552	$	0.14
Effect of Diluted Securities:
Stock options		-		31,304
Diluted EPS	$	270,479		2,008,856	$	0.13

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

	Nine Months Ended September 30,
	2004		2003
Net Income, as reported	$	1,022,009	$	683,962
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects		77,860		12,063
Pro forma net income	$	944,149	$	671,899
Earnings per share:
Basic - as reported	$	0.51	$	0.35
Basic - pro forma	$	0.47	$	0.34
Diluted - as reported	$	0.49	$	0.34
Diluted - pro forma	$	0.45	$	0.33

	Three Months Ended September 30,
	2004		2003
Net Income, as reported	$	383,777	$	270,479
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects		28,733		4,021
Pro forma net income	$	355,044	$	266,458
Earnings per share:
Basic - as reported	$	0.19	$	0.14
Basic - pro forma	$	0.18	$	0.13
Diluted - as reported	$	0.18	$	0.13
Diluted - pro forma	$	0.17	$	0.13

5.   Stock Split

        In April 2004, we announced a 3-for-2 stock split on our common stock in the form of a 50% stock dividend. On June 2, 2004, shareholders of record as of May 12, 2004 received one additional share of stock for every two shares of stock owned prior to the 3-for-2 stock split. All factional shares were paid in cash. The earnings per share amounts for all periods shown have been adjusted to reflect the 3-for-2 split.

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Item 2.    Management’s Discussion and Analysis or Plan of Operation.

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

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

o significant increases in competitive pressure in the banking and financial services industries;

o changes in the interest rate environment which could reduce anticipated or actual margins;

o changes in political conditions or the legislative or regulatory environment;

o 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;

o changes occurring in business conditions and inflation;

o changes in technology;

o the level of allowance for loan loss;

o the rate of delinquencies and amounts of charge-offs;

o the rates of loan growth;

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

o changes in monetary and tax policies;

o loss of consumer confidence and economic disruptions resulting from terrorist activities;

o changes in the securities markets; and

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

Overview

        The following discussion describes our results of operations for the quarter ended September 30, 2004 as compared to the quarter ended September 30, 2003 as well as results for the nine months ended September 30, 2004 and 2003, and also analyzes our financial condition as of September 30, 2004 as compared to December 31, 2003. Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

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

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

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

Results of Operations
EARNINGS REVIEW

Our net income was $1,022,009, or $.51 per common share, for the nine months ended September 30, 2004 as compared to a net income of $683,962, or $.35 per common share, for the nine months ended September 30, 2003. Our net income was $383,777, or $.19 per common share, for the three months ended September 30, 2004 as compared to net income of $270,479, or $.14 per common share, for the same period of 2003. The improvement in net income reflects the bank’s continued growth, as average earning assets increased to $181.7 million during the first nine months of 2004 from $142.7 million during the same period of 2003. We had a gain on the sale of securities of $37,395 during the first nine months of 2004, compared to $134,703 during the first nine months of 2003. The return on average assets for the nine month period ended September 30 was .70% in 2004 compared to .59% in 2003. The return on average equity was 8.74% in 2004 versus 6.44% in 2003.

Net Interest Income

During the first nine months of 2004, net interest income increased to $5,838,186, from $4,300,622 in the same period of 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. The growth in net interest income resulted from an increase of $1,937,389 in interest income, offset by an increase in interest expense of $399,825. For the three months ended September 30, 2004, net interest income increased to $2,171,392 from $1,648,786 during the comparable period of 2003. The net interest spread was 4.02% in the nine months of 2004 compared to 3.59% during the same period of 2003. The net interest margin was 4.34% for the nine month period ended September 30, 2004 compared to 4.03% for the same period of 2003.

Provision for Loan Losses

The provision for loan losses was $838,000 for the first nine months of 2004 and $566,000 for the same period of 2003. For the three month period ending September 30, 2004 and 2003, the provision was $330,000 and $275,000, respectively. The increase in the provision for the nine month period ending September 30, 2004 was the result of increased charge offs during this period combined with 34% loan growth compared to 2003. The increase for the three month period was due to increased charge offs and increased loan growth, in addition to our management’s assessment of the adequacy of the reserve for possible loan losses given the size, mix and quality of the current loan portfolio. Our management anticipates our loan portfolio will continue to grow in 2004 and that we will continue to increase the amount of the provision for loan losses as the portfolio grows. See also “Allowance for Possible Loan Losses” below.

Noninterest Income

Total noninterest income was virtually unchanged during the first nine months of 2004 compared to the same period of 2003, increasing to $769,637 from $768,205. However, all categories of noninterest income except gain on the sale of investment securities increased during the first nine months of 2004. Service fees on deposit accounts, the largest component of noninterest income, increased from $364,145 for the first nine months of 2003 to $392,118 during the same period of 2004. This category of noninterest income increased due to growth in the number of deposit accounts as well as increased fee-related activities of our customers. Other income increased to $218,966 for the first nine months of 2004 compared to $148,199 for the same period of 2003. The reason the total noninterest income increased so slightly during the nine-month period is that our net gain on the sale of investment securities declined from $134,703 for the nine month period ended September 30, 2003 to $37,395 for the nine-month period ended September 30, 2004. The reason for this decrease was due to the mix of our securities portfolio and the reduced market value. For the three months ended September 30, 2004, noninterest income was $295,085 as compared to $186,794 for the same period in 2003. For the three months ended September 30, 2004, other income was $89,118 compared to $29,269 in 2003. Other income increased primarily due to the bank’s mortgage activities and fees related to mortgage loans.

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Noninterest Expense

Noninterest expenses totaled $4,136,481 for the nine months ended September 30, 2004, an increase of $712,095 over the $3,424,386 reported for the nine months ended September 30, 2003, and totaled $1,523,690 for the three months ended September 30, 2004 compared to $1,138,271 in the same period of 2003. As an annualized percentage of average total assets, our total noninterest expenses decreased from 2.97% in 2003 to 2.84% in 2004. While our total assets have grown at a 37% rate over year-end 2003, we have been able to manage our expenses while accommodating our growth. Salary, wages and employee benefits increased by $396,518 during the nine months ended September 30, 2004 and $170,947 during the three months ended September 30, 2004 compared to the same periods in 2003. These increases are the results of personnel additions made to our productive capacity, normal compensation adjustments, higher costs associated with group insurance coverage, and certain incentive awards.

Advertising and public relations expense increased to $188,719 for the nine months ended September 30, 2004 compared to $118,141 for the same period in 2003 and totaled $72,655 for the three months ended September 30, 2004 compared to $40,826 in the same period in 2003. This increase is due primarily to the promotion of our new Litchfield office that opened in July of 2004, as well as special promotions in all markets. Professional fees increased $55,778 for the nine months ended September 30, 2004 compared to the same period in 2003, and $23,980 for the three months ended September 30, 2004 compared to the same period in 2003. This increase is due to the escalating cost of accounting, auditing and legal services in addition to increased regulatory fees.

Occupancy expense increased by $84,105 during the nine months ended September 30, 2004 compared to 2003 and $45,778 for the three months ended September 30, 2004 compared to the same period in 2003. This increase is the result of the opening of the Litchfield office in July 2004 and increases on lease payments for most locations. Overall, we are satisfied with the control of our noninterest expenses, though we can give no assurances that they will not increase in future periods.

BALANCE SHEET REVIEW

Loans

At September 30, 2004, net loans (gross loans less unearned fees and the allowance for loan losses) totaled $171.9 million, an increase of $43.4 million from September 30, 2003. Average total loans increased from $126.4 million with a yield of 6.08% in the first nine months of 2003 to $151.7 million with a yield of 6.55% in 2004. 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.

Because loans typically provide higher yields than other types of earning assets, one of our goals is for loans to represent the largest category of earning assets. At September 30, 2004, total loans were 80.6% of earning assets compared to 88.8% at September 30, 2003. The decline is due primarily to a money market special during this quarter that grew deposits at a greater pace than we were able to deploy them into loans. Normally, we should maintain this ratio between 85% and 90%.

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        The following table shows the composition of the loan portfolio by category at September 30, 2004 and 2003.

Composition of Loan Portfolio

	September 30, 2004						September 30, 2003
				Percent						Percent
	Amount			of Total			Amount			of Total
Commercial	$	31,005,232			17.8	%	$	29,785,289			22.8	%
Real estate - construction		12,020,227			6.9	%		10,769,632			8.3	%
Real estate - mortgage		124,180,860			71.2	%		81,671,475			62.6	%
Consumer		7,103,038			4.1	%		8,182,744			6.3	%
Loans, gross		174,309,357			100.0	%		130,409,140			100.0	%
Unearned income		(321,360	)					(268,019	)
Allowance for possible loan losses		(2,089,372	)					(1,599,767	)
Loans, net	$	171,898,625					$	128,541,354

The principal component of our loan portfolio at September 30, 2004 and 2003 was mortgage loans, which represented 71.2% and 62.6% of the portfolio, respectively. In the context of this discussion, a “real estate mortgage loan” is defined as any loan, other than loans for construction purposes, secured by real estate, regardless of the purpose of the loan. We follow the common practice of financial institutions in our market area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. The collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component. Generally, we limit the loan-to-value ratio to 80%. Due to the relatively short time our portfolio has existed, the current mix may not be indicative of the ongoing portfolio mix. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentrations of collateral.

Off Balance Sheet Risk

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

At September 30, 2004, the bank had issued commitments to extend credit of $9.3 million through various types of lending arrangements. The commitments expire over the next 36 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 borrower.

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 $4.1 million at September 30, 2004. 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.

Allowance for Possible Loan Losses

There are risks inherent in making all loans, including risks with respect to the period of time over which loans may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual

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borrowers, and, in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral. To address these risks, we have developed policies and procedures to evaluate the overall quality of our credit portfolio and the timely identification of potential problem loans. We maintain an allowance for possible loan losses which we establish through charges in the form of a provision for loan losses. We charge loan losses and credit recoveries directly to this allowance.

We attempt to maintain the allowance at a level that will be adequate to provide for potential losses in our loan portfolio. To maintain the allowance at an adequate level, we periodically make additions to the allowance by charging an expense to the provision for loan losses on our statement of income. We evaluate the allowance for loan losses on an overall portfolio basis, as well as allocating the allowance to loan categories. We consider a number of factors in determining the level of this allowance, including our total amount of outstanding loans, our amount of past due loans, our historic loan loss experience, general economic conditions, and our assessment of potential losses, classified and criticized loans, concentrations of credit and internal credit risk ratings. Due to the rapid growth of our bank over the past several years and our relatively short operating history, a large portion of the loans in our loan portfolio and of our lending relationships are of relatively recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refer to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because our loan portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition. Our evaluation of the allowance for loan losses is inherently subjective as it requires estimates that are susceptible to significant change. In addition, regulatory agencies periodically review our allowance for loan losses as part of their examination process, and they may require us to record additions to the allowance based on their judgment about information available to them at the time of their examinations. Our losses will undoubtedly vary from our estimates, and there is a possibility that charge-offs in future periods will exceed the allowance for loan losses as estimated at any point in time.

The following table sets forth certain information with respect to our allowance for loan losses and the composition of charge-offs and recoveries for the nine months ended September 30, 2004 and 2003.

Allowance for Loan Losses

	Nine months ending September 30,
	2004			2003
Average total loans outstanding	$	151,660,446		$	126,406,767
Total loans outstanding at period end		173,987,997			130,141,121
Total nonperforming loans		804,595			489,468
Beginning balance of allowance	$	1,760,481		$	1,275,778
Loans charged off		(509,814	)		(242,168	)
Total recoveries		705			157
Net loans charged off		(509,109	)		(242,011	)
Provision for loan losses		838,000			566,000
Balance at period end	$	2,089,372		$	1,599,767
Net charge-offs to average total loans		.34	%		.19	%
Allowance as a percent of total loans		1.20	%		1.23	%
Nonperforming loans as a
percentage of total loans		.46	%		.38	%
Nonperforming loans as a
percentage of allowance		38.51	%		30.60	%

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Nonperforming loans are defined as loans currently not accruing interest or past due greater than 90 days and still accruing interest. At September 30, 2004, we had 12 loans totaling $804,595 listed as nonperforming. Of the 12 loans, eight are secured by real estate and total $701,731. The remaining balance is made up of two consumer loans and one home equity line of credit.

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

Allocation of the Allowance for Loan Losses

	As of September 30, 2004
Residential real estate	$	62,926	3.01
Commercial construction		86,994	4.16
Commercial real estate		477,153	22.84
Commercial		302,483	14.48
Consumer		84,150	4.03
Other		282	0.01
Unallocated		328,550	15.73
Special Allocated	$	746,834	35.74
Total allowance for
Loan losses	$	2,089,372	100.0	%

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Investment Securities

Total securities averaged $22.6 million in the first nine months of 2004 and totaled $37.6 million at September 30, 2004. During the same period of 2003, total securities averaged $12.8 million and totaled $13.1 million at September 30, 2003. At September 30, 2004, our total investment securities portfolio had a book value of $37,584,311 and a market value of $37,601,729 for an unrealized net gain of $17,418. We primarily invest in U.S. Government Agencies and U.S. Government Mortgage- backed securities. Our investment securities portfolio increased during the first nine months of 2004 because deposits were growing at a faster pace than we could deploy them into loans due to a money market special during this quarter.

At September 30, 2004, short-term investments totaled $4,209,000 compared to $3,277,756 as of September 30, 2003. These funds are one source of our bank’s liquidity and are generally invested in an earning capacity on an overnight or short-term basis.

Deposits and Other Interest-Bearing Liabilities

        Average total deposits were $158.3 million and average interest-bearing deposits were $132.7 million in the first nine months of 2004. Average total deposits were $131.2 million and average interest-bearing deposits were $107.2 million in the same period of 2003.

        The following table sets forth our deposits by category as of September 30, 2004 and September 30, 2003.

Deposits

	September 30, 2004					September 30, 2003
			Percent of					Percent of
	Amount		Deposits			Amount		Deposits
Demand deposit accounts	$	29,164,845		15.5	%	$	25,542,423		19.5	%
Interest bearing checking accounts		6,963,155		3.7	%		5,493,067		4.2	%
Money market accounts		58,334,669		31.0	%		22,649,197		17.3	%
Savings accounts		3,473,696		1.8	%		3,157,363		2.4	%
Time deposits less than $100,000		50,598,339		26.9	%		42,846,902		32.6	%
Time deposits of $100,000 or over		39,628,132		21.1	%		31,516,049		24.0	%
Total deposits	$	188,162,835		100.0	%	$	131,205,001		100.0	%

Most of the growth in our deposits was in money market accounts, which increased nearly 160% from the amount at September 30, 2003. This growth was primarily a result of special promotions and increased advertising.

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 $148.5 million at September 30, 2004 compared to $99.7 million at September 30, 2003. We expect a stable base of deposits to be our primary source of funding to meet both our short-term and long-term liquidity needs. Core deposits as a percentage of total deposits were approximately 78.9% at September 30, 2004 and 76.0% at September 30, 2003. Our loan-to-deposit ratio was 90.6% at September 30, 2004 versus 95.3% at September 30, 2003. The average loan-to-deposit ratio was 88.6% during the first nine months of 2004 and 96.3% during the same period of 2003.

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In addition to deposits, we obtained funds from the Federal Home Loan Bank to help fund our loan growth. Average borrowings from the Federal Home Loan Bank were $16.0 million during the first nine months of 2004 and totaled $16.5 million at September 30, 2004. The following table reflects the current borrowing terms as of September 30, 2004.

FHLB Description	Balance		Current Rate			Maturity Date
CIP/EDP	$	4,000,000		3.69	%		07/11/05
CIP/EDP		2,500,000		1.88	%		02/28/05
Fixed Rate Credit		3,500,000		1.93	%		08/17/05
Fixed Rate Credit		1,500,000		2.25	%		02/17/06
Convertible		5,000,000		1.86	%		09/29/08
	$	16,500,000

CAPITAL

Under the capital guidelines of the Office of the Comptroller of the Currency and the Federal Reserve, we are required to maintain a minimum total risk-based capital ratio of 8%, with at least 4% being Tier 1 capital, at both the bank and holding company levels.To be considered “well-capitalized,” we must meet regulatory standards of 10% for total risk-based capital and 6% for Tier 1 capital. Tier 1 capital consists of common shareholders’ equity, qualifying perpetual preferred stock, and minority interest in equity accounts of consolidated subsidiaries, less goodwill. In addition, we must maintain a minimum Tier 1 leverage ratio (Tier 1 capital to total average assets) of at least 4%. The “well-capitalized” standard for the Tier 1 leverage ratio is 5%. At September 30, 2004, our total shareholders’ equity was $16.1 million ($16.1 million at the bank level). We were considered to be “well capitalized” at both the holding company and bank level for regulatory purposes at September 30, 2004, as our Tier 1 capital ratio was 11.2% (9.0% at the bank level), our total risk-based capital ratio was 12.9% (10.2% at the bank level), and our Tier 1 leverage ratio was 10.3% (7.4% at the bank level).

On May 27, 2004, we raised $5.0 million through the issuance and sale of floating rate capital securities of our wholly-owned subsidiary, BFNB Trust. These capital securities are reported on our consolidated balance sheet as junior subordinated debentures. BFNB Trust loaned these proceeds to our holding company to use for general corporate purposes. The trust preferred debt qualifies as Tier 1 capital under Federal Reserve Board guidelines.

Debt issuance costs, net of accumulated amortization, from the junior subordinated debentures totaled $43,603 at September 30, 2004 and is included in other assets on our consolidated balance sheet. Amortization of debt issuance costs from trust preferred debt totaled $1,402 for the nine month period ended September 30, 2004 and is reported in other noninterest expense on the consolidated statement of income.

The capital securities accrue and pay distributions annually at a rate per annum equal to the three-month LIBOR plus 270 basis points, which was 4.350% at September 30, 2004. The distribution rate payable on the capital securities is cumulative and payable quarterly in arrears. We have the right, subject to events of default, to defer payments of interest on the capital securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity date of May 27, 2034.

We have no current intention to exercise our right to defer payments of interest on the capital securities.

The capital securities mature or are mandatorily redeemable upon maturity on May 27, 2034 and or upon earlier optional redemption as provided in the indenture. We have the right to redeem the capital securities, in whole or in part, on or after May 27, 2009. We may also redeem the capital securities prior to such dates upon occurrence of specified conditions and the payment of a redemption premium.

LIQUIDITY AND INTEREST RATE SENSITIVITY

Our primary sources of liquidity are core deposits, scheduled repayments on our loans, advances from the Federal Home Loan Bank, and interest on, pay downs and maturities of our investments. 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

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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 $9.5 million. We also have a line of credit with the Federal Home Loan Bank to borrow up to 75% of our 1 to 4 family loans, resulting in an availability of funds of $4.6 million at September 30, 2004. FHLB has approved borrowings up to 15% of the bank’s total assets less advances outstanding. The borrowings are available by pledging and purchasing additional collateral and FHLB stock. At September 30, 2004, we had borrowed $16.5 million on this line. We believe that our liquidity and ability to manage assets will be sufficient to meet our cash requirements over the near term.

IMPACT OF INFLATION

Unlike most industrial companies, the assets and liabilities of financial institutions such as the company and the 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 in the same magnitude as the prices of goods and services. As discussed previously, management seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation.

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 the footnotes to the consolidated financial statements at December 31, 2003 as filed on our annual report on Form 10-KSB. Certain accounting policies involve significant judgments and assumptions by us which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe 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 which 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 a critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the credit worthiness of borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses, the impact of current events, and conditions, and other factors impacting the level of probable inherent losses. Under different conditions or using different assumptions, the actual amount of credit losses incurred by us may be different from management’s estimates provided in our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a more complete discussion of our processes and methodology for determining our allowance for loan losses.

RECENTLY ISSUED ACCOUNTING STANDARDS

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

In November 2003, the Emerging Issues Task Force (“EITF”) reached a consensus that certain quantitative and qualitative disclosures should be required for debt and marketable equity securities classified as available for sale or held to maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balance sheet date but for which other-than-temporary impairment has not been recognized. Accordingly EITF issued EITF No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This issue addresses the meaning of other-than-temporary impairment and its application to investments classified as either available for sale or held to maturity under SFAS No. 115 and provides guidance determining the amount of impairment and additional quantitative and qualitative disclosures. The guidance for determining the amount of impairment was scheduled to be effective for periods ending after June 15, 2004, but has been delayed indefinitely pending implementation guidance by the FASB. The disclosure provisions of EITF No. 03-1 were effective for fiscal years ending after December 15, 2003. Adopting the disclosure provisions of EITF No. 03-1 did not have any impact on our financial position or results of operations.

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In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”, which amends and clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and loan commitments that relate to the origination of mortgage loans held for sale, and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying to conform it to language used in FIN 45, and amends certain other existing pronouncements. The pronouncement was generally effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have any impact on our financial condition or operating results.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires an issuer to classify certain financial instruments that include certain obligations, such as mandatory redemption, repurchase of the issuer’s equity, or settlement by issuing equity, previously classified as equity, as liabilities or assets in come circumstances. SFAS No. 150 was generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have any impact on our financial condition or operating results.

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees and warranties that it has issued. FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantee. The initial recognition requirements of FIN 45 were effective for guarantees issued or modified after December 31, 2002. The disclosure requirements were effective for financial statements for periods ending after December 15, 2002. The adoption of FIN 45 did not have any impact on our financial position or results of operations.

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities.” FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns, or both. FIN No. 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. FIN No. 46 provides guidance for determining whether an entity qualifies as a variable interest entity by considering, among other considerations, whether the entity lacks sufficient equity or its equity holders lack adequate decision-making ability. The consolidation requirements of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements applied in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The adoption of FIN No. 46 did not have any effect on our financial position or results of operations.

In March 2004, the FASB issued an exposure draft on “Share-Based Payment.” The proposed Statement addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. This proposed Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and generally would require instead that such transactions be accounted for using a fair-value-based method. This Statement, if approved, was scheduled to be effective for awards that are granted, modified, or settled in fiscal years beginning after a) December 15, 2004 for public entities and nonpublic entities that used the fair-value-based method of accounting under the original provisions of Statement 123 for recognition or pro forma disclosure purposes and b) December 15, 2005 for all other nonpublic entities.On October 16, 2004, the FASB delayed the effective date of this proposal by six months and anticipates it will be effective for by the third quarter of 2005. Retrospective application of this Statement is not permitted. The adoption of this Statement, if approved, could have an impact on our financial position or results of operations.

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

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Item 3.   Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective as of September 30, 2004. There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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

PART II – OTHER INFORMATION

Item 1.   Legal Proceedings.

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

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

        Not applicable.

Item 3.   Defaults Upon Senior Securities.

        Not applicable.

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

        Not applicable.

Item 5.   Other Information.

        Not applicable.

Item 6.   Exhibits.

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

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

32            Section 1350 Certifications.

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SIGNATURES

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

BEACH FIRST NATIONAL BANCSHARES, INC.

Date:  November 9, 2004
By:  /s/ Walter E. Standish, III
        Walter E. Standish, III
         President and Chief Executive Officer

Date:   November 9, 2004
By:  /s/ Richard N. Burch
        Richard N. Burch
        Chief Financial and Principal Accounting Officer

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INDEX TO EXHIBITS

Exhibit
Number           Description

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

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

32                      Section 1350 Certifications.

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