Beach First National Bancshares (BFNB) 10QSB 2005 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 quarterly period ended:  September 30, 2005

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

Commission file number:  000-22503

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

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

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

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

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

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

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

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

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

PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.

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

	September 30,					December 31,
	2005			2004		2004
	(unaudited)			(unaudited)		(audited)
ASSETS
Cash and due from banks	$	5,156,506		$	3,678,206	$	4,824,176
Federal funds sold and short term investments		607,305			4,209,000		463,069
Investment securities available for sale		45,392,922			36,386,786		36,202,370
Loans, net		276,693,072			171,898,625		189,059,926
Federal Reserve Bank stock		534,000			309,000		309,000
Federal Home Loan Bank stock		1,448,900			925,000		1,070,200
Premises and equipment, net		5,112,738			4,512,169		4,681,812
Cash value life insurance		3,271,008			3,192,355		3,230,950
Investment in BFNB Trusts		310,000			155,000		-
Other assets		3,290,746			1,618,244		2,249,842
Total assets	$	341,817,197		$	226,884,385	$	242,091,345
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Noninterest bearing deposits	$	34,066,310		$	29,164,845	$	32,540,139
Interest bearing deposits		233,029,902			158,997,990		170,628,819
Total deposits		267,096,212			188,162,835		203,168,958
Other borrowings		24,580,000			16,500,000		16,500,000
Junior subordinated debentures		10,310,000			5,155,000		5,155,000
Other liabilities		1,626,547			969,205		934,425
Total liabilities		303,612,759			210,787,040		225,758,383
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 10,000,000 shares authorized;
shares issued and outstanding - 3,168,458 at September 30,
2005, 2,013,008 at September 30, 2004 and 2,013,508 at
December 31, 2004		3,168,458			2,013,008		2,013,508
Paid-in capital		30,277,536			11,332,816		11,335,982
Retained earnings		5,286,591			2,740,025		3,153,939
Accumulated other comprehensive income (loss)		(528,147	)		11,496		(170,467	)
Total shareholders' equity		38,204,438			16,097,345		16,332,962
Total liabilities and shareholders' equity	$	341,817,197		$	226,884,385	$	242,091,345

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

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

	Nine Months Ended					Three Months Ended
	September 30,					September 30,
	2005			2004		2005			2004
INTEREST INCOME
Interest and fees on loans	$	13,143,631		$	7,335,800	$	5,178,211		$	2,739,856
Investment securities		1,326,583			700,841		485,766			314,411
Fed funds sold and short term investments		110,684			75,265		43,606			46,350
Dividends on long-term investments		10,748			2,240		4,535			1,656
Total interest income		14,591,646			8,114,146		5,712,118			3,102,273
INTEREST EXPENSE
Deposits		3,991,768			1,917,648		1,549,433			774,286
Short-term borrowings		428,115			283,057		152,914			100,776
Long-term borrowings-junior subordinated debt		362,427			75,255		152,913			55,819
Total interest expense		4,782,310			2,275,960		1,855,260			930,881
Net interest income		9,809,336			5,838,186		3,856,858			2,171,392
PROVISION FOR POSSIBLE LOAN
LOSSES		1,643,000			838,000		544,000			330,000
Net interest income after provision
for possible loan losses		8,166,336			5,000,186		3,312,858			1,841,392
NONINTEREST INCOME
Service fees on deposit accounts		407,166			392,118		124,897			128,181
Gain on sale of loan		14,610			-		-			-
Gain (loss) on sale of investment securities		(3,935	)		37,395		(13,600	)		37,400
Income from cash value life insurance		68,371			121,158		21,472			40,386
Mortgage loan referral fees		180,541			100,974		74,224			41,424
Other income		157,166			117,992		61,778			47,694
Total noninterest income		823,919			769,637		268,771			295,085
NONINTEREST EXPENSES
Salaries and wages		2,634,429			1,840,553		982,170			671,425
Employee benefits		491,417			360,631		166,455			123,162
Supplies and printing		75,487			63,738		25,964			27,165
Advertising and public relations		215,279			188,719		78,334			72,655
Professional fees		225,388			148,133		76,618			55,200
Depreciation and amortization		398,350			328,041		138,976			110,918
Occupancy		545,179			348,179		183,313			137,571
Data processing fees		335,706			261,595		115,494			93,501
Other operating expenses		735,046			596,892		274,362			232,093
Total noninterest expenses		5,656,281			4,136,481		2,041,686			1,523,690
Income before income taxes		3,333,974			1,633,342		1,593,943			612,787
INCOME TAX EXPENSE		1,201,322			611,333		552,392			229,010
Net income	$	2,132,652		$	1,022,009	$	987,551		$	383,777
BASIC NET INCOME PER COMMON SHARE
	$	.86		$	.51	$	.31		$	.19
DILUTED NET INCOME PER COMMON SHARE	$	.83		$	.49	$	.30		$	.18

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

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Beach First National Bancshares, Inc. and Subsidiaries
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, 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

									Accumulated
									Other			Total
	Common stock				Paid-in		Retained		Comprehensive			Shareholders
	Shares		Amount		Capital		Earnings		Income			Equity
BALANCE, DECEMBER 31, 2004		2,013,508	$	2,013,508	$	11,335,982	$	3,153,939	$	(170,467	)	$	16,332,962
Net income		-		-		-		2,132,652		-			2,132,652
Other comprehensive income, net of taxes:
Unrealized loss on investment securities		-		-		-		-		(360,277	)		(360,277	)
Less reclassification adjustments for losses
included in net income		-		-		-		-		2,597			2,597
Comprehensive income													1,774,972
Exercise of stock options		4,950		4,950		28,368		-		-			33,318
Issuance of common stock		1,150,000		1,150,000		18,913,186		-		-			20,063,186
BALANCE, SEPTEMBER 30, 2005		3,168,458	$	3,168,458	$	30,277,536	$	5,286,591	$	(528,147	)	$	38,204,438

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

4

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

	Nine Months Ended
	September 30,
	2005			2004
OPERATING ACTIVITIES
Net income	$	2,132,652		$	1,022,009
Adjustments to reconcile net income to
net cash provided by operating activities:
Provisions for loan losses		1,643,000			838,000
Accretion of deferred loan fees		(411,879	)		(321,359	)
Depreciation and amortization		377,797			357,243
Loss (Gain) on sale of investment securities		3,935			(37,395	)
Discount accretion and premium amortization		39,799			152,913
Increase (decrease) in other assets		(1,350,904	)		(354,143	)
Increase (decrease) in other liabilities		254,741			208,628
Net cash provided by operating activities		2,685,207			1,865,896
INVESTING ACTIVITIES
Purchase of investment securities		(13,845,736	)		(29,681,035	)
Proceeds from sale or call of investment securities		4,695,085			5,254,499
Purchase of FHLB Stock		(378,700	)		(350,000	)
Purchase of Federal Reserve Bank Stock		(225,000	)		-
Purchase of BFNB Trust Stock		-			(155,000	)
Decrease (increase) in Federal funds sold & short term investments		(144,236	)		389,520
Increase in loans, net		(88,864,267	)		(38,563,554	)
Purchase of life insurance contracts		(40,058	)		(115,785	)
Purchase of premises and equipment		(808,723	)		(256,036	)
Net cash used in investing activities		(99,611,635	)		(63,477,391	)
FINANCING ACTIVITIES
Increase in Federal funds purchased & borrowings		8,080,000			5,000,000
Investment in BFNB Trusts		5,155,000			5,155,000
Exercise of stock options		33,318			184,750
Issuance of common stock, net		20,063,186			-
Net increase in deposits		63,927,254			50,063,269
Net cash provided by financing activities		97,258,758			60,403,019
Net increase (decrease) in cash and cash equivalents		332,330			(1,208,476	)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD	$	4,824,176		$	4,886,682
CASH AND CASH EQUIVALENTS, END OF
PERIOD	$	5,156,506		$	3,678,206
CASH PAID FOR
Income taxes	$	1,201,322		$	611,333
Interest	$	4,782,310		$	2,275,960

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

5

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

1.Basis of Presentation

The accompanying unaudited consolidated condensed financial statements for Beach First National Bancshares, Inc. (“Company”) were prepared in accordance with instructions for Form 10-QSB and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles. All adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for fair presentation of the interim consolidated financial statements have been included. The results of operations for the nine month period ended September 30, 2005 are not necessarily indicative of the results that may be expected for the entire year. These consolidated financial statements do not include all disclosures required by generally accepted accounting principles and should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2004.

2.Principles of Consolidation

The accompanying unaudited consolidated condensed financial statements include the accounts of the Company and its subsidiary, Beach First National Bank. The Company also owns two grantor trusts, Beach First National Trust I and Beach First National Trust II. All significant inter-company items and transactions have been eliminated in consolidation. In accordance with current accounting guidance, the financial statements of Trust I and Trust II have not been included in the Company’s financial statements.

3.Earnings Per Share

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

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

In 2004, the board of directors declared a 3 for 2 stock split on the Company’s common stock in the form of a 50% stock dividend. The stock dividend was paid June 2, 2004 to shareholders of record as of May 12, 2004. Shareholders of record received one additional share for every two shares held as of the close of business on the record date. Fractional shares resulting from the stock split were paid in cash based on the closing price as of the record date of May 12, 2004. As a result of the common stock dividend, earnings per share were retroactively restated for all previous periods.

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

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

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

For the Nine Months Ended
September 30, 2005

	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Basic EPS	$	2,132,652		2,476,052	$	0.86
Effect of Diluted Securities:
Stock options		-		87,368		(0.03	)
Diluted EPS	$	2,132,652		2,563,420	$	0.83

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		(0.02	)
Diluted EPS	$	1,022,009		2,083,144	$	0.49

For the Three Months Ended
September 30, 2005

	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Basic EPS	$	987,551		3,168,458	$	0.31
Effect of Diluted Securities:
Stock options		-		87,368		(0.01	)
Diluted EPS	$	987,551		3,255,826	$	0.30

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		(0.01	)
Diluted EPS	$	383,777		2,094,230	$	0.18

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

	Nine Months Ended September 30,
	2005		2004
Net Income, as reported	$	2,132,652	$	1,022,009
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects		70,208		77,860
Pro forma net income	$	2,062,444	$	944,149
Earnings per share:
Basic - as reported	$	0.86	$	0.51
Basic - pro forma	$	0.83	$	0.47
Diluted - as reported	$	0.83	$	0.49
Diluted - pro forma	$	0.80	$	0.45

	Three Months Ended September 30,
	2005		2004
Net Income, as reported	$	2,132,652	$	1,022,009
Net Income, as reported	$	987,551	$	383,777
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects		23,727		18,102
Pro forma net income	$	963,824	$	365,675
Earnings per share:
Basic - as reported	$	0.31	$	0.19
Basic - pro forma	$	0.30	$	0.19
Diluted - as reported	$	0.30	$	0.18
Diluted - pro forma	$	0.30	$	0.18

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

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On September 1, 2005, BFNM Building, LLC entered into an A1A Document A114-2001 Standard Form of Agreement between Owner and Contractor with Harrington Construction Co. and Graham Group Architects to construct the building on the property for $5,237,478. Michael Harrington, a member of the Company’s board of directors, is the owner and president of Harrington Construction Co. The Company expects that the building will be completed by March 22, 2006. Harrington Construction Co. was awarded the contract after a competitive bidding process. Harrington Construction Co.‘s total fee for the project is $233,116. As of September 30, 2005, no material transactions had occurred with respect of BFNM, LLC.

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

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

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

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

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

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

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

• changes occurring in business conditions and inflation;

• changes in technology;

• the level of allowance for loan loss;

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

• the rates of loan growth;

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

• changes in monetary and tax policies;

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

• changes in the securities markets; and

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

Critical Accounting Policies

        We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our consolidated financial statements. Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, 2004 as filed on our Form 10-KSB.

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

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

Overview

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

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

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

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

Results of Operations
EARNINGS REVIEW

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

Net Interest Income

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

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

Provision for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged as an expense on our statement of income. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. The provision for loan losses was $1,643,000 for the first nine months of 2005 and $838,000 for the same period of 2004. For the three month period ended September 30, 2005 and 2004, the provision was $544,000 and $330,000, respectively. The increase in the provision for the nine month period ended September 30, 2005 was the result of increased loan growth and management’s assessment of the adequacy of the reserve for possible loan losses given the size, mix and quality of the current loan portfolio. Please see the discussion below under “Allowance for Possible Loan Losses” for a description of the factors we considered in determining the amount of the provision we expense each period to maintain this allowance.

Noninterest Income

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

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

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

Noninterest Expense

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

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

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

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

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

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

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

BALANCE SHEET REVIEW

General

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

Investment Securities

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

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At September 30, 2005, short-term investments totaled $607,305 compared to $4.2 million as of September 30, 2004. These funds are one source of our bank’s liquidity and are generally invested in an earning capacity on an overnight or short-term basis. This decline in short-term investments is primarily due to higher loan demand during this quarter and the competitive market for deposits.

Loans

Since loans typically provide higher yields than other types of earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. As of September 30, 2005, loans represented 83.3% of average earning assets compared to 80.6% at September 30, 2004. At September 30, 2005, net loans (total loans less the allowance for loan losses) totaled $276.7 million, an increase of $104.8 million from September 30, 2004. Average total loans increased from $151.7 million, with a yield of 6.47%, in the first nine months of 2004 to $235.0 million, with a yield of 7.48%, during the same period in 2005. The increase in yield on loans during these periods is due to the increasing interest rate environment in 2004 and 2005. The interest rates charged on loans vary with the degree of risk and the maturity and amount of the loan. Competitive pressures, money market rates, availability of funds and government regulations also influence interest rates.

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

Composition of Loan Portfolio

	September 30, 2005						September 30, 2004
				Percent						Percent
	Amount			of Total			Amount			of Total
Commercial	$	41,490,898			14.8	%	$	31,005,232			17.8	%
Real estate - construction		18,627,033			6.6	%		12,020,227			6.9	%
Real estate - mortgage		212,895,275			75.8	%		124,180,860			71.2	%
Consumer		7,996,205			2.8	%		7,103,038			4.1	%
Loans, gross		281,009,411			100.0	%		174,309,357			100.0	%
Unearned income		(414,547	)					(321,360	)
Allowance for possible loan losses		(3,901,792	)					(2,089,372	)
Loans, net	$	276,693,072					$	171,898,625

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

Allowance for Possible Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged to expense on our statement of income. The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. The evaluation of the allowance is segregated into general allocations and specific allocations. For general allocations, the portfolio is segregated into risk-similar segments for which historical loss ratios are calculated and adjusted for identified trends or changes in current portfolio characteristics.

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Historical loss ratios are calculated by product type for consumer loans (installment and revolving), mortgage loans, and commercial loans and may be adjusted for other risk factors. To allow for modeling error, a range of probable loss ratios is then derived for each segment. The resulting percentages are then applied to the dollar amounts of the loans in each segment to arrive at each segment’s range of probable loss levels. Certain nonperforming loans are individually assessed for impairment under SFAS No. 114 and assigned specific allocations. Other identified high-risk loans or credit relationships based on internal risk ratings are also individually assessed and assigned specific allocations.

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

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

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

At September 30, 2005, the allowance for possible loan losses was $3.9 million, or 1.39% of outstanding total loans, compared to an allowance for possible loan losses of $2.1 million, or 1.20% of outstanding total loans, at September 30, 2004. This increase is due to growth in the loan portfolio and needs based on ongoing evaluations of credits. In the first nine months of 2005, we had net charge-offs totaling $163,047. During the same period in 2004, we had net charge-offs totaling $509,109. We had non-performing loans totaling $1.0 million at September 30, 2005 and $804,595 at September 30, 2004. While there can be no assurances, we do not expect significant losses relating to these non-performing loans.

The following table sets forth certain information with respect to our allowance for loan losses and the composition of charge-offs and recoveries for the nine months ended September 30, 2005 and 2004.

Allowance for Loan Losses

	Nine months ended September 30,
	2005			2004
Average total loans outstanding	$	235,003,335		$	151,660,446
Total loans outstanding at period end		280,594,864			173,987,997
Total nonperforming loans		1,010,006			804,595
Beginning balance of allowance	$	2,421,839		$	1,760,481
Loans charged off		(190,935	)		(509,814	)
Total recoveries		27,888			705
Net loans charged off		(163,047	)		(509,109	)
Provision for loan losses		1,643,000			838,000
Balance at period end	$	3,901,792		$	2,089,372
Net charge-offs to average total loans		.07	%		.34	%
Allowance as a percent of total loans		1.39	%		1.20	%
Nonperforming loans as a
percentage of total loans		.36	%		.46	%
Nonperforming loans as a
percentage of allowance		25.89	%		38.51	%

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

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

Allocation of the Allowance for Loan Losses

	As of September 30, 2005
Residential real estate	$	121,918	6.33	%
Commercial construction		133,474	14.46	%
Commercial real estate		1,267,223	60.13	%
Commercial		513,633	14.62	%
Consumer		99,102	2.82	%
Other		-	-
Unallocated		1,248,272	-
Special Allocated	$	518,170	1.64	%
Total allowance for
Loan losses	$	3,901,792	100.0	%

Nonperforming Assets

We discontinue accrual of interest on a loan when we conclude it is doubtful that we will be able to collect interest from the borrower. We reach this conclusion by taking into account factors such as the borrower’s financial condition, economic and business conditions, and the results of our previous collection efforts. Generally, we will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. When we place a loan in nonaccrual status, we reverse all interest which has been accrued on the loan but remains unpaid and we deduct this interest from earnings as a reduction of reported interest income. We do not accrue any additional interest on the loan balance until we conclude the collection of both principal and interest is reasonably certain. At September 30, 2005, there were no loans accruing interest which were 90 days or more past due and we had no restructured loans.

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Deposits and Other Interest-Bearing Liabilities

Average total deposits were $237.7 million and average interest-bearing deposits were $206.7 million in the first nine months of 2005. Average total deposits were $158.3 million and average interest-bearing deposits were $132.7 million in the same period of 2004.

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

			Deposits
	September 30, 2005					September 30, 2004
			Percent of					Percent of
	Amount		Deposits			Amount		Deposits
Demand deposit accounts	$	34,066,310		12.7	%	$	29,164,845		15.5	%
Interest bearing checking accounts		19,186,493		7.2	%		6,963,155		3.7	%
Money market accounts		74,957,347		28.1	%		58,334,669		31.0	%
Savings accounts		3,991,983		1.5	%		3,473,696		1.8	%
Time deposits less than $100,000		74,098,721		27.7	%		50,598,339		26.9	%
Time deposits of $100,000 or over		60,795,359		22.8	%		39,628,131		21.1	%
Total deposits	$	267,096,212		100.0	%	$	188,162,835		100.0	%

Deposit growth was attributable to internal growth and the generation of new deposit accounts due primarily to special promotions and increased advertising. The slight increase in demand deposit accounts during this reporting period was primarily the result of a shift of approximately $15.0 million in demand deposits to interest bearing accounts. Interest bearing checking accounts increased primarily due to a change mandated by the South Carolina Bar Association requiring that all lawyer trust accounts be interest bearing. This created a shift from demand deposit accounts to interest bearing checking accounts.

Core deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $206.3 million at September 30, 2005 compared to $148.5 million at September 30, 2004. We expect a stable base of deposits to be our primary source of funding to meet both our short-term and long-term liquidity needs. Core deposits as a percentage of total deposits were approximately 77.2% at September 30, 2005 and 78.9% at September 30, 2004. Our loan-to-deposit ratio was 96.5% at September 30, 2005 versus 90.6% at September 30, 2004. The average loan-to-deposit ratio was 98.9% during the first nine months of 2005 and 88.6% during the same period of 2004.

In addition to deposits, we obtained funds from the Federal Home Loan Bank to help fund our loan growth. Average borrowings from the Federal Home Loan Bank were $18.8 million during the first nine months of 2005 and totaled $21.5 million at September 30, 2005. The following table reflects the current borrowing terms as of September 30, 2005.

FHLB Description	Balance		Current Rate			Maturity Date
Fixed Rate Credit		1,500,000		2.25	%		02/17/2006
Convertible		5,000,000		3.31	%		08/19/2010
Convertible		5,000,000		3.44	%		03/10/2015
Convertible		5,000,000		3.68	%		07/13/2015
Convertible		5,000,000		4.06	%		09/29/2016
	$	21,500,000

Junior Subordinated Debentures

On May 27, 2004 we raised $5.0 million and on March 30, 2005 we raised an additional $5.0 million through the issuance and sale of floating rate trust preferred securities through BFNB Trust I and BFNB Trust II (the “Trusts”). These trust preferred securities are reported on our consolidated balance sheet as junior subordinated debentures. The Trusts loaned these proceeds to our holding company to use for general corporate purposes. Trust preferred securities currently qualify as Tier 1 capital under Federal Reserve Board guidelines, subject to certain limitations.

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

The trust preferred securities accrue and pay distributions annually at a rate per annum equal to the three month LIBOR plus 270 and 190 basis points, respectively, which was 6.35% and 5.77% at September 30, 2005. The distribution rate payable on these securities is cumulative and payable quarterly in arrears. We have the right, subject to events of default, to defer payments of interest on the trust preferred securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity dates of May 27, 2034 and March 30, 2035, respectively. We have no current intention to exercise our right to defer payments of interest on the trust preferred securities. We have the right to redeem the trust preferred securities, in whole or in part, on or after May 27, 2009 and March 30, 2010, respectively. We may also redeem the trust preferred securities prior to such dates upon occurrence of specified conditions and the payment of a redemption premium.

Capital Resources

The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the capital adequacy guidelines, regulatory capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type of asset. Tier 2 capital consists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations. We are also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio. At both the holding company and bank level, we are subject to various regulatory capital requirements administered by the federal banking agencies. To be considered “well-capitalized,” we must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.

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

On June 14, 2005, we closed the sale of 1,150,000 shares of our common stock at $18.75 per share in a firm commitment underwritten offering solely managed by Sandler O’Neill & Partners, L.P. We received net proceeds from the offering of approximately $20 million after deducting underwriting discounts and expenses. We plan to use the net proceeds for general corporate purposes, which include, among other things, providing additional capital to our bank to support our asset growth.

LIQUIDITY MANAGEMENT

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

        Our primary sources of liquidity are deposits, scheduled repayments on our loans, and interest on and maturities of our investments. We plan to meet our future cash needs through the liquidation of temporary investments and the generation of deposits. All of our securities have been classified as available for sale. Occasionally, we might sell investment securities in connection with the management of our interest sensitivity gap or to manage cash availability. We may also utilize our cash and due from banks, security repurchase agreements, and federal funds sold to meet liquidity requirements as needed. In addition, we have the ability, on a short-term basis, to purchase federal funds from other

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financial institutions. Presently, we have made arrangements with commercial banks for short-term unsecured advances of up to $16.4 million. We also have a line of credit with the FHLB to borrow up to 80% of our 1 to 4 family loans, resulting in an availability of funds of $20.7 million at September 30, 2005. The FHLB has approved borrowings up to 15% of the bank’s total assets less advances outstanding. The borrowings are available by pledging additional collateral and purchasing FHLB stock. At September 30, 2005, we had borrowed $21.5 million on this line. We believe that our existing stable base of core deposits, our bond portfolio, borrowings from the FHLB, and short-term federal funds lines will enable us to successfully meet our liquidity needs for the next 12 months.

Interest Rate Sensitivity

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

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

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

Off Balance Sheet Risk

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

        At September 30, 2005, the bank had issued commitments to extend credit of $42.0 million through various types of lending arrangements, of which $36.9 million was at variable rates. The commitments expire over the next 18 months. Past experience indicates that many of these commitments to extend credit will expire unused. We believe that we have adequate sources of liquidity to fund commitments that are drawn upon by the borrowers.

        In addition to commitments to extend credit, we also issue standby letters of credit which are assurances to a third party that they will not suffer a loss if our customer fails to meet its contractual obligation to the third party. Standby letters of credit totaled $8.2 million at September 30, 2005. Past experience indicates that many of these standby letters of credit will expire unused. However, through our various sources of liquidity, we believe that we will have the necessary resources to meet these obligations should the need arise.

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Impact of Inflation

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

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

Recently Issued Accounting Standards

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

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

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

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

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

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

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

Item 3. Controls and Procedures

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

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

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

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

         Not applicable.

Item 3. Defaults Upon Senior Securities.

         Not applicable.

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

         Not applicable.

Item 5. Other Information.

         Not applicable.

Item 6. Exhibits.

10	.1	A1A Document A114-2001 Standard Form of Agreement between Owner and Contractor with
		Harrington Construction Co. and Graham Group Architects dated September 1, 2005.
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.

BEACH FIRST NATIONAL BANCSHARES, INC.

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

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

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INDEX TO EXHIBITS

Exhibit

Number    Description

10	.1	A1A Document A114-2001 Standard Form of Agreement between Owner and Contractor with
		Harrington Construction Co. and Graham Group Architects dated September 1, 2005.
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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