SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                            -------------------------
                                    FORM 10-K

+-+
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
+-+ SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended September 30, 2005

                                       OR
+-+
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
+-+ SECURITIES EXCHANGE ACT OF 1934

                         Commission File Number: 0-19684

                          COASTAL FINANCIAL CORPORATION
             (Exact name of registrant as specified in its charter)

                   Delaware                                    57-0925911
--------------------------------------------                   ------------
(State or other jurisdiction of incorporation             (I.R.S. Employer I.D.)
or organization)

2619 Oak Street, Myrtle Beach, South Carolina                    29577-3129
---------------------------------------------                   ------------
(Address of principal executive offices)                          (Zip Code)

Registrant's telephone number, including area code:       (843) 205-2000
                                                          --------------

Securities registered pursuant to Section 12(b) of the Act:     None
                                                               -----

Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.01 per share
                     --------------------------------------
                                (Title of Class)


      Indicate by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  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 [_].

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

      Indicate by check mark whether the registrant is an accelerated  filer (as
defined in Rule 12b-2 of the Act.  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].

      The aggregate market value of the voting and non-voting common equity held
by non-affiliates  of the registrant,  based upon the closing sales price of the
registrant's common stock as quoted on the NASDAQ System under the symbol "CFCP"
as of the last business day of the registrant's  most recently  completed second
fiscal quarter, was $265,362,136  (19,412,007 shares at $13.67 per share.) It is
assumed for purposes of this calculation that none of the registrant's officers,
directors and 5% stockholders are affiliates.

As of December 5, 2005, there were issued and outstanding  19,479,469  shares of
the registrant's Common Stock.


                                       1
<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

      1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
September 30, 2005 (Parts I and II)

      2.  Portions  of the  Proxy  Statement  for the  2006  Annual  Meeting  of
Stockholders. (Part III)




                                       2
<PAGE>

                                     PART I

Item 1.  Business
-----------------

General

      Coastal Financial  Corporation  ("Coastal Financial" or the "Company") was
incorporated  in the State of Delaware in June 1990, for the purpose of becoming
a savings and loan holding  company for Coastal  Federal  Bank,  formerly  named
Coastal Federal Savings Bank,  ("Coastal Federal" or the "Bank"). On January 28,
1991, the  stockholders  of the Bank approved a plan to reorganize the Bank into
the holding  company form of  ownership.  The  reorganization  was  completed on
November 6, 1991,  on which date the Bank became the wholly owned  subsidiary of
the  Company,  and the  stockholders  of the  Bank  became  stockholders  of the
Company. Prior to completion of the reorganization,  the Company had no material
assets or  liabilities  and engaged in no  business  activities.  The  financial
results contained herein relate primarily to the Company's principal subsidiary,
Coastal Federal.

      Coastal  Federal  conducts  its  business  from its main  office in Myrtle
Beach,  South  Carolina,  thirteen  additional  branch offices  located in South
Carolina,  and seven  branch  offices  located in North  Carolina.  Two of these
branches  were opened after  September  30,  2005.  The deposits of the Bank are
insured by the Federal Deposit Insurance  Corporation ("FDIC") under the Savings
Association  Insurance  Fund  ("SAIF").  The  corporate  offices of the Bank are
located at 2619 Oak Street,  Myrtle  Beach,  South  Carolina  and the  telephone
number is (843) 205-2000.

      Coastal Federal's  twenty-one  offices are located in Horry and Georgetown
Counties of South  Carolina,  and  Brunswick  and New Hanover  Counties of North
Carolina.  The economy of these four counties depends  primarily on tourism.  To
the extent  area  businesses  rely  heavily on tourism for  business,  decreased
tourism would have a significant  adverse  effect on Coastal  Federal's  primary
deposit base and lending area. Moreover, Coastal Federal would likely experience
a higher degree of loan delinquencies should the local economy be materially and
adversely affected.

      Coastal  Federal's  principal  business  currently  consists of attracting
deposits  from the general  public and using these funds to originate  consumer,
commercial business loans, commercial real estate loans and residential mortgage
loans.


      The      Company      maintains      an      Internet      website      at
http://www.coastalfederal.com. The Company makes available its annual reports on
-----------------------------
Form  10-K,  quarterly  reports on Form  10-Q,  current  reports on Form 8-K and
amendments to such reports filed or

                                       3
<PAGE>

furnished  pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act
of 1934,  as amended,  and other  information  related to the  Company,  free of
charge,  on this site as soon as reasonably  practicable after it electronically
files  those  documents  with,  or  otherwise  furnishes  them to the  SEC.  The
Company's  Internet website and the information  contained  therein or connected
thereto are not  intended  to be  incorporated  into this annual  report on Form
10-K.




                                       4
<PAGE>

Rate/Volume Analysis

The following table sets forth certain information regarding changes to interest
income and interest expense of the Company for the periods  indicated.  For each
category   of   interest-earning   assets  and   interest-bearing   liabilities,
information is provided on changes attributed to (i) changes in rate (changes in
rate  multiplied  by old  volume);  (ii)  changes in volume  (changes  in volume
multiplied by old rate), (iii) changes in rate-volume (change in rate multiplied
by change in volume),  and (iv) the net change  (the sum of the prior  columns).
Non-accrual loans are included in the average volume calculations.

<TABLE>
<CAPTION>
                                                                    Year Ended September 30,
                        ------------------------------------------------------------------------------------------------------------
                                 2003 Compared to 2002                 2004 Compared to 2003           2005 Compared to 2004
                                  Increase (Decrease)                   Increase (Decrease)              Increase (Decrease)
                                        Due to                               Due to                            Due to
                        ------------------------------------   ---------------------------------   ---------------------------------
                         Rate     Volume    Rate/      Net      Rate     Volume   Rate/    Net      Rate   Volume    Rate/     Net
                                           Volume                                Volume                             Volume
                        -------   -------  -------   -------   -------   ------- ------  -------   ------  -------  -------  -------
<S>                     <C>       <C>      <C>       <C>       <C>       <C>      <C>    <C>       <C>     <C>      <C>      <C>
Interest-earning assets:

 Loans                  $(4,869)  $ 7,469  $  (903)  $ 1,697   $(3,082)  $ 8,515  $(626) $ 4,807   $2,506  $ 7,170  $   385  $10,061

 Mortgage-backed
  securities/investments (2,695)    7,903   (1,564)    3,644      (383)    2,216    (49)   1,784      478    2,160       54    2,692
                        -------   -------  -------   -------   -------   -------  -----  -------   ------  -------  -------  -------

Total net change in
 income on interest-
 earning assets          (7,564)   15,372   (2,467)    5,341    (3,465)   10,731   (675)   6,591    2,984    9,330      439   12,753
                        -------   -------  -------   -------   -------   -------  -----  -------   ------  -------  -------  -------

Interest-bearing
 liabilities:

 Deposits                (3,487)    2,333     (597)   (1,751)   (2,233)      373   (115)  (1,975)     855      584       93    1,532
 Brokered CD's               --        --       --        --        --        --     --       --       --       --    2,523    2,523
 FHLB advances           (1,271)    3,184     (527)    1,386      (971)    2,942   (315)   1,656       59    1,550        8    1,617
 Repurchase               1,534
   agreements                (4)       --      (13)    1,517      (344)      925   (185)     396    1,322     (626)    (392)     304
 Other borrowings            --        --       --        --       (46)      630   (135)     449      230       --       --      230
                        -------   -------  -------   -------   -------   -------  -----  -------   ------  -------  -------  -------

Total net change in
 expense on interest-
 bearing liabilities     (4,762)    7,051   (1,137)    1,152    (3,594)    4,870   (750)     526    2,466    1,508    2,232    6,206
                        -------   -------  -------   -------   -------   -------  -----  -------   ------  -------  -------  -------

Net change in net
 interest income        $(2,802)  $ 8,321  $(1,330)  $ 4,189   $   129   $ 5,861  $  75  $ 6,065   $  518  $ 7,822  $(1,793) $ 6,547
                        =======   =======  =======   =======   =======   =======  =====  =======   ======  =======  =======  =======

------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       5
<PAGE>


Average Balance Sheet

      The  following  table  sets  forth  certain  information  relating  to the
Company's  average  balance  sheet and reflects the yield on average  assets and
cost of average liabilities for the periods indicated. Such yields and costs are
derived  by  dividing  income or  expense  by the  average  balance of assets or
liabilities,  respectively,  for the periods  presented.  Non-accrual  loans are
included in average balance calculations.

<TABLE>
<CAPTION>
                                                                        Year Ended September 30,
                                     -----------------------------------------------------------------------------------------------
                                                  2003                            2004                            2005
                                     -----------------------------  ------------------------------   -------------------------------
                                      Average              Yield/     Average               Yield/    Average                Yield/
                                      Balance   Interest  Rate (2)    Balance   Interest   Rate (2)   Balance    Interest   Rate (2)
                                      -------   --------  --------    -------   --------   --------   -------    --------   --------
<S>                                  <C>        <C>         <C>     <C>          <C>         <C>     <C>          <C>         <C>
                                                                         (Dollars in thousands)
ASSETS
 Loans                               $629,817   $41,958     6.66%   $  757,633   $46,765     6.17%   $  873,797   $56,826     6.50%

 Mortgage-backed securities
  /investments(1)(3)                  357,680    17,256     4.82       403,610    19,040     4.72       449,402    21,732     4.84
                                     --------   -------   ------    ----------   -------   ------    ----------   -------   ------
Total interest-earning
 assets                              $987,497   $59,214     6.00%   $1,161,243   $65,805     5.67%   $1,323,199   $78,558     5.94%
                                     ========   =======   ======    ==========   =======   ======    ==========   =======   ======
LIABILITIES
 Transaction accounts (4)             369,871     3,925     1.06       418,405     3,331      .80       505,340     4,457      .88
 Statement savings accounts            40,913       427     1.04        50,509       405      .80        64,973       663     1.02
 Certificate accounts                 258,355     7,647     2.96       250,211     6,288     2.51       241,310     6,436     2.67
   Brokered certificate
     accounts                              --        --       --            --        --       --        79,369     2,523     3.18
 FHLB advances                        212,501     9,068     4.27       281,437    10,724     3.81       322,108    12,341     3.83
 Securities sold under
   repurchase agreements               93,496     1,718     1.84       143,842     2,114     1.47       101,221     2,418     2.39
 Other borrowings                       3,792       213     5.62        15,000       662     4.41        15,000       892     5.95
                                     --------   -------   ------    ----------   -------   ------    ----------   -------   ------
Total interest-bearing
 liabilities                         $978,928   $22,998     2.35%   $1,159,404   $23,524     2.03%   $1,329,321   $29,730     2.24%
                                     ========   =======   ======    ==========   =======   ======    ==========   =======   ======

Net interest income/
 interest rate spread                           $36,216     3.65%                $42,281     3.64%                $48,828     3.70%
Net yield on interest earning assets                        3.67%                            3.64%                            3.69%
Ratio of interest earning assets
 to interest-bearing liabilities                            1.01                             1.00                             1.00

</TABLE>

(1)   Includes  short-term  interest-bearing  deposits,  Federal funds sold, and
      investments held to maturity.
(2)   Yield for average investments classified as available for sale is computed
      using historical cost balances and does not give effect to changes in fair
      value that are reflected as a component of stockholders' equity.
(3)   Investment  securities  include  taxable and  tax-exempt  securities.  Net
      interest income has not been adjusted to produce a tax-equivalent yield.
(4)   Average  noninterest-bearing  deposits  included  in  average  transaction
      accounts above for 2003, 2004 and 2005 are $75,321, $101,298 and $163,278,
      respectively.

                                       6
<PAGE>

Lending Activities

      General.  The  principal  lending  activities  of Coastal  Federal are the
origination of consumer loans, commercial business loans, commercial real estate
loans and residential  mortgage  loans.  The Bank  originates  construction  and
permanent  loans  on  single  family  and  multi-unit  dwellings,  as well as on
commercial  structures.  The Bank  emphasizes the origination of adjustable rate
residential and commercial real estate mortgages.

      The  Bank's net loan  portfolio,  including  loans held for sale,  totaled
approximately $942.4 million at September 30, 2005,  representing  approximately
61.1%  of its  total  assets.  On that  date,  approximately  37.8%  of  Coastal
Federal's  gross loan portfolio was secured by mortgages on  one-to-four  family
residential properties.

      In an  effort  to  ensure  that  the  yields  on its  loan  portfolio  and
investments are  interest-rate  sensitive,  the Bank has implemented a number of
measures,  including:  (i)  emphasis  on  the  origination  of  adjustable  rate
mortgages  on  residential  and  commercial  properties;   (ii)  origination  of
construction loans secured by residential properties, generally with terms for a
one-year period or less; and (iii)  origination of commercial and consumer loans
having either adjustable rates or relatively short maturities.  At September 30,
2005, adjustable rate loans constituted  approximately $752.3 million (or 79.8%)
of the Bank's total loan portfolio.  Therefore,  at such date,  fixed rate loans
comprised only 20.2% of the total loan  portfolio.  These lending  practices are
intended  to shorten the term of the Bank's  assets and make the loan  portfolio
more responsive to interest rate volatility.

      The Company has  identified  one  concentration  of credit risk that it is
monitoring.  This involves  loans for the  acquisition of land and loans for the
development  of land,  which totaled  $121.2  million as September 30, 2005, and
which is included in the  Mortgage  Loans - Land,  land  development  and other,
primarily  commercial  real  estate line in the Loan  Portfolio  Analysis on the
following page. See Note 1(h) of the Notes to Consolidated  Financial Statements
in the Annual Report to Stockholders for a complete discussion of this monitored
credit risk.

                                       7
<PAGE>

Loan Portfolio Analysis

The following table set forth the composition of the Company's loan portfolio by
type of loan as of the dates indicated.

<TABLE>
<CAPTION>
                                                                           At September 30,
                                  --------------------------------------------------------------------------------------------------
                                         2001                2002                2003                2004                2005
                                  ------------------  ------------------  ------------------  ------------------  ------------------
                                   Amount    Percent   Amount    Percent   Amount    Percent   Amount    Percent   Amount    Percent
                                   ------    -------   ------    -------   ------    -------   ------    -------   ------    -------
<S>                               <C>         <C>     <C>          <C>    <C>         <C>     <C>         <C>     <C>         <C>
                                                                        (Dollars in thousands)

Mortgage loans:

 Construction                     $ 60,765    11.56%  $ 45,544     7.99%  $ 81,227    11.16%  $ 93,292    11.23%  $ 42,959    14.56%
 Single family to 4 family units   268,670    51.10    261,296    45.88    308,293    42.37    337,533    40.62    371,014    37.79
 Land, land development and
   other, primarily commercial
   real estate                     137,282    26.11    202,117    35.49    263,688    36.24    312,460    37.60    369,714    37.66
Commercial business loans           18,886     3.59     18,377     3.23     24,475     3.36     32,101     3.86     38,691     3.94
Consumer loans:
 Mobile home                         2,056     0.39      3,446     0.61      4,607     0.63      4,618     0.56      4,308     0.44
 Automobiles                         6,599     1.26      7,117     1.25      8,516     1.17      8,177     0.98      8,221     0.84
 Equity lines of credit             22,379     4.26     24,273     4.26     26,639     3.66     30,906     3.72     34,019     3.47
 Other                               9,161     1.73      7,378     1.29     10,234     1.41     11,905     1.43     12,777     1.30
                                  --------   ------   --------   ------   --------   ------   --------   ------   --------   ------

Total loans and loans

    held for sale, gross          $525,798   100.00%  $569,548   100.00%  $727,679   100.00%  $830,992   100.00%  $981,703   100.00%
                                             ======              ======              ======              ======              ======

 Add (Subtract):
 Loans in process                  (13,983)             (6,365)            (16,570)            (21,613)            (28,345)
 Deferred loan costs, net              372                 245                 556                 674                 771
 Allowance for loan losses          (7,159)             (7,883)             (9,832)            (11,077)            (11,748)
                                  --------            --------            --------            --------            --------

Total loans and loans held
       for sale, net              $505,028            $555,545            $701,833            $798,976            $942,381
                                  ========            ========            ========            ========            ========
</TABLE>


                                       8
<PAGE>

      Commercial  Business Loans. The Bank is permitted under OTS regulations to
make  secured  or  unsecured  loans  for  commercial,   corporate,  business  or
agricultural  purposes,  including the issuance of letters of credit  secured by
real estate,  business  equipment,  inventories,  accounts  receivable  and cash
equivalents.  The aggregate amount of such loans  outstanding may not exceed 20%
of such institution's assets.

      Coastal  Federal has been making  commercial  business loans since 1983 on
both a secured and  unsecured  basis.  The majority of these loans have interest
rates that adjust with changes in the prime rate as published in The Wall Street
                                                                 ---------------
Journal.  The Bank's  non-real  estate  commercial  loans  primarily  consist of
-------
short-term  loans for  working  capital  purposes,  seasonal  loans and lines of
credit.  The Bank  customarily  requires a personal  guaranty  of payment by the
principals of any  borrowing  entity and reviews the  financial  statements  and
income tax returns of the guarantors.  At September 30, 2005, the Bank had $38.7
million   outstanding   in  commercial   business   loans,   which   represented
approximately 3.9% of its gross loan portfolio and 2.5% of total assets.

      Commercial  business  lending is inherently  riskier than secured mortgage
lending  and  involves  risks  that are  different  from those  associated  with
residential and commercial real estate lending. Real estate lending is generally
considered  to  be   collateral   based  lending  with  loan  amounts  based  on
predetermined  loan to collateral  values and liquidation of the underlying real
estate  collateral is viewed as the primary  source of repayment in the event of
borrower default. Although commercial business loans are often collateralized by
equipment,   inventory,  accounts  receivable  or  other  business  assets,  the
liquidation of such collateral in the event of a borrower default is often not a
sufficient source of repayment because accounts  receivable may be uncollectible
and inventories  and equipment may be obsolete,  of limited use, or have limited
marketability,  among other things.  Accordingly,  the repayment of a commercial
business loan depends primarily on the creditworthiness of the borrower (and any
guarantors),  while  liquidation  of collateral  is a secondary and  potentially
insufficient source of repayment.

      Commercial Real Estate Loans. The Bank may invest,  by OTS regulation,  in
non-residential  real estate  loans up to 400% of its capital as computed  under
GAAP plus  general loan loss  reserves.  At  September  30,  2005,  this limited
Coastal Federal's aggregate  non-residential  real estate loans to approximately
$455.5  million.  At such date, the Bank had  non-residential  real estate loans
outstanding of $369.7 million  compared to $312.5 million at September 30, 2004.
During  fiscal 2002 through 2005,  the Bank opened four offices.  The Bank hired
commercial  lending  officers to reside in many of these  offices and intends to
have commercial lending officers or business banking officers in the majority of
its  banking  offices.  As a result of this  focus,  the Bank has  significantly
increased the number of its

                                       9
<PAGE>

commercial  lending  officers  over the  last two  years.  The Bank  expects  to
continue to focus significant  origination efforts in commercial real estate and
commercial  lending. It is expected that the Bank's commercial real estate loans
will continue to comprise the most significant portion of the Bank's loan growth
in future years.

      The  commercial  real estate loans  originated  by the Bank are  primarily
secured by shopping centers,  office  buildings,  warehouse  facilities,  retail
outlets,  hotels, motels and multi-family apartment buildings. The interest rate
of the  commercial  real estate loans  presently  offered by the Bank  generally
adjusts  every  one,  three  or five  years  and is  indexed  to  U.S.  Treasury
securities  or adjusts  daily  indexed to the prime  interest  rate.  Such loans
generally  have a fifteen to twenty  year  term,  with the  payments  based on a
similar amortization  schedule.  In some cases, the Bank may require the loan to
include a call  option at the  Bank's  option  in three to ten  years.  The Bank
generally  requires that such loans have a minimum debt service coverage of 120%
of  projected  net  operating  income  together  with other  generally  accepted
underwriting criteria.

      Commercial  real  estate  lending  entails  significant  additional  risks
compared to residential lending.  Commercial real estate loans typically involve
large loan  balances to single  borrowers  or groups of related  borrowers.  The
payment  experience  of such loans is typically  dependent  upon the  successful
operation of the real estate project.  These risks can be significantly affected
by supply and demand  conditions  in the market for office and retail  space and
for  apartments  and, as such may be subject,  to a greater  extent,  to adverse
conditions in the economy.  In dealing with these risk factors,  Coastal Federal
generally  limits itself to a real estate  market or to borrowers  with which it
has  experience.  The Bank  concentrates  on originating  commercial real estate
loans  secured  by  properties  located  within  its  market  areas of Horry and
Georgetown  Counties,  South  Carolina and Brunswick  and New Hanover  Counties,
North  Carolina.  Additionally,  the Bank has,  on a limited  basis,  originated
commercial  real estate loans  secured by  properties  located in other parts of
North and South Carolina.

      Consumer  Loans.  The Bank is permitted by OTS regulations to invest up to
35% of its assets in consumer loans. The Bank currently offers a wide variety of
consumer  loans on a secured and  unsecured  basis  including  home  improvement
loans,  loans secured by savings accounts and automobile,  truck and boat loans.
The Bank also offers a revolving line of credit secured by  owner-occupied  real
estate. Total consumer loans, including equity lines of credit generally secured
by one-to-four  family  residences,  amounted to $59.3  million,  or 6.0% of the
gross loan portfolio, and 3.8% of total assets, at September 30, 2005.

      Coastal Federal offers consumer loans in order to provide a wider range of
financial  services to its  customers.  These loans also

                                       10
<PAGE>

have a shorter term and normally  higher  interest rates than  residential  real
estate loans.

      Consumer  loans entail greater risk than do  residential  mortgage  loans,
particularly  in the case of  consumer  loans that are  unsecured  or secured by
assets that may depreciate rapidly, such as automobiles,  boats and other moving
vehicles.  In such cases,  repossessed  collateral for a defaulted consumer loan
may not provide an adequate source of repayment of the outstanding  loan and the
remaining  deficiency  often does not  warrant  further  substantial  collection
efforts  against the  borrower.  In  addition,  consumer  loan  collections  are
dependent on the borrower's  continuing  financial stability and, thus, are more
likely to be adversely  affected by job loss, a change in family  status such as
divorce, illness or personal bankruptcy. Furthermore, the application of various
federal and state laws,  including  federal and state  bankruptcy and insolvency
laws, may limit the amount  recoverable on such loans.  Such loans may also give
rise to claims and  defenses  by the  borrower  against  Coastal  Federal as the
holder of the loan,  and a borrower  may be able to assert  claims and  defenses
that it has against the seller of the underlying collateral.

      Residential  Mortgage Loans. The Bank originates loans to enable borrowers
to purchase  existing homes or residential  lots,  refinance  existing  mortgage
loans or construct new homes.  Residential mortgage loans originated by the Bank
are generally long-term loans,  amortized on a monthly basis, with principal and
interest due each month.  The  contractual  loan payment period for  residential
mortgage  loans  typically  ranges  from 10 to 30 years.  The Bank's  experience
indicates that real estate loans remain  outstanding for  significantly  shorter
periods than their contractual terms. Borrowers may refinance or prepay loans at
their option, subject to any prepayment penalty provisions included in the note.
The Bank generally requires mortgagee title insurance on all single-family first
mortgage and residential mortgage loans.

      The Bank offers adjustable rate residential  mortgage loans ("ARMs"),  the
interest rates of which generally adjust based upon treasury securities indices.
Although  Coastal  Federal's ARMs are beneficial in helping the Bank improve the
interest  rate  sensitivity  of  its  assets,  such  loans  may  pose  potential
additional  risks to Coastal Federal.  A precipitous  increase in interest rates
could be expected to result in an increase in  delinquencies or defaults on such
loans,  whereas a  significant  decrease  in rates  could  cause  repayments  to
increase significantly.

      Coastal Federal also offers residential mortgage loans with fixed rates of
interest.  These  loans  generally  can be sold in the  secondary  market or are
portfolio loans where the Bank offers such loans at rates above  conforming loan
rates. In addition, Coastal Federal securitized loans into FHLMC mortgage-backed
securities of

                                       11
<PAGE>

$46.8 million and $52.6 million in 2004 and 2005, respectively.  The securitized
mortgage-backed  securities were generally sold in the secondary market within a
few days of securitization.

      At September 30, 2005, approximately $371.0 million or 37.8% of the Bank's
loan  portfolio,  and 24.0% of total  assets,  consisted of  one-to-four  family
residential loans.

      Construction  Loans. The Bank originates  residential  construction  loans
that generally  have a term of six to twelve months for  individuals or one year
for builders.  The individual's  loans are generally tied to a commitment by the
Bank to  provide  permanent  financing  upon  completion  of  construction.  The
interest rate charged on  construction  loans is generally  indexed to the prime
rate as published in The Wall Street Journal or the current  permanent loan rate
                     -----------------------
and  varies  depending  on the terms of the loan and the loan  amount.  The Bank
customarily  requires personal  guaranties of payment from the principals of the
borrowing entities.

      The interest rate on commercial real estate  construction  loans presently
offered by the Bank is  generally  indexed to the prime rate as published in The
                                                                             ---
Wall  Street  Journal.  Residential  and  commercial  real  estate  construction
---------------------
financing  generally  expose the Bank to a greater  risk of loss than  long-term
financing on improved,  occupied  real estate,  due in part to the fact that the
loans are underwritten on projected,  rather than historical,  income and rental
results.  The Bank's risk of loss on such loans  generally  depends largely upon
the accuracy of the initial  appraisal of the property's  value at completion of
construction  and the estimated  cost  (including  interest) of  completion.  If
either  estimate  proves to have been  inaccurate  and the borrower is unable to
provide  additional  funds  pursuant to his  guaranty,  the lender either may be
required  to advance  funds  beyond the amount  originally  committed  to permit
completion of the  development  and/or be confronted at the maturity of the loan
with a project whose value is  insufficient  to assure full  repayment.  Coastal
Federal generally provides a permanent  financing  commitment on residential and
commercial properties at the time the Bank provides the construction financing.

      The Bank's underwriting  criteria are designed to evaluate and to minimize
the risks of each residential and commercial real estate  construction loan. The
Bank  considers  evidence of the financial  stability and reputation of both the
borrower and the  contractor,  the amount of the  borrower's  cash equity in the
project,  independent  evaluation and review of the building costs, local market
conditions,  pre-construction sale and leasing information based upon evaluation
of similar  projects and the borrower's cash flow  projections  upon completion.
The Bank generally requires personal  guaranties of payment by the principals of
any borrowing entity.

                                       12
<PAGE>

      At September 30, 2005, approximately $143.0 million or 14.6% of the Bank's
gross loan portfolio consisted of construction loans on both residential ($128.0
million) and commercial properties ($15.0 million).


                                       13
<PAGE>

Loan Maturity

      The following  table sets forth certain  information at September 30, 2005
regarding the dollar amount of loans  maturing in the Company's  loan  portfolio
based on their contractual terms to maturity  including  scheduled  payments and
potential  prepayments.  Specific  prepayment  speeds  applied  to  loans  are a
function of their underlying coupons, lifetime rate caps and maturities.  Demand
loans (without a stated maturity), loans having no stated schedule of repayments
and no stated maturity and overdrafts are reported as due in one year or less.

                                            More than
                                            One Year
                                 One Year    Through    More than
                                 or Less    Five Years  Five Years    Totals
                                 -------    ----------  ----------    ------
                                              (In thousands)

First mortgage loans            $ 147,475   $ 212,591   $ 125,562   $ 485,628
Land, land development and
   other, primarily
    commercial real estate         80,340     227,824      61,550     369,714
Equity lines of credit              6,812      15,617      11,590      34,019
Consumer loans                      5,671      16,299       3,336      25,306
Commercial loans                   16,402      22,289          --      38,691
                                ---------   ---------   ---------   ---------
        Total loans, gross      $ 256,700   $ 494,620   $ 202,038   $ 953,358
                                =========   =========   =========
Add (Subtract):
   Deferred loan costs, net                                               771
   Allowance for loan losses                                          (11,748)
                                                                    ---------
           Total loans, net                                         $ 942,381
                                                                    =========

      The following  table sets forth the dollar amount of all loans expected to
be repaid one year or later after September 30, 2005,  which have fixed interest
rates and those which have floating or adjustable interest rates.


                                                       Floating or
                                            Fixed      Adjustable
                                            Rates         Rates          Totals
                                            -----         -----          ------
                                                     (In thousands)

First mortgage loans                      $ 71,775       $266,378       $338,153
Land, land development and
    other, primarily
     commercial real estate                 55,619        233,756        289,375
Equity lines of credit                         163         27,044         27,207
Consumer loans                              12,280          7,355         19,635
Commercial loans                             9,922         12,366         22,288
                                          --------       --------       --------
       Total loans                        $149,759       $546,899       $696,658
                                          ========       ========       ========

                                       14
<PAGE>

      Loan Solicitation and Processing. The Bank actively solicits mortgage loan
applications  from the  communities it serves.  Detailed loan  applications  are
obtained to determine  the  borrower's  ability to repay,  and more  significant
items on these applications are verified. After analysis of the loan application
and  property or  collateral  involved,  including an  independent  appraisal of
property,  the Bank's  underwriter  or Credit  Administration  Group reviews the
loan, and the Bank makes a lending  decision.  With respect to commercial loans,
the Bank also reviews the capital  adequacy of the business,  the ability of the
borrower to repay the loan and honor its other  obligations and general economic
and industry  conditions.  Loans are approved  based on size,  requiring  higher
levels of authorization  for larger dollar loan amounts.  A member of the Bank's
Internal Loan Committee must approve all residential  mortgage loan applications
in  excess of 80% of the  lesser of  appraised  value or  purchase  price of the
property, unless the borrowers have private mortgage insurance.

      The Bank's general policy is to obtain customary title and flood insurance
on real estate loans.  Borrowers must also obtain paid hazard insurance policies
prior to closing.  Borrowers on residential  mortgage loans, which exceed 80% of
the value of the security property,  are also generally required to escrow funds
on a monthly basis for real estate taxes, hazard insurance premiums, and private
mortgage insurance premiums.

      Residential Mortgage Loan Originations, Purchases and Sales. The Bank may,
depending on economic conditions,  purchase or sell mortgage loans to manage the
interest  rate  sensitivity  of  interest-earning  assets  and  interest-bearing
liabilities,  to provide additional funding for lending activities, and generate
service  fee  income.  The Bank  retains a portion of the  interest  paid by the
borrower on the loans as consideration for its servicing activities.

      Residential  Loan  Commitments.   The  Bank,  upon  the  submission  of  a
residential loan application,  generally provides a written commitment as to the
interest  rate  applicable  to such loan. If the loan has not been closed within
the rate  lock  period,  the rate may be  adjusted  to  reflect  current  market
conditions at the Bank's  option.  Loans that require  closing time in excess of
the rate  lock  period  from  the  date of  application  are  issued  a  written
commitment,  with a term  ranging  from three to six  months.  The Bank  charges
either a higher  interest rate or a fee to lock in the rate for an extended rate
lock period.  Refer to Note 4 of the Notes to Consolidated  Financial Statements
for more information.

      Delinquencies.  Coastal  Federal's  collection  procedures  provide  for a
series of contacts with delinquent borrowers. If the delinquency continues, more
formal  efforts are made to contact the  delinquent  borrower.  If a residential
mortgage  loan  continues  in a delinquent  status for 90 days or more,  Coastal
Federal generally initiates foreclosure  proceedings.  Coastal Federal generally
initiates  collection  activities  on a commercial  or consumer loan if the loan
continues  in a  delinquent  status  for 30 days or  more.  In  certain  limited
instances,  however,  Coastal  Federal  may  modify  the loan or grant a limited
moratorium on loan  payments to enable the borrower to reorganize  his financial
affairs.

                                       15
<PAGE>

      Problem Assets and Asset  Classification.  Loans are reviewed on a regular
basis and a reserve for  uncollectible  interest is  established  on loans where
collection of interest is questionable, generally when such loans become 90 days
delinquent.   Loan  balances  that  relate  to  interest  amounts  reserved  are
considered to be on a nonaccrual basis.

      The  following  table sets forth  information  with  respect to the Bank's
non-performing assets at the dates indicated.

<TABLE>
<CAPTION>
                                                            At September 30,
                                             ----------------------------------------------
                                              2001      2002      2003      2004      2005
                                              ----      ----      ----      ----      ----
<S>                                          <C>       <C>       <C>       <C>       <C>
                                                        (Dollars in thousands)
Loans accounted for on a nonaccrual basis:
    Real estate -
     Residential                             $1,554    $  785    $3,538    $3,852    $  998
     Commercial                               1,185        18     2,816     1,106     1,048
Commercial business                             322     2,423       793       783       488
Consumer                                        193       288       302       115       107
                                             ------    ------    ------    ------    ------
          Total                               3,254     3,514     7,449     5,856     2,641
                                             ------    ------    ------    ------    ------

Accruing loans which are
  contractually past due
  90 days or more:
    Real estate -
      Residential                                --        --        --        --        --
      Commercial                                 --        --        --        --        --
    Commercial business                          --        --        --        --        --
    Consumer                                     --        --        --        --        --
                                             ------    ------    ------    ------    ------
            Total                                --        --        --        --        --
                                             ------    ------    ------    ------    ------

Restructured loans                            1,693       970       369       731       771
Real estate owned, net                        2,363     1,046     1,627       785       818
Other nonperforming assets                       --        --        --        --        --
                                             ------    ------    ------    ------    ------
Total nonperforming assets                   $7,310    $5,530    $9,445    $7,372    $4,230
                                             ======    ======    ======    ======    ======
Total nonaccrual loans to
  net loans                                    0.64%     0.63%     1.06%     0.73%     0.28%
Total nonaccrual loans to
  total assets                                 0.43%     0.37%     0.63%     0.45%     0.17%
Total nonperforming assets
  to total assets                              0.96%     0.58%     0.80%     0.56%     0.27%

Total nonperforming
assets, excluding restructured
loans which are generally
performing under the restructured
terms, to total assets                         0.74%     0.48%     0.77%     0.51%     0.22%

</TABLE>

                                       16
<PAGE>

      Please refer to Note 4 of the Notes to Consolidated  Financial  Statements
for additional information on impaired loans and reserved accrued interest.

      The allowance for  uncollectible  interest which is netted against accrued
interest receivable totaled $605,000 and $528,000 at September 30, 2004 and 2005
respectively.

      OTS regulations  require that each insured institution review and classify
its assets on a regular basis. In addition,  in connection with  examinations of
insured  institutions,  OTS examiners have authority to identify  problem assets
and,  if   appropriate,   require  them  to  be   classified.   There  are  four
classifications for problem assets: special mention,  substandard,  doubtful and
loss.  Assets  categorized as special mention have potential credit weakness and
require close management attention,  but are not yet classified further.  Assets
classified  as  substandard  or doubtful  have well defined  weaknesses  and the
institution  may sustain some loss if the weaknesses  are not  corrected.  If an
asset or portion thereof is classified loss, the insured institution must either
establish  specific  allowances  for loan  losses  in the  amount of 100% of the
portion of the asset  classified  loss or charge off such  amount.  A portion of
general loss  allowances  established to cover possible losses related to assets
classified   substandard   or  doubtful  may  be  included  in   determining  an
institution's  regulatory capital,  while specific valuation allowances for loan
losses generally do not qualify as regulatory capital.

      Coastal Federal had two individually  classified  assets in excess of $1.5
million as of September 30, 2005. At that date,  classified  assets  amounted to
$18.7 million ($9.4 million  substandard;  $345,000  doubtful;  and $9.0 million
special  mention).  Substandard  assets consist  primarily of fifteen loans with
aggregate  balances of  approximately  $7.6 million at September  30, 2005.  The
largest  amount to any one borrower was $2.5  million.  Special  mention  assets
consist primarily of twenty-seven loans with aggregate balances of approximately
$7.9 million at September 30, 2005.

      Allowance for Loan Losses.  The adequacy of the allowance is analyzed on a
quarterly basis.  For purposes of this analysis,  adequacy is defined as a level
of reserves sufficient to absorb probable losses inherent in the loan portfolio.
The  methodology  employed  for this  analysis  considers  historical  loan loss
experience,  the results of loan reviews, current economic conditions, and other
qualitative  and  quantitative  factors that warrant  current  consideration  in
determining an adequate allowance.

      The evaluation of the allowance is segregated into general allocations and
specific allocations.  For general allocations, the portfolio is segregated into
risk-similar  segments  for which  historical  loss  ratios are  calculated  and
adjusted for identified trends or changes in current portfolio  characteristics.
Historical  loss  ratios are  calculated  by  product  type for  consumer  loans
(installment and revolving),  mortgage loans, and commercial loans. 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.

                                       17
<PAGE>

      Certain nonperforming loans are individually assessed for impairment under
SFAS 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 are 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
or conditions may include  evaluation of current  general  economic and business
conditions; geographic, collateral, or other concentrations; system, procedural,
policy,  or underwriting  changes;  experience of lending staff;  entry into new
markets or new  product  offerings;  and  results  from  internal  and  external
portfolio examinations.

      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.

      Assessing  the  adequacy  of the  allowance  is a  process  that  requires
considerable judgment.  Management's  methodology and judgments are based on the
information  currently available and includes numerous assumptions about current
events, which are believed to be reasonable,  but which may or may not be valid.
Thus,  there can be no  assurance  that loan losses in future  periods  will not
exceed the current  allowance  amount or that future  increases in the allowance
will not be  required.  No  assurance  can be given  that  management's  ongoing
evaluation of the loan  portfolio in light of changing  economic  conditions and
other relevant  circumstances  will not require  significant future additions to
the allowance,  thus adversely  affecting the operating  results of the Company.
Management  believes  that the current level of the allowance for loan losses is
presently  adequate  considering  the  composition  of the loan  portfolio,  the
portfolio's  loss  experience,  delinquency  trends,  current regional and local
economic conditions and other factors.

      The  allowance is also  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. In addition,  such regulatory  agencies
could require management to adjust the allowance based on information  available
to them at the time of their examination.

      See  Note  4  of  the  Notes  to  Consolidated  Financial  Statements  and
"Management's  Discussion  and  Analysis  -  Non-performing  Assets" in the 2005
Annual Report to Stockholders attached hereto and incorporated by reference.

                                       18
<PAGE>

Loan Loss Allowance Analysis

      The following  table sets forth  analysis of the  Company's  allowance for
loan losses for the periods  indicated.  Where  specific loan loss reserves have
been established,  any difference between the loss reserve and the amount of the
loss  realized  has been  charged or  credited to the loan loss  allowance  as a
charge-off or recovery.

                                             Year Ended September 30,
                                ------------------------------------------------
                                  2001      2002     2003       2004      2005
                                  ----      ----     ----       ----      ----
                                              (Dollars in thousands)

Allowance at beginning of
  period                        $ 7,064   $ 7,159   $ 7,883   $ 9,832   $11,077
Provision for loan losses           955     1,235     2,655     1,750     1,697
                                -------   -------   -------   -------   -------
Recoveries:
   Residential loans                  3         4        --        --        --
   Commercial loans                  --        --        92       200       108
   Construction loans                --        --        --        --        --
   Consumer loans                    57        62        44        49       116
                                -------   -------   -------   -------   -------
     Total recoveries                60        66       136       249       224
                                -------   -------   -------   -------   -------

Charge-offs:
   Residential loans                167        --        46        --        27
   Commercial loans                 226        90       388       268       781
   Construction loans                --        --        --        --        --
   Consumer loans                   527       487       408       486       442
                                -------   -------   -------   -------   -------
     Total charge-offs              920       577       842       754     1,250
                                -------   -------   -------   -------   -------
     Net charge-offs                860       511       706       505     1,026
                                -------   -------   -------   -------   -------
Allowance at end of period      $ 7,159   $ 7,883   $ 9,832   $11,077   $11,748
                                =======   =======   =======   =======   =======

Ratio of allowance to net
  loans outstanding at the
  end of the period                1.42%     1.42%     1.40%     1.39%     1.25%

Ratio of net charge-offs
  to average loans outstanding
  during the period                0.17%     0.10%     0.11%     0.07%     0.12%

                                       19
<PAGE>

Loan Loss Allowance by Category

      The  following  table sets forth the  breakdown of the  allowance for loan
losses by loan category for the periods indicated.

<TABLE>
<CAPTION>
                                                        September 30,
                      -----------------------------------------------------------------------------------
                               2001                          2002                       2003
                      --------------------------- --------------------------- ---------------------------
                              As a %    Loan Type         As a %    Loan Type         As a %    Loan Type
                              of out-   As a %            of out-   As a %            of out-   As a %
                              standing  of out-           standing  of out-           standing  of out-
                              loans in  standing          loans in  standing          loans in  standing
                      Amount  category  loans     Amount  category  loans     Amount  category  loans
                      ------  --------  -----     ------  --------  -----     ------  --------  -----
                                                   (Dollars in thousands)
<S>                   <C>      <C>      <C>       <C>      <C>      <C>       <C>      <C>      <C>
Residential           $2,148   0.65%    65.55%    $2,272   0.72%    57.08%    $1,992   0.61%    55.61%
Commercial             4,893   3.13     30.92      5,273   2.39     39.69      7,229   2.51     41.06
Consumer                 118   0.66      3.53        338   1.88      3.23        611   2.62      3.33
                      ------           ------     ------           ------     ------           ------
Total allowance for
  loan losses         $7,159   1.42%   100.00%    $7,883   1.42%   100.00%    $9,832   1.40%   100.00%
                      ======           ======     ======           ======     ======           ======

<CAPTION>

                                                September 30,
                       ------------------------------------------------------------
                                   2004                          2005
                       ------------------------------ -----------------------------
                                As a %      Loan Type          As a %     Loan Type
                                of out-     As a %             of out-    As a %
                                standing    of out-            standing   of out-
                                loans in    standing           loans in   standing
                       Amount   category    loans     Amount   category   loans
                       ------   --------    -----     ------   --------   -----
<S>                    <C>        <C>       <C>       <C>        <C>       <C>
                                          (Dollars in thousands)
Residential            $ 1,007    0.23%     53.78%    $   980    0.19%     53.91%
Commercial               9,222    2.68      43.13       9,794    2.39      43.40
Consumer                   848    3.43       3.09         974    3.85       2.69
                       -------    ----     ------     -------    ----     ------
Total allowance for
  loan losses          $11,077    1.39%    100.00%    $11,748    1.25%    100.00%
                       =======    ====     ======     =======    ====     ======
</TABLE>

                                       20
<PAGE>

Investment Activities

      Under OTS  regulations,  the Bank has authority to invest in various types
of liquid assets,  including U.S.  Treasury  obligations,  securities of various
federal agencies and of state and municipal governments, deposits at the FHLB of
Atlanta,  certificates  of deposit of federally  insured  institutions,  certain
bankers'  acceptances and federal funds. Subject to various  restrictions,  such
regulated  institutions  may also invest a portion of their assets in commercial
paper,  corporate debt securities and mutual funds,  the assets of which conform
to the investments that OTS-chartered  institutions are otherwise  authorized to
make directly.  These  institutions are also required to maintain minimum levels
of liquid assets which vary from time to time. See "Regulation and Supervision -
Federal Home Loan Bank  System."  The Bank may decide to increase its  liquidity
above  the  required  levels  depending  upon  the  availability  of  funds  and
comparative yields on investments in relation to return on loans.

      Coastal  Federal is  required  under  federal  regulations  to  maintain a
minimum  amount of liquid  assets and is also  permitted to make  certain  other
securities   investments.   See   "Regulation   and   Supervision"   herein  and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Liquidity and Capital Resources" in the Annual Report.

      Investment  decisions  are made in  accordance  with the  Bank's  approved
Investment  Policy  by the  Investment  Officer  who  reports  quarterly  to the
Asset/Liability  Management  Committee  ("ALCO  Committee").  The ALCO Committee
meets quarterly and consists of Directors Benton,  Bishop,  Calliham,  Clemmons,
Creel,  Dusenbury,  Gerald and Thompson,  and Executive Vice Presidents Douglas,
Graham,  Rexroad,  Sherry and Stalvey and Senior Vice  Presidents  Benjamin  and
Gehman  and Vice  President  Loehr.  The ALCO  Committee  acts  within  policies
established  by the  Board of  Directors.  At  September  30,  2005  the  Bank's
investment  portfolio had a market value of  approximately  $435.3 million.  The
investment   securities   portfolio   consisted   primarily  of  mortgage-backed
securities.  For further information concerning the Bank's securities portfolio,
see Notes 2 and 3 of the Notes to  Consolidated  Financial  Statements  attached
hereto and incorporated by reference.

                                       21
<PAGE>

Service Corporation Activities

      The Company has four wholly  owned  subsidiaries,  Coastal  Federal  Bank,
Coastal  Financial  Capital  Trust I (see Note 11 of the  Notes to  Consolidated
Financial  Statements),   Coastal  Planners  Holding  Corporation,  and  Coastal
Investor Services, Inc (inactive).

      Coastal Federal Bank has two wholly-owned  subsidiaries:  Coastal Mortgage
Bankers  and  Realty  Co.,  Inc.   ("Coastal  Mortgage   Bankers"),   which  was
incorporated  in 1970  under the laws of South  Carolina,  and  Coastal  Federal
Holding Corporation  ("CHFC"),  which was incorporated in 1998 under the laws of
Delaware.  As of September 30, 2005 Coastal  Mortgage Bankers has one first tier
subsidiary,   Sherwood  Development  Corporation,  which  is  inactive.  Coastal
Mortgage Bankers is not active in any real estate operations.

      On February 20, 1998, Coastal Real Estate Investment Corporation ("CREIC")
was incorporated in North Carolina. CREIC is a wholly owned operating subsidiary
of CFHC and is a real estate  investment  trust  ("REIT").  CREIC engages in the
investment in, and management of, real estate related assets, primarily mortgage
loans.  CFHC  engages  in the  management  of its  investment  in CREIC  and the
management of the related dividends received on that investment. On September 1,
1998, CREIC was capitalized with approximately  $131.8 million of mortgage loans
from  Coastal  Federal.  On  December  10,  1998,  CREIC  became a wholly  owned
subsidiary  of CFHC through an exchange of stock  transaction.  In January 2003,
2004 and 2005, CREIC received capital  contributions  from CFHC of $50.0 million
each year to purchase loans.

      Coastal  Federal Capital Trust I was formed as a statutory trust under the
laws of the state of Delaware,  for the purpose of issuing capital securities to
institutional  investors in a trust  preferred  issue.  During fiscal 2004,  the
Company deconsolidated the Trust for financial reporting purposes as a result of
Financial  Accounting  Standards Board  Interpretation  No. 46 "Consolidation of
Variable  Interest  Entities".  Refer to Note 11 of the  Notes  to  Consolidated
Financial Statements for further information.

      Coastal   Planners  Holding   Corporation  has  one  subsidiary,   Coastal
Retirement,  Estate and Tax Planners,  Inc.,  which was formed during the fourth
fiscal quarter of 2003 and offers objective,  fee-based  financial  planning and
tax preparation services.

Deposit Activities and Other Sources of Funds

      General.  Deposits  and loan  repayments  are the major  source of Coastal
Federal's funds for lending and other investment purposes. Loan repayments are a
relatively  stable source of funds,  while deposit inflows and outflows and loan
prepayments  are  significantly  influenced by general  interest rates and money
market  conditions.  Borrowings  may be used to compensate for reductions in the

                                       22
<PAGE>

availability  of funds from  other  sources.  They may also be used for  general
business purposes.

      Deposit  Accounts.  Deposits are attracted from within  Coastal  Federal's
primary  market  area  through  the  offering  of a broad  selection  of deposit
instruments,   including  checking  accounts,  money  market  accounts,  savings
accounts, certificates of deposit and retirement accounts. Deposit account terms
vary, according to the minimum balance required, the time periods the funds must
remain on deposit and the interest rate, among other factors. In determining the
terms of its deposit  accounts,  Coastal Federal  considers the rates offered by
its competition,  profitability  to Coastal  Federal,  matching deposit and loan
products and its customer  preferences and concerns.  Coastal Federal  generally
reviews its deposit mix and pricing at least monthly.


Time Deposits with balances of $100,000 or More

      The following  table sets forth the amount and maturities of time deposits
with balances of $100,000 or more at September 30, 2005.

                                   Amount Due
--------------------------------------------------------------------------------
     Up to          Over 3              Over 6           Over 12
    3 Months    through 6 months   through 12 months      Months         Total
--------------------------------------------------------------------------------
                                 (In thousands)

    $86,356        $127,388             $58,175           $20,241       $292,160
    =======        ========             =======           =======       ========

                                       23
<PAGE>

Deposit Flow

    The following table sets forth the balances of deposits in the various types
of deposit accounts offered by the Bank at the dates indicated.

<TABLE>
<CAPTION>
                                                                    At September 30,
                              ------------------------------------------------------------------------------------------------
                                         2003                            2004                               2005
                              -----------------------------  ------------------------------  ---------------------------------
                                       Percent    Increase             Percent    Increase                Percent    Increase
                               Amount  of Total  (Decrease)   Amount   of Total  (Decrease)    Amount     of Total  (Decrease)
                               ------  --------  ----------   ------   --------  ----------    ------     --------  ----------
<S>                           <C>        <C>     <C>         <C>        <C>      <C>         <C>            <C>     <C>
                                                                 (Dollars in thousands)
Transaction accounts:
   NOW checking               $ 98,171   14.08%  $  30,790   $110,802   14.71%   $  12,631   $   139,810    13.05%  $  29,008
   Noninterest-bearing
    checking                    86,258   12.38      23,255    122,357   16.24       36,099       219,080    20.45      96,723
                              --------  ------   ---------   --------  ------    ---------   -----------   ------   ---------

Total transaction accounts     184,429   26.46      54,045    233,159   30.95       48,730       358,890    33.50     125,731
                              --------  ------   ---------   --------  ------    ---------   -----------   ------   ---------

Money market demand accounts   206,010   29.56      (6,914)   224,437   29.79       18,427       213,078    19.89     (11,359)
Statement savings accounts      46,236    6.63       7,144     55,205    7.33        8,969        71,824     6.71      16,619
Fixed-rate certificates
  (original maturity):
   3 months                      3,477    0.50      (1,491)     3,865     .51          388         2,775     0.26      (1,090)
   6 months                     82,349   11.81      (7,828)    33,052    4.39      (49,297)       93,805     8.76      60,753
   9 months                      6,702     .96     (10,911)    51,159    6.79       44,457        17,204     1.61     (33,955)
   12 months                    57,777    8.29         571     57,696    7.66          (81)       56,980     5.32        (716)
   18 months                    46,044    6.61      15,050     37,978    5.04       (8,066)      215,767    20.15     177,789
   24 months                    36,313    5.21       8,374     28,264    3.75       (8,049)       21,795     2.04      (6,469)
   30 months                     2,923    0.42        (118)     2,673     .35         (250)        2,684     0.25          11
   36 months                    11,649    1.67          69     11,559    1.53          (90)        4,361     0.41      (7,198)
   48 months                    10,108    1.45       2,172     11,662    1.55        1,554         9,444     0.88      (2,218)
   60 months                        20    0.00           1         --      --          (20)           --       --          --
                              --------  ------   ---------   --------  ------    ---------   -----------   ------   ---------


                               257,362   36.92       5,889    237,908   31.57      (19,454)      424,815    39.68     186,907
                              --------  ------   ---------   --------  ------    ---------   -----------   ------   ---------
Variable rate certificates:
  (original maturity)
   12 months                       130    0.02         (33)       161     .02           31           170     0.02           9
   18 months                     1,311    0.19        (160)     1,115     .15         (196)          936     0.09        (179)
   30 months                     1,534    0.22         (40)     1,394     .19         (140)        1,205     0.11        (189)
                              --------  ------   ---------   --------  ------    ---------   -----------   ------   ---------
Total variable                   2,975    0.43        (233)     2,670     .36         (305)        2,311     0.22        (359)
                              --------  ------   ---------   --------  ------    ---------   -----------   ------   ---------
Total certificates             260,337   37.35       5,656    240,578   31.93      (19,759)      427,126    39.90     186,548
                              --------  ------   ---------   --------  ------    ---------   -----------   ------   ---------

Total deposits                $697,012  100.00%  $  59,931   $753,379  100.00%   $  56,367   $ 1,070,918   100.00%  $ 317,539
                              ========  ======   =========   ========  ======    =========   ===========   ======   =========
</TABLE>

                                       24
<PAGE>

      Borrowings.  Demand and time deposits are the primary  source of funds for
Coastal Federal's lending and investment activities and for its general business
purposes. The Bank has in the past, however,  relied upon advances from the FHLB
of  Atlanta  to  supplement  its supply of  lendable  funds and to meet  deposit
withdrawal  requirements.  The FHLB of  Atlanta  has served as one of the Bank's
primary  borrowing  sources.  Advances  from the FHLB of Atlanta  are  typically
secured  by  the  Bank's  first   mortgage  loans  and  certain  of  the  Bank's
mortgage-backed securities portfolio. At September 30, 2005, Coastal Federal had
advances  totaling $ 289.0 million from the FHLB of Atlanta due on various dates
through 2018 with a weighted  average  interest rate of 3.93%.  Certain of these
advances are subject to call  provisions.  Call provisions are more likely to be
exercised by the FHLB when rates rise.  See Note 9 of the Notes to  Consolidated
Financial  Statements  of the 2005  Annual  Report to  Stockholders  for further
information on the call provisions of various FHLB advances.

      The FHLB of Atlanta  functions as a central reserve bank providing  credit
for financial institutions and certain other member financial institutions. As a
member,  Coastal Federal is required to own capital stock in the FHLB of Atlanta
and is  authorized  to apply for  advances  on the  security  of such  stock and
certain of its mortgage loans,  certain  commercial real estate loans, and other
assets  (principally  securities which are obligations of, or guaranteed by, the
United States) provided certain standards related to creditworthiness  have been
met.  The FHLB of Atlanta  determines  specific  lines of credit for each member
institution.

      In addition to the borrowing  described  above,  the Bank may borrow funds
under  reverse  repurchase  agreements  pursuant  to which  it sells  securities
(generally  secured by government  securities  and  mortgage-backed  securities)
under an agreement to buy them back at a specified price at a later date.  These
agreements  to  repurchase  are deemed to be  borrowings  collateralized  by the
securities  sold. At September 30, 2005,  the Company had  repurchase  agreement
lines of credit and available collateral consisting of investment securities and
mortgage-backed  securities of $178.3  million,  as well as a federal funds line
available of $20.0 million.

      The  Company  had  $15.5   million  of  junior   subordinated   debentures
outstanding  on September 30, 2005. For more  information  on these  debentures,
please see Note 11 of the Notes to Consolidated Financial Statements in the 2005
Annual Report to Stockholders attached hereto and incorporated by reference.

                                       25
<PAGE>

The  following  tables  set  forth  certain  information   regarding  short-term
borrowings by the Bank at the end of and during the periods indicated:

                                                        At September 30,
                                               --------------------------------
                                                  2003       2004         2005
                                               --------------------------------
                                                      (Dollars in thousands)
Outstanding balance:
   Securities sold under agreements
     to repurchase:
     Customer                                  $  7,703    $ 12,931    $ 31,937
     Broker                                     125,899      94,242      10,000
   Short-term FHLB advances (1)                  91,435     147,500      88,177

Weighted average rate(at month end)paid on:
   Securities sold under agreements
     to repurchase:
     Customer                                      0.81%       1.42%       2.82%
     Broker                                        1.64        1.74        2.39
     Short-term FHLB advances (1)                  3.81        4.15        3.94

Maximum amount of borrowings outstanding
   At any month end:
   Securities sold under agreements
     to repurchase:
     Customer                                  $  7,703    $ 12,931    $ 39,317
     Broker                                     125,899     184,129     109,958
   Short-term FHLB advances (1)                 121,582     159,735     216,200

Approximate average short-term borrowings
   outstanding with respect to:
   Securities sold under agreements
     to repurchase:
     Customer                                  $  4,812    $  9,033    $ 27,498
     Broker                                      92,476     134,809      73,723
   Short-term FHLB advances (1)                  86,191     103,360     146,150

Weighted average rate (year to date)paid on:
   Securities sold under agreements
     to repurchase:
     Customer                                      1.02%       1.01%       2.43%
     Broker                                        2.04        1.50        2.37
   Short-term FHLB advances (1)                    3.81        4.15        3.94

(1)   Short-term  FHLB advances  include  various  advances which are subject to
      call by FHLB within one year.

                                       26
<PAGE>

Competition

      As of June 30,  2005 the most  recent  date for  which  published  data is
available, Coastal Federal held the largest share of deposits, a 17.9% share, in
Horry  County,  S.C.  according to the Federal  Deposit  Insurance  Corporation.
Coastal  Federal  also  held the  third  highest  market  share of  deposits  in
Brunswick County,  N.C. with an 8.1% share. The Bank faces strong competition in
the  attraction  of deposits (its primary  source of lendable  funds) and in the
origination  of loans.  Its most direct  competition  for deposits and loans has
historically  come from other  financial  institutions  located  in its  primary
market area.  The Bank  estimates  that there are 96 offices of other  financial
institutions in Horry County,  and 31 offices in Brunswick County.  Particularly
in times of high  interest  rates,  the Bank has  faced  additional  significant
competition  for investors'  funds from short-term  money market  securities and
other  corporate and government  securities.  The Bank's  competition  for loans
comes principally from other financial institutions,  mortgage banking companies
and mortgage brokers.

Personnel

      As of September 30, 2005 the Company had 435 full-time  Associates  and 51
part-time  Associates.  The  Associates  are  not  represented  by a  collective
bargaining  unit.  The Bank  believes its  relationship  with its  Associates is
excellent.

                           REGULATION AND SUPERVISION

General

      As a savings and loan holding company,  the Company is required by federal
law to file reports with, and otherwise  comply with, the rules and  regulations
of  the  Office  of  Thrift  Supervision.  The  Bank  is  subject  to  extensive
regulation,  examination and supervision by the Office of Thrift Supervision, as
its primary federal regulator, and the Federal Deposit Insurance Corporation, as
the deposit  insurer.  The Bank is a member of the Federal Home Loan Bank System
and, with respect to deposit  insurance,  of the Savings  Association  Insurance
Fund managed by the Federal Deposit  Insurance  Corporation.  The Bank must file
reports with the Office of Thrift  Supervision and the Federal Deposit Insurance
Corporation  concerning its  activities  and financial  condition in addition to
obtaining  regulatory approvals prior to entering into certain transactions such
as mergers with, or acquisitions of, other financial institutions. The Office of
Thrift  Supervision  and/or the Federal Deposit  Insurance  Corporation  conduct
periodic  examinations  to test the Bank's safety and  soundness and  compliance
with  various   regulatory   requirements.   This   regulation  and  supervision
establishes a

                                       27
<PAGE>

comprehensive  framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors.  The
regulatory structure also gives the regulatory  authorities extensive discretion
in connection with their supervisory and enforcement  activities and examination
policies,  including  policies with respect to the  classification of assets and
the  establishment of adequate loan loss reserves for regulatory  purposes.  Any
change in such regulatory  requirements  and policies,  whether by the Office of
Thrift Supervision,  the Federal Deposit Insurance  Corporation or the Congress,
could  have a  material  adverse  impact  on the  Company,  the Bank  and  their
operations. Certain of the regulatory requirements applicable to the Bank and to
the Company are  referred  to below or  elsewhere  herein.  The  description  of
statutory  provisions and regulations  applicable to OTS regulated  institutions
and their holding companies set forth in this Form 10-K does not purport to be a
complete  description of such statutes and  regulations and their effects on the
Bank and the Company.

Holding Company Regulation

      The Company is a  nondiversified  unitary savings and loan holding company
within the meaning of federal law.  Under prior law, a unitary  savings and loan
holding  company,  such as the Company,  was not generally  restricted as to the
types of  business  activities  in which it may engage,  provided  that the Bank
continued to be a qualified  thrift  lender.  See "Federal  Savings  Institution
Regulation  - QTL Test." The  Gramm-Leach-Bliley  Act of 1999  provides  that no
company may acquire  control of an OTS regulated  institution  after May 4, 1999
unless it engages  only in the  financial  activities  permitted  for  financial
holding  companies  under  the law or for  multiple  savings  and  loan  holding
companies as described below. Further, the Gramm-Leach-Bliley Act specifies that
existing savings and loan holding  companies may only engage in such activities.
The  Gramm-Leach-Bliley  Act, however,  grandfathered the unrestricted authority
for  activities  with  respect to unitary  savings  and loan  holding  companies
existing  prior to May 4, 1999, so long as the Bank continues to comply with the
QTL  Test.   The  Company  does  qualify  for  the   grandfathering.   Upon  any
non-supervisory  acquisition  by the Company of another  savings  institution or
savings bank that meets the  qualified  thrift lender test and is deemed to be a
savings  institution  by the Office of Thrift  Supervision,  the  Company  would
become a multiple savings and loan holding company (if the acquired  institution
is held as a separate  subsidiary)  and would generally be limited to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, subject to the prior approval of the Office of Thrift  Supervision,
and certain activities authorized by Office of Thrift Supervision regulation.

      A savings  and loan  holding  company  is  prohibited  from,  directly  or
indirectly,  acquiring  more than 5% of the voting  stock of  another  financial
institution or savings and loan holding company,  without prior written approval
of the Office of Thrift Supervision and from acquiring or retaining control of a
depository  institution  that is not  insured by the Federal  Deposit  Insurance
Corporation. In evaluating applications

                                       28
<PAGE>

by holding  companies  to  acquire  savings  institutions,  the Office of Thrift
Supervision   considers  the  financial  and  managerial  resources  and  future
prospects of the Company and institution involved, the effect of the acquisition
on the risk to the deposit  insurance  funds,  the  convenience and needs of the
community and competitive factors.

      The Office of Thrift  Supervision  may not  approve any  acquisition  that
would result in a multiple savings and loan holding company  controlling savings
institutions in more than one state, subject to two exceptions: (i) the approval
of interstate supervisory acquisitions by savings and loan holding companies and
(ii) the  acquisition  of a savings  institution in another state if the laws of
the  state  of  the  target  savings   institution   specifically   permit  such
acquisitions.  The states  vary in the extent to which  they  permit  interstate
savings and loan holding company acquisitions.

      Although savings and loan holding  companies are not currently  subject to
specific  capital  requirements  or  specific  restrictions  on the  payment  of
dividends or other capital distributions,  federal regulations do prescribe such
restrictions on subsidiary  savings  institutions as described  below.  The Bank
must  notify the  Office of Thrift  Supervision  30 days  before  declaring  any
dividend to the Company. In addition,  the financial impact of a holding company
on its  subsidiary  institution  is a matter that is  evaluated by the Office of
Thrift Supervision and the agency has authority to order cessation of activities
or  divestiture  of  subsidiaries  deemed  to pose a threat  to the  safety  and
soundness of the institution.

      Acquisition  of the Company.  Under the Federal Change in Bank Control Act
("CIBCA"), a notice must be submitted to the Office of Thrift Supervision if any
person (including a company),  or group acting in concert,  seeks to acquire 10%
or more of the Company's  outstanding voting stock,  unless the Office of Thrift
Supervision  has  found  that the  acquisition  will not  result  in a change of
control of the Company. Under the CIBCA, the Office of Thrift Supervision has 60
days from the  filing of a complete  notice to act,  taking  into  consideration
certain  factors,  including  the  financial  and  managerial  resources  of the
acquirer  and the  anti-trust  effects of the  acquisition.  Any company that so
acquires  control  would  then be subject to  regulation  as a savings  and loan
holding company.

Sarbanes-Oxley Act of 2002

      The  Sarbanes-Oxley  Act of 2002, which  implemented  legislative  reforms
intended to address  corporate  and  accounting  fraud,  restricts  the scope of
services that may be provided by accounting  firms to their public company audit
clients and any  non-audit  services  being  provided to a public  company audit
client will require  preapproval by the company's audit committee.  In addition,
the  Sarbanes-Oxley  Act requires chief  executive  officers and chief financial
officers,  or their  equivalent,  to certify to the accuracy of periodic reports

                                       29
<PAGE>

filed with the Securities and Exchange Commission, subject to civil and criminal
penalties if they knowingly or willingly violate this certification requirement.

      Under the  Sarbanes-Oxley  Act,  bonuses issued to top  executives  before
restatement of a company's financial  statements are now subject to disgorgement
if such  restatement  was  due to  corporate  misconduct.  Executives  are  also
prohibited from insider trading during retirement plan "blackout"  periods,  and
loans  to  company  executives  (other  than  loans  by  financial  institutions
permitted by federal rules and  regulations)  are  restricted.  The  legislation
accelerates  the time frame for  disclosures by public  companies and changes in
ownership in a company's securities by directors and executive officers.

      The  Sarbanes-Oxley  Act also  increases  the  oversight  of, and codifies
certain  requirements  relating to audit  committees of public companies and how
they interact  with the company's  "registered  public  accounting  firm." Among
other  requirements,  companies must disclose whether at least one member of the
committee is a "financial expert" (as such term is defined by the Securities and
Exchange Commission) and if not, why not.

      Although the Company has incurred additional expense in complying with the
provisions of the Sarbanes-Oxley Act and the resulting  regulations,  management
does not  believe  that such  compliance  had a  material  impact on  results of
operations or financial condition.

Federal Savings Institution Regulation

      Business Activities.  Federal law and regulations govern the activities of
federal  savings  banks.  These laws and  regulations  delineate  the nature and
extent  of the  activities  in  which  federal  savings  banks  may  engage.  In
particular,   certain  lending  authority  for  federal  savings  banks,   e.g.,
commercial,  non-residential  real property loans and consumer loans, is limited
to a specified percentage of the institution's capital or assets.

      Capital Requirements. The Office of Thrift Supervision capital regulations
require their regulated  institutions to meet three minimum capital standards: a
1.5% tangible capital ratio, a 4% leverage ratio (3% for institutions  receiving
the highest rating on the CAMELS examination rating system) and an 8% risk-based
capital ratio. In addition,  the prompt  corrective  action standards  discussed
below also establish,  in effect, a minimum 2% tangible capital  standard,  a 4%
leverage ratio (3% for  institutions  receiving the highest rating on the CAMELS
system),  and, together with the risk-based capital standard itself, a 4% Tier 1
risk-based capital standard.  The Office of Thrift Supervision  regulations also
require  that,  in  meeting  the  tangible,

                                       30
<PAGE>

leverage and risk-based  capital  standards,  institutions must generally deduct
investments in and loans to subsidiaries engaged in activities as principal that
are not permissible for a national bank.

      The  risk-based  capital  standard for savings  institutions  requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and  supplementary  capital)  to  risk-weighted  assets  of at  least 4% and 8%,
respectively.  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%,  assigned  by the  Office of  Thrift  Supervision  capital
regulation based on the risks believed inherent in the type of asset. Core (Tier
1)  capital  is  defined  as common  stockholders'  equity  (including  retained
earnings),  certain noncumulative perpetual preferred stock and related surplus,
and minority  interests in equity  accounts of  consolidated  subsidiaries  less
intangibles  other than  certain  mortgage  servicing  rights  and  credit  card
relationships.   The  components  of  supplementary  capital  currently  include
cumulative  preferred stock,  long-term  perpetual  preferred  stock,  mandatory
convertible securities,  subordinated debt and intermediate preferred stock, the
allowance  for  loan  and  lease  losses  limited  to  a  maximum  of  1.25%  of
risk-weighted  assets and up to 45% of  unrealized  gains on  available-for-sale
equity  securities with readily  determinable fair market values.  Overall,  the
amount of supplementary  capital included as part of total capital cannot exceed
100% of core capital.

      The OTS has authority to establish  higher capital  requirements  where it
determines that the  circumstances  of a particular  institution  require it. At
September 30, 2005 the Bank met each of its capital requirements. See Note 14 of
the Notes to Consolidated Financial Statements for further information.

      Prompt Corrective  Regulatory  Action. The Office of Thrift Supervision is
required  to  take  certain   supervisory   actions   against   undercapitalized
institutions,  the severity of which  depends upon the  institution's  degree of
undercapitalization. Generally, an institution that has a ratio of total capital
to risk  weighted  assets of less than 8%, a ratio of Tier 1 (core)  capital  to
risk-weighted  assets of less than 4% or a ratio of core capital to total assets
of less  than 4% (3% or less  for  institutions  with  the  highest  examination
rating) is considered to be  "undercapitalized." An institution that has a total
risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or
a  leverage  ratio  that is  less  than 3% is  considered  to be  "significantly
undercapitalized" and an institution that has a tangible capital to assets ratio
equal to or less than 2% is deemed to be "critically  undercapitalized." Subject
to a narrow exception, the Office of Thrift Supervision is required to appoint a
receiver   or   conservator    for   an   institution    that   is   "critically
undercapitalized."  The regulation also provides that a capital restoration plan
must be filed with the Office of Thrift  Supervision  within 45 days of the date
an institution  receives  notice that it is  "undercapitalized,"  "significantly
undercapitalized"  or "critically  undercapitalized."  Compliance  with the plan
must be guaranteed by any parent holding

                                       31
<PAGE>

company. In addition,  numerous mandatory supervisory actions become immediately
applicable to an undercapitalized  institution,  including,  but not limited to,
increased   monitoring  by  regulators  and  restrictions  on  growth,   capital
distributions  and expansion.  The Office of Thrift  Supervision could also take
any one of a number of discretionary supervisory actions, including the issuance
of a capital  directive and the  replacement  of senior  executive  officers and
directors.

      Insurance  of  Deposit  Accounts.  The  Bank is a  member  of the  Savings
Association  Insurance Fund. The Federal Deposit Insurance Corporation maintains
a  risk-based  assessment  system by which  institutions  are assigned to one of
three categories based on their  capitalization  and one of three  subcategories
based on examination ratings and other supervisory information. An institution's
assessment rate depends upon the categories to which it is assigned.  Assessment
rates for Savings Association  Insurance Fund member institutions are determined
semi-annually by the Federal Deposit  Insurance  Corporation and currently range
from zero basis  points for the  healthiest  institutions  to 27 basis points of
assessable deposits for the riskiest.

      The  Federal  Deposit  Insurance  Corporation  has  authority  to increase
insurance  assessments.  A significant increase in Savings Association Insurance
Fund  insurance  premiums  would likely have an adverse  effect on the operating
expenses and results of operations of the Bank.  Management  cannot predict what
insurance assessment rates will be in the future.

      Insurance of deposits may be terminated by the Federal  Deposit  Insurance
Corporation upon a finding that the institution has engaged in unsafe or unsound
practices,  is in an unsafe or unsound  condition to continue  operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
Federal Deposit Insurance  Corporation or the Office of Thrift Supervision.  The
management  of the Bank does not know of any  practice,  condition  or violation
that might lead to termination of deposit insurance.

      Loans  to  One   Borrower.   Federal  law  provides   that  OTS  regulated
institutions  are  generally  subject  to the  limits  on loans to one  borrower
applicable to national banks.  Such an institution may not make a loan or extend
credit  to a single  or  related  group of  borrowers  in  excess  of 15% of its
unimpaired  capital and surplus.  An additional amount may be lent, equal to 10%
of unimpaired  capital and surplus,  if secured by specified readily  marketable
collateral.  At September 30, 2005 the Bank's limit on loans to one borrower was
$18.4 million, and the Bank's largest aggregate  outstanding balance of loans to
one borrower was $16.0 million.

      QTL Test. The HOLA requires OTS regulated institutions to meet a qualified
thrift lender test.  Under the test,  such an  institution is required to either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or maintain at least 65% of its "portfolio  assets" (total assets less: (i)
specified liquid assets up to

                                       32
<PAGE>

20% of total assets; (ii) intangibles,  including goodwill;  and (iii) the value
of property used to conduct business) in certain "qualified thrift  investments"
(primarily  residential  mortgages and related  investments,  including  certain
mortgage-backed securities) in at least 9 months out of each 12 month period.

      An institution  that fails the qualified  thrift lender test is subject to
certain operating restrictions and may be required to convert to a bank charter.
As of September 30, 2005 the Bank met the qualified  thrift lender test.  Recent
legislation has expanded the extent to which education loans,  credit card loans
and small business loans may be considered "qualified thrift investments."

      Limitation  on  Capital   Distributions.   Office  of  Thrift  Supervision
regulations  impose  limitations  upon all capital  distributions by a regulated
institution,  including  cash  dividends,  payments to repurchase its shares and
payments to stockholders of another institution in a cash-out merger.  Under the
regulations,  an  application  to and the prior approval of the Office of Thrift
Supervision is required  prior to any capital  distribution  if the  institution
does not meet the criteria  for  "expedited  treatment"  of  applications  under
Office of Thrift Supervision regulations (i.e.,  generally,  examination ratings
in the two top  categories),  the total capital  distributions  for the calendar
year exceed net income for that year plus the amount of retained  net income for
the preceding two years, the institution would be undercapitalized following the
distribution  or the  distribution  would  otherwise  be  contrary to a statute,
regulation or agreement with Office of Thrift Supervision.  If an application is
not  required,  the  institution  must still  provide  prior notice to Office of
Thrift  Supervision  of the  capital  distribution  if,  like the Bank,  it is a
subsidiary of a holding company.  In the event the Bank's capital fell below its
regulatory  requirements or the Office of Thrift Supervision notified it that it
was in need of more than normal supervision,  the Bank's ability to make capital
distributions could be restricted. In addition, the Office of Thrift Supervision
could prohibit a proposed capital  distribution by any institution,  which would
otherwise be permitted by the  regulation,  if the Office of Thrift  Supervision
determines  that  such  distribution  would  constitute  an  unsafe  or  unsound
practice.

      Assessments. OTS regulated institutions are required to pay assessments to
the Office of Thrift  Supervision to fund the agency's  operations.  The general
assessments,  paid on a semi-annual  basis, are computed upon the  institution's
total assets,  including  consolidated  subsidiaries,  as reported in the Bank's
latest quarterly thrift financial  report.  The assessments paid by the Bank for
the fiscal year ended September 30, 2005 totaled $252,000.

      Transactions  with  Related  Parties.  The Bank's  authority  to engage in
transactions  with  "affiliates"  (e.g.,  any company that  controls or is under
common  control  with an  institution,  including  the  Company  and its non-OTS
regulated  institution  subsidiaries)  is limited by federal law. The  aggregate
amount of covered  transactions with any individual

                                       33
<PAGE>

affiliate is limited to 10% of the capital and surplus of the  institution.  The
aggregate amount of covered  transactions  with all affiliates is limited to 20%
of the institution's  capital and surplus.  Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
federal  law. The purchase of low quality  assets from  affiliates  is generally
prohibited.  The  transactions  with  affiliates  must  be on  terms  and  under
circumstances  that  are at  least  as  favorable  to the  institution  as those
prevailing  at  the  time  for  comparable   transactions  with   non-affiliated
companies.  In addition,  OTS regulated institutions are prohibited from lending
to any affiliate that is engaged in activities that are not permissible for bank
holding  companies and no such  institution  may purchase the  securities of any
affiliate other than a subsidiary.

      The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is also
governed  by  federal  law.  Such  loans  are  required  to  be  made  on  terms
substantially  the same as those  offered to  unaffiliated  individuals  and not
involve more than the normal risk of repayment.  Recent  legislation  created an
exception for loans made pursuant to a benefit or  compensation  program that is
widely  available  to all  employees  of  the  institution  and  does  not  give
preference to insiders over other employees.  The law limits both the individual
and aggregate  amount of loans the Bank may make to insiders  based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.

      Enforcement.  The Office of Thrift  Supervision  has  primary  enforcement
responsibility over their regulated  institutions and has the authority to bring
actions  against  the  institution  and  all   institution-affiliated   parties,
including  stockholders,  and any  attorneys,  appraisers  and  accountants  who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured  institution.  Formal enforcement action may range from the
issuance  of a capital  directive  or cease and  desist  order,  to  removal  of
officers and/or directors,  to institution of receivership,  conservatorship  or
termination  of  deposit  insurance.  Civil  penalties  cover  a wide  range  of
violations  and can amount to  $25,000  per day,  or even $1 million  per day in
especially  egregious cases. The Federal Deposit  Insurance  Corporation has the
authority to recommend to the Director of the Office of Thrift  Supervision that
enforcement  action  to  be  taken  with  respect  to  a  particular   regulated
institution. If the Director does not take action, the Federal Deposit Insurance
Corporation  has  authority  to take such action  under  certain  circumstances.
Federal law also establishes criminal penalties for certain violations.

      Standards  for Safety and  Soundness.  The federal  banking  agencies have
adopted Interagency  Guidelines  prescribing Standards for Safety and Soundness.
The  guidelines  set forth the safety and soundness  standards  that the federal
banking  agencies  use to identify  and address  problems at insured  depository
institutions   before  capital  becomes  impaired.   If  the  Office  of  Thrift
Supervision  determines that a regulated

                                       34
<PAGE>

institution fails to meet any standard prescribed by the guidelines,  the Office
of Thrift  Supervision  may require the institution to submit an acceptable plan
to achieve compliance with the standard.

Federal Home Loan Bank System

      The Bank is a member of the Federal Home Loan Bank System,  which consists
of 12 regional  Federal Home Loan Banks.  The Federal Home Loan Bank  provides a
central credit facility primarily for member institutions. The Bank, as a member
of the Federal Home Loan Bank, is required to acquire and hold shares of capital
stock in that Federal  Home Loan Bank in an amount at least equal to $500,  1.0%
of the aggregate  principal amount of its unpaid residential  mortgage loans and
similar  obligations  at the  beginning  of each year,  or 1/20 of its  advances
(borrowings) from the Federal Home Loan Bank, whichever is greater. The Bank was
in compliance with this requirement with an investment in Federal Home Loan Bank
stock at September 30, 2005 of $15.8 million.

      The  Federal  Home  Loan  Banks  are  required  to  provide  funds for the
resolution of insolvent  thrifts in the late 1980s and to  contribute  funds for
affordable  housing  programs.  These  requirements  could  reduce the amount of
dividends  that the Federal Home Loan Banks pay to their  members and could also
result in the  Federal  Home Loan Banks  imposing a higher  rate of  interest on
advances to their  members.  If dividends  were  reduced,  or interest on future
Federal Home Loan Bank advances increased,  the Bank's net interest income would
likely also be reduced.  Recent  legislation  has changed the  structure  of the
Federal Home Loan Banks funding  obligations for insolvent thrifts,  revised the
capital  structure  of the  Federal  Home Loan  Banks and  implemented  entirely
voluntary membership for Federal Home Loan Banks.  Management cannot predict the
effect that these  changes may have with  respect to its Federal  Home Loan Bank
membership.

Federal Reserve System

      The Federal Reserve Board regulations  require OTS regulated  institutions
to maintain  non-interest  earning reserves against their  transaction  accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows: a
3% reserve  ratio is assessed on net  transaction  accounts up to and  including
$47.6  million;  a 10% reserve ratio is applied above $47.6  million.  The first
$7.0 million of otherwise  reservable  balances  (subject to  adjustments by the
Federal Reserve Board) are exempted from the reserve  requirements.  The amounts
are adjusted annually. The Bank complies with the foregoing requirements.

Privacy Requirements of the GLBA

      The  Gramm-Leach-Bliley  Act  of  1999  provides  for  sweeping  financial

                                       35
<PAGE>

modernization for commercial banks, savings banks,  securities firms,  insurance
companies,  and other  financial  institutions  operating in the United  States.
Among other provisions,  the  Gramm-Leach-Bliley  Act places  limitations on the
sharing of consumer  financial  information  with  unaffiliated  third  parties.
Specifically,  the  Gramm-Leach-Bliley  Act requires all financial  institutions
offering  financial  products or services to retail  customers  to provide  such
customers  with the  financial  institution's  privacy  policy and provide  such
customers  the  opportunity  to "opt out" of the sharing of  personal  financial
information with unaffiliated third parties.

Anti-Money Laundering

      The Uniting  and  Strengthening  America by  Providing  Appropriate  Tools
Required to Intercept  and Obstruct  Terrorism  Act of 2001  (referred to as the
"USA  PATRIOT  Act")  significantly  expands the  responsibilities  of financial
institutions,  including savings and loan associations, in preventing the use of
the U.S.  financial  system to fund terrorist  activities.  Title III of the USA
PATRIOT  Act  provides  for  a  significant  overhaul  of  the  U.S.  anti-money
laundering regime.  Among other provisions,  it requires financial  institutions
operating in the United States to develop new anti-money  laundering  compliance
programs,  due  diligence  policies  and  controls to ensure the  detection  and
reporting of money laundering. Such required compliance programs are intended to
supplement  existing  compliance  requirements,  also  applicable  to  financial
institutions,  under  the Bank  Secrecy  Act and the  Office of  Foreign  Assets
Control  Regulations.  Management  has  established  policies and  procedures to
ensure compliance with the USA PATRIOT Act's  provisions,  and the impact of the
USA PATRIOT Act on our operations has not been material.

Other Regulations

      Interest and other charges  collected or contracted for by Coastal Federal
are subject to state  usury laws and federal  laws  concerning  interest  rates.
Coastal Federal's loan operations are also subject to federal laws applicable to
credit transactions, such as the:

      a.    Truth-In-Lending  Act,  governing  disclosures  of  credit  terms to
            consumer borrowers;

      b.    Home  Mortgage   Disclosure   Act  of  1975,   requiring   financial
            institutions to provide  information to enable the public and public
            officials to determine whether a financial institution is fulfilling
            its  obligation  to help meet the housing  needs of the community it
            serves;

      c.    Equal Credit  Opportunity  Act,  prohibiting  discrimination  on the
            basis  of  race,  creed or other  prohibited  factors  in  extending
            credit;

      d.    Fair Credit  Reporting Act of 1978,  governing the use and

                                       36
<PAGE>

            provision of information to credit reporting agencies;

      e.    Fair Debt  Collection  Act,  governing the manner in which  consumer
            debts may be collected by collection agencies; and

      f.    rules and regulations of the various federal  agencies  charged with
            the responsibility of implementing such federal laws.

The deposit operations of Coastal Federal also are subject to the:

      g.    Right to  Financial  Privacy Act,  which  imposes a duty to maintain
            confidentiality   of  consumer   financial  records  and  prescribes
            procedures for complying with administrative  subpoenas of financial
            records;

      h.    Electronic   Funds   Transfer  Act  and   Regulation  E  promulgated
            thereunder, which governs automatic deposits to and withdrawals from
            deposit accounts and customers' rights and liabilities  arising from
            the use of automated  teller machines and other  electronic  banking
            services; and

      i.    Check  Clearing for the 21st Century Act (also known as "Check 21"),
            which,  effective October 28, 2004, gives "substitute  checks," such
            as digital  check  images and copies made from that image,  the same
            legal standing as the original paper check.

                                    TAXATION

Federal Taxation

      General.  The Company and the Bank report their income via a  consolidated
return on a fiscal  year basis using the accrual  method of  accounting  and are
subject to federal income taxation in the same manner as other corporations with
some  exceptions,  including  particularly  the  Bank's  reserve  for bad  debts
discussed below.  The following  discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive  description of the tax rules
applicable to the Bank or the Company.

      Tax Bad Debt Reserves.  For discussion  related to the Bank's Tax Bad Debt
Reserves,  please  refer  to  Note 12 of the  Notes  to  Consolidated  Financial
Statements.

      Distributions.   To  the   extent   that  the  Bank   makes   "nondividend
distributions"  to the Company that are considered as made: (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses  exceeds the amount  that would have been  allowed  under the  experience
method;  or (ii) from the  supplemental  reserve  for  losses on loans  ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable

                                       37
<PAGE>

income.  Nondividend distributions include distributions in excess of the Bank's
current and  accumulated  earnings and profits,  distributions  in redemption of
stock, and distributions in partial or complete liquidation.  However, dividends
paid  out  of the  Bank's  current  or  accumulated  earnings  and  profits,  as
calculated for federal income tax purposes,  will not be considered to result in
a  distribution  from the Bank's bad debt  reserve.  Thus,  any dividends to the
Company that would reduce  amounts  appropriated  to the Bank's bad debt reserve
and deducted for federal  income tax purposes  would create a tax  liability for
the Bank.  The amount of additional  taxable  income  attributable  to an Excess
Distribution  is an amount  that,  when reduced by the tax  attributable  to the
income, is equal to the amount of the  distribution.  Thus, if, the Bank makes a
"nondividend distribution," then approximately one and one-half times the amount
so used would be  includable  in gross income for federal  income tax  purposes,
assuming a 35% corporate  income tax rate  (exclusive of state and local taxes).
See  "Regulation"  for limits on the payment of dividends by the Bank.  The Bank
does not intend to pay dividends that would result in a recapture of any portion
of its tax bad debt reserve.

      Corporate  Alternative  Minimum Tax. The Code imposes a tax on alternative
minimum  taxable income ("AMTI") at a rate of 20%.  Generally,  only 90% of AMTI
can be offset by net operating loss  carryovers.  AMTI is increased by an amount
equal to 75% of the amount by which the Bank's adjusted current earnings exceeds
its AMTI (prior to reduction for net operating losses).

      Dividends-Received  Deduction and Other  Matters.  The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations.  The corporate dividends-received deduction is
generally 70% in the case of dividends  received from unaffiliated  corporations
with which the  Company  and the Bank will not file a  consolidated  tax return,
except  that if the  Company  or the Bank  owns  more than 20% of the stock of a
corporation  distributing a dividend,  then 80% of any dividends received may be
deducted.

      State Income  Taxation.  South Carolina has adopted the Code as it relates
to OTS  regulated  institutions,  effective for taxable  years  beginning  after
December 31, 1985.  Coastal  Federal is subject to South Carolina  income tax at
the rate of 6% and North Carolina income tax at a rate of 6.9%. This rate of tax
is imposed on OTS regulated  institutions  in lieu of the general state business
corporation income tax.

      For information  regarding  income taxes payable by Coastal  Federal,  see
Note 12 of the Notes to Consolidated Financial Statements.

      Audits.  There have not been any audits of the Company's  federal or state
income tax returns during the past five years.

                                       38
<PAGE>

Risk Factors.

      Our primary market areas depend  substantially on tourism,  and a downturn
in tourism could hurt our business and our prospects.

      Our business is concentrated in and around Myrtle Beach, South Carolina, a
popular  beach and golf resort area.  The economy of Myrtle Beach  significantly
depends on services and industries related to tourism. Any event that negatively
and materially  impacts  tourism will likely  adversely  impact the Myrtle Beach
economy.

      Tourism revenue is vulnerable to fluctuations in the national  economy.  A
prolonged  downturn in the national  economy  could have a  significant  adverse
effect on the economy of the Myrtle Beach area.  Virtually  any  development  or
event that could dissuade travel or spending related to tourism,  whether inside
or outside of Myrtle Beach,  could  adversely  affect the Myrtle Beach  economy.
Consequently, the Myrtle Beach economy is more susceptible than the economies of
other  cities  to  issues  such  as  higher  gasoline  and  other  fuel  prices,
unemployment  levels,  recession,  rising  interest  rates,  and other  economic
conditions,  whether  domestic or foreign.  Coastal North and South Carolina are
also more susceptible to severe weather, such as hurricanes and flooding.

      A  deterioration  in  economic  conditions  generally,  and a slowdown  in
tourism in particular, could result in the following consequences,  any of which
could adversely affect our business,  financial condition, results of operations
and prospects and expose us to a greater risk of loss:

      -     Loan delinquencies may increase;
      -     Problem assets and foreclosures may increase;
      -     Demand for our products and services may decline; and
      -     Collateral  for loans made by us may decline in value,  reducing the
            borrowing  power of our customers,  and reducing the value of assets
            and collateral associated with our loans.

      Rising  interest rates may reduce the Company's net income and future cash
flows.

      Interest rates were recently at historically  low levels.  However,  since
June 30, 2004, the U.S. Federal Reserve has increased its target for the federal
funds rate 11 times to 4.00%.  If interest  rates continue to rise, and if rates
on the Company's  deposits and borrowings  reprice upwards faster than the rates
on the Company's loans and investments, the Company would experience compression
of its interest rate spread and net interest margin, which would have a negative
effect on the Company's profitability.

                                       39
<PAGE>

      The  Company's  allowance for loan losses may be  inadequate,  which could
hurt the Company's earnings.

      The  Company's  allowance  for loan  losses may not be  adequate  to cover
actual loan losses.  If the Company is required to increase its loan allowances,
future  earnings  may be reduced.  When  borrowers  default and do not repay the
loans that the Bank makes to them,  the Company may lose  money.  The  Company's
experience shows that some borrowers either will not pay on time or will not pay
at all,  which will  require  the  Company to charge off the  defaulted  loan or
loans.  The Company  provides for losses by reserving  what it believes to be an
adequate amount to absorb any probable inherent losses. A charge off reduces the
Company's  allowance for loan losses. If the Company's allowance for loan losses
were to become insufficient,  it would be required to increase its allowances by
recording a larger  provision for loan losses,  which would reduce  earnings for
that future period.

      Because the Company competes  primarily on the basis of the interest rates
it  offers  depositors  and the  terms of its  loans it  offers  borrowers,  the
Company's  margins could decrease if it were required to increase  deposit rates
or lower interest rates on loans in response to competitive pressures.

      The Company faces intense  competition both in making loans and attracting
deposits.  The Company competes  primarily on the basis of its depository rates,
the terms of the loans it originates and the quality of the Company's  financial
and depository  services.  This  competition  has made it more difficult for the
Company to make new loans and, at times,  has forced the Company to offer higher
deposit rates in its market area. The Company expects competition to increase in
the future as a result of legislative,  regulatory and technological changes and
the  continuing  trend of  consolidation  in the  financial  services  industry.
Technological  advances,  for example,  have lowered  barriers to market  entry,
enabled banks to expand their  geographic  reach by providing  services over the
Internet and enabled non-depository  institutions to offer products and services
that  traditionally  have been  provided  by banks.  Recent  changes  in federal
banking law permit  affiliation  among  banks,  securities  firms and  insurance
companies,  which also will  change  the  competitive  environment  in which the
Company  conducts  business.  Some of the  institutions  with which the  Company
competes  are  significantly  larger  than  the  Company,  and  therefore,  have
significantly greater resources.

      Various factors could hinder or prevent takeover attempts.

      Provisions of the Company's  Certificate of  Incorporation  and Bylaws and
federal  and state  regulations  make it  difficult  and  expensive  to pursue a
takeover  attempt that management  opposes.  These provisions will also make the
removal of the current board of directors or management,  or the  appointment of
new directors,  more  difficult.  For example,  the Company's  Certification  of
Incorporation  and Bylaws  contain  provisions  that could  impede a takeover or
prevent  the  Company  from

                                       40
<PAGE>

being acquired, including a classified board of directors and limitations on the
ability of the Company's  stockholders  to remove a director from office without
cause.  The Company's board of directors may issue  additional  shares of common
stock or establish classes or series of preferred stock with rights, preferences
and  limitations  as  determined by the board of directors  without  stockholder
approval.  These factors give the board of directors the ability to prevent,  or
render more difficult or costly,  the completion of a takeover  transaction that
the Company's stockholders might view as being in their best interests.

Item 2.  Properties
-------------------

      The  principal  offices of the Company are located in a 25,000 square foot
Main Office at 2619 Oak Street in Myrtle  Beach,  SC. This  facility also houses
Coastal  Mortgage  Bankers  and Realty Co, Inc,  Coastal  Investor  Services,  a
division of Coastal Federal Bank, and many corporate  functions.  Several of the
Bank's operations groups, including loan and deposit servicing, human resources,
marketing,  and residential  lending  administration,  are in separate buildings
owned and leased by the Bank in Myrtle  Beach.  The Bank also owns a facility in
Conway, SC, which houses its Item Processing and Technology functions.

      At September 30, 2005 the Bank operated 13 branches in South  Carolina and
6 branches in North Carolina. Of these, 4 are leased and 15 are owned.

      The net book value of the Company's  investment in office,  properties and
equipment  totaled $22.8 million at September 30, 2005.  See Note 6 of the Notes
to Consolidated  Financial  Statements.  Coastal Federal uses the services of an
independent  data processing  service to process  customer  records and monetary
transactions,  post deposit and general  ledger  entries and record  activity in
installment lending, loan servicing and loan originations.

Item 3.  Legal Proceedings
--------------------------

      The Company is not a  defendant  in any  lawsuits.  The  subsidiaries  are
defendants in lawsuits arising out of the normal course of business.  Based upon
current information received from counsel representing the subsidiaries in these
matters,  the Company believes none of the lawsuits would have a material impact
on the Company's financial status.

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

      Not Applicable.

                                       41
<PAGE>

                                     PART II

Item 5. Market for the  Registrant's  Common Equity, Related Stockholder Matters
--------------------------------------------------------------------------------
                and Issuer Purchases of Equity Securities
                -----------------------------------------

      The  information  contained  under the section  captioned  "Market for the
Corporation's Common Stock and Related Stockholder Matters" in the Corporation's
Annual  Report to  Stockholders  for the Fiscal  Year Ended  September  30, 2005
("Annual Report") is incorporated herein by reference.

Item 6.  Selected Financial Data
--------------------------------

      The information contained in the section captioned "Financial  Highlights"
in the Annual Report is incorporated herein by reference.

Item 7.  Management's Discussion and Analysis of Financial
----------------------------------------------------------
                Condition and Results of Operations
                -----------------------------------

      The  information   contained  in  the  section   captioned   "Management's
Discussion  and  Analysis"  in the  Annual  Report  is  incorporated  herein  by
reference.

Item 7A.  Quantitative and Qualitative Disclosures about
--------------------------------------------------------
                 Market Risk
                 -----------

      The  information  contained in the section  captioned  "Interest Rate Risk
Disclosure" in the Annual Report is incorporated herein by reference.

Item 8.  Financial Statements and Supplementary Data
----------------------------------------------------

      The consolidated financial statements contained in the Annual Report which
are listed under Item 14 herein are incorporated herein by reference.

Item 9.  Changes in and Disagreements with Accountants on
---------------------------------------------------------
                Accounting and Financial Disclosure
                -----------------------------------

      The registrant  has not,  within the 24 months before the date of the most
recent financial  statements,  changed its accountants,  nor have there been any
disagreements on accounting and financial disclosure.

Item 9A. Controls and Procedures
--------------------------------

      The Company's  management,  including the  Company's  principal  executive
officer and principal financial officer, have evaluated the effectiveness of the
Company's  "disclosure controls and procedures," as such term is defined in Rule
13a-15(e)  promulgated  under the

                                       42
<PAGE>

Securities  Exchange Act of 1934, as amended,  (the "Exchange Act").  Based upon
their  evaluation,  the  principal  executive  officer and  principal  financial
officer concluded that, as of the end of the period covered by this report,  the
Company's  disclosure  controls and procedures were effective for the purpose of
ensuring that the  information  required to be disclosed in the reports that the
Company files or submits under the Exchange Act with the Securities and Exchange
Commission  (the "SEC") (1) is  recorded,  processed,  summarized  and  reported
within the time  periods  specified  in the SEC's  rules and  forms,  and (2) is
accumulated  and  communicated  to  the  Company's  management,   including  its
principal executive and principal  financial  officers,  as appropriate to allow
timely  decisions  regarding  required  disclosure.  In addition,  based on that
evaluation, no change in the Company's internal control over financial reporting
occurred during the year ended September 30, 2005 that has materially  affected,
or is reasonably  likely to materially  affect,  the Company's  internal control
over financial reporting.

Management's  annual report on internal control over financial reporting and the
attestation  report of the registered  public  accounting firm are  incorporated
herein by reference to the section  captioned  "Management's  Report on Internal
Control over Financial  Reporting" and "Report of Independent  Registered Public
Accounting Firm" in the annual report.

Item 9B.  Other Information
---------------------------

      None.

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant
------------------------------------------------------------

      The  information  called  for by Item 10 with  respect  to  directors  and
Section 16 matters is set forth in the Registrant's Proxy Statement for its 2006
Annual Meeting of  Stockholders  under the caption  "Elections of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance",  respectively, and is
hereby  incorporated by reference.  The  information  called for by Item 10 with
respect to the identification of the members of the Registrant's Audit Committee
and the  presence  of an audit  committee  financial  expert is set forth in the
Registrant's  Proxy Statement for the 2006 Annual Meeting of Stockholders  under
the captions  "Committees of the Board of Directors" and is hereby  incorporated
by reference.

      Certain executive officers of the Bank also serve as executive officers of
the Corporation.  The day-to-day  management duties of the executive officers of
the Company and the Bank relate  primarily to their  duties as to the Bank.  The
executive  officers  of the  Company  and the Bank are  elected  annually by the
respective  Boards of

                                       43
<PAGE>

Directors and hold office until their successors have been elected and qualified
or until they are removed from office.



                                       44
<PAGE>

Executive Officers of the Registrant
------------------------------------

Name, Age and Position                    Business Experience
----------------------                    -------------------

Michael C. Gerald, 56                     Mr.  Gerald has been  associated  with
President, Chief Executive                Coastal  Federal since 1974 and serves
Officer and a Director                    as  Director,   President   and  Chief
                                          Executive  Officer of the  Corporation
                                          and Bank.  Mr.  Gerald  also serves as
                                          Director  and   President  of  Coastal
                                          Mortgage  Bankers  &  Realty  Company,
                                          Inc.,  as Director  and  President  of
                                          Coastal    Real   Estate    Investment
                                          Corporation,  and  as  a  Director  of
                                          Coastal  Retirement,  Estate  and  Tax
                                          Planners,  Inc. He currently serves on
                                          the  Board  of   Visitors  of  Coastal
                                          Carolina  University's  Wall School of
                                          Business,  as Chairman of the Board of
                                          Directors  of the  Waccamaw  Community
                                          Foundation,  on the Board of Directors
                                          of the Coastal  Education  Foundation,
                                          and on the  Board of  Trustees  of the
                                          USC Business Partnership Foundation.

Jimmy R. Graham, 57,                      Mr.  Graham  serves as Executive  Vice
Executive Vice President and              President   and   Chief    Information
Chief Information Officer                 Officer of Coastal Federal. Mr. Graham
                                          serves as Executive  Vice President of
                                          Coastal Financial Corporation.  He has
                                          been  associated  with the bank  since
                                          1977.

Jerry L. Rexroad, CPA, 45,                Mr.  Rexroad  joined  the  Company  in
Executive Vice President and              April  1995  and  is  Executive   Vice
Chief Financial Officer                   President and Chief Financial  Officer
                                          of   Coastal   Federal   and   Coastal
                                          Financial  Corporation.   Mr.  Rexroad
                                          also  serves  as the  Chief  Financial
                                          Officer  and a  Director  for  Coastal
                                          Mortgage  Bankers  &  Realty  Company,
                                          Inc., Coastal Investor Services, Inc.,
                                          Coastal Planners Holding  Corporation,
                                          Coastal   Retirement  Estate  and  Tax
                                          Planners,  Coastal  Federal  Mortgage,
                                          Coastal    Real   Estate    Investment
                                          Corporation  and  President of Coastal
                                          Federal Holdings Corporation.  He is a
                                          Past   Chairman   of  the   Board   of
                                          Directors  for Junior  Achievement  of
                                          Horry County as well as Past  Chairman
                                          of the Board of  Directors  for Junior
                                          Achievement of Greenville. Mr. Rexroad
                                          is   a    Director    of    PowerHouse
                                          Ministries,  Inc.  and Chairman of the
                                          Board  of  Deacons  at  Grand   Strand
                                          Baptist  Church.  He  is  a  certified
                                          public accountant,  and is a member of
                                          the AICPA and SCACPA. Prior to joining
                                          the Company, Mr. Rexroad was a partner
                                          with KPMG LLP where he was  partner in
                                          charge of the  Financial  Institutions
                                          practice in South Carolina.

                                       45
<PAGE>

Phillip G. Stalvey, 49,                   Mr.    Stalvey   is   Executive   Vice
Executive Vice President                  President and Banking Group Leader for
and Banking Group Leader                  the  Bank.   He  also   serves  as  an
                                          Executive   Vice   President   of  the
                                          Corporation   and  is  a  director  of
                                          Coastal  Federal  Mortgage and Coastal
                                          Investor  Services,  Inc.  He has been
                                          associated  with  Coastal  Federal for
                                          the past 23 years.  In  addition,  Mr.
                                          Stalvey  is a member  of the  Florence
                                          Stake Presidency with his Church and a
                                          member of the  Myrtle  Beach Air Force
                                          Base Redevelopment Authority.

Steven J. Sherry, 54                      Mr.  Sherry  joined the Company in May
Executive Vice President and              1998 and is Executive  Vice  President
Director of Marketing                     and  Director  of  Marketing  for  the
                                          Bank. He also serves as Executive Vice
                                          President and Chief Marketing  Officer
                                          for Coastal Financial Corporation. Mr.
                                          Sherry   is  a  member   of  the  Bank
                                          Marketing  Association.  He is  active
                                          with  Horry  County   United  Way  and
                                          serves on the  Executive  Board of the
                                          Franklin G. Burroughs-Simeon B. Chapin
                                          Art Museum.  Mr. Sherry holds numerous
                                          achievement  awards for  marketing and
                                          advertising.

Susan J. Cooke, 55                        Ms. Cooke is Senior Vice President and
Senior Vice President and                 Corporate    Secretary   for   Coastal
Corporate Secretary                       Federal  and  for  Coastal   Financial
                                          Corporation,  Corporate  Secretary for
                                          Coastal   Mortgage  Bankers  &  Realty
                                          Company,  Inc.,  and Coastal  Investor
                                          Services,  Inc.  Ms.  Cooke  has  been
                                          employed  with  Coastal   Federal  for
                                          eighteen years. She is a member of the
                                          American    Society    of    Corporate
                                          Secretaries,    Inc.,   the   National
                                          Association for Female Executives, and
                                          is a Board  Member and Chairman of the
                                          Community  Kitchen  of  Myrtle  Beach,
                                          Inc.

                                       46
<PAGE>

Robert D. Douglas, 46                     Mr. Douglas joined the  corporation in
Executive Vice President                  June 1994 and serves as Executive Vice
Human Resources/Coastal                   President  of  the  Bank  and  Coastal
Federal University Group                  Financial  Corporation.  He previously
                                          served  as   Chairman   of  the  Human
                                          Resources   Committee   of  the  South
                                          Carolina       Community       Bankers
                                          Association.  He has served on various
                                          advisory   committees  for  the  Horry
                                          County  Drug and  Alcohol  Commission,
                                          the South Carolina Employment Security
                                          Commission,      Coastal      Carolina
                                          University   and   Horry    Georgetown
                                          Technical   College,   and  the  Grand
                                          Strand Area Chamber of Commerce. He is
                                          a member of the  Coastal  Organization
                                          for  Human  Resources  Management  and
                                          serves as a member of Coastal Carolina
                                          University  Career  Services  Advisory
                                          Board.  He also serves on the Board of
                                          Directors  for the  Coastal  Samaritan
                                          Counseling  Center and is  Chairman of
                                          the Finance Committee.

      The Company has adopted a Code of Ethics,  a copy of which is incorporated
by reference to the September 30, 2003 Form 10-K filed on December 22, 2003. The
Company  intends to disclose any changes or waivers from the Code of Ethics in a
report on Form 8-K.


Item 11.  Executive Compensation
--------------------------------

      The  information  contained  under the  section  captioned  "Proposal I --
Election of  Directors  --  Executive  Compensation"  in the Proxy  Statement is
incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and
-------------------------------------------------------------
                Management and Related Stockholder Matters
                ------------------------------------------

      (a)   Security Ownership of Certain Beneficial Owners

            Information   required  by  this  item  is  incorporated  herein  by
            reference to the section  captioned  "Stock  Ownership" of the Proxy
            Statement.

      (b)   Security Ownership of Management

            Information   required  by  this  item  is  incorporated  herein  by
            reference to the section  captioned  "Stock  Ownership" of the Proxy
            Statement.

      (c)   Management of the Corporation  knows of no  arrangements,  including
            any  pledge by any  person of  securities  of the  Corporation,  the
            operation  of which may at a  subsequent  date result in a change in
            control of the registrant.

                                       47
<PAGE>

      (d)   Equity Compensation Plan Information as of September 30, 2005

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
                                                                                     Number of securities
                                                                                   remaining available for
                               Number of securities                                future issuance under
                                to be issued upon          Weighted-average       equity compensation plans
                                   exercise of           price of outstanding            (excluding
                               outstanding options,       options, warrants         securities reflected
        Plan Category          warrants and rights             and rights              in column (a))
             (a)                       (b)                        (c)                        (d)
-------------------------------------------------------------------------------------------------------------
<S>                                  <C>                          <C>                       <C>
Equity compensation plans
approved by security holders         2,811,609                    $8.52                     97,292
-------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security                N/A                        N/A                       N/A
holders
-------------------------------------------------------------------------------------------------------------
Total                                2,811,609                    $8.52                     97,292
-------------------------------------------------------------------------------------------------------------
</TABLE>

Item 13.  Certain Relationships and Related Transactions
--------------------------------------------------------

      The information  required by this item is incorporated herein by reference
to the section captioned "Transactions with Management" in the Proxy Statement.

Item 14. Principal Accountant Fees and Services
-----------------------------------------------

      The information  required by this item is incorporated herein by reference
to the section captioned "Auditing and Related Fees" in the Proxy Statement.

                                     PART IV

Item 15.  Exhibits and Financial Statement Schedules
----------------------------------------------------

      1.    Report of Independent Registered Public Accounting Firm (1)

      2.    All Financial Statements (1)

            (a)   Consolidated Statements of Financial Condition as of September
                  30, 2004 and 2005.

            (b)   Consolidated  Statements  of  Operations  for the Years  Ended
                  September 30, 2003, 2004 and 2005.

            (c)   Consolidated    Statements   of   Stockholders'   Equity   and
                  Comprehensive  Income for the Years Ended  September 30, 2003,
                  2004 and 2005.

                                       48
<PAGE>

            (d)   Consolidated  Statements  of Cash  Flows for the  Years  Ended
                  September 30, 2003, 2004 and 2005.

            (e)   Notes to Consolidated Financial Statements.

      3.    All Schedules  have been  omitted,  as the required  information  is
            either  inapplicable  or  included  in  the  Notes  to  consolidated
            Financial Statements.

      4.    Exhibits

            3     (a)   Certificate  of  Incorporation   of  Coastal   Financial
                        Corporation (1)

            3     (b)   Certificate of Amendment to Certificate of Incorporation
                        of Coastal Financial Corporation (5)

            3     (c)   Bylaws of Coastal Financial Corporation (1)

            10    (a)   Employment Agreement with Michael C. Gerald (7)

                  (b)   Employment Agreement with Jerry L. Rexroad (7)

                  (c)   Employment Agreement with Phillip G. Stalvey (7)

                  (d)   Employment Agreement with Steven J. Sherry (7)

                  (e)   Employment Agreement with Jimmy R. Graham (7)

                  (f)   1990 Stock Option Plan (2)

                  (g)   Directors Performance Plan (3)

                  (h)   2000 Stock Option Plan (4)

            13    Annual  Report  to  Stockholders  for the  Fiscal  Year  Ended
                  September 30, 2005

            14    Code of Ethics (6)

            21    Subsidiaries of the Registrant

            23    Consent of Independent Registered Public Accounting Firm

            31    (a)   Rule   13a-14(a)/15d-14(a)   Certification   of    Chief
                        Executive Officer

                                       49
<PAGE>

            31    (b)   Rule   13a-14(a)/15d-14(a)    Certification   of   Chief
                        Financial Officer

            32    (a)   Section 1350 Certification of Chief Executive Officer

            32    (b)   Section 1350 Certification of Chief Financial Officer

(1)   Incorporated by reference to Registration Statement on Form S-4 filed with
      the Securities and Exchange Commission on November 26, 1990.

(2)   Incorporated  by reference to 1995 Form 10-K filed with the Securities and
      Exchange Commission on December 29, 1995.

(3)   Incorporated  by  reference  to the proxy  statement  for the 1996  Annual
      Meeting of Stockholders.

(4)   Incorporated  by  reference  to the proxy  statement  for the 2000  Annual
      Meeting of Stockholders.

(5)   Incorporated  by  reference to the March 31, 1998 Form 10-Q filed with the
      Securities and Exchange Commission on May 15, 1998.

(6)   Incorporated  by reference to the  September 30, 2003 Form 10-K filed with
      the Securities and Exchange Commission on December 22, 2003.


                                       50
<PAGE>

                                   SIGNATURES

      Pursuant  to the  requirements  of Section 13 or 15 (d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto duly  authorized.

                                           COASTAL FINANCIAL CORPORATION

Date:  December 14, 2005                   By:  /s/Michael C. Gerald
                                                --------------------
                                                Michael C. Gerald
                                                President/Chief Executive
                                                Officer
                                                (Duly Authorized Representative)

      Pursuant to the  requirement of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

By:    /s/Michael C. Gerald                By:    /s/Jerry L. Rexroad
       --------------------                       -------------------
       Michael C. Gerald                          Jerry L. Rexroad
        President/Chief Executive                  Executive Vice President
        Officer And a Director                     And Chief Financial Officer
        (Principal Executive                       (Principal Financial and
        Officer)                                   Accounting Officer)

Date:  December 14, 2005                          December 14, 2005

By:    /s/James T. Clemmons                By:    /s/Frank A. Thompson, II
       --------------------                       ------------------------
       James T. Clemmons                          Frank A. Thompson, II
        Chairman of the Board                      Director

Date:  December 14, 2005                   Date:  December 14, 2005

By:    /s/James C. Benton                  By:    /s/James P. Creel
       ------------------                         -----------------
       James C. Benton                            James P. Creel
        Director                                   Director

Date:  December 14, 2005                   Date:  December 14, 2005

By:    /s/G. David Bishop                  By:    /s/James H. Dusenbury
       ------------------                         ---------------------
       G. David Bishop                            James H. Dusenbury
        Director                                   Director

Date:  December 14, 2005                   Date:  December 14, 2005

By:    /s/E. Lawton Benton                 By:    /s/J. Robert Calliham
       -------------------                        ---------------------
       E. Lawton Benton                           J. Robert Calliham
        Director                                   Director

Date:  December 14, 2005                   Date:  December 14, 2005


                                       51