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, 2006 OR +-+o 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
  or organization)

(I.R.S. Employer I.D.)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: Common Stock, par value $.01 per share(Title of Class) Securities
registered pursuant to Section 12(g) of the Act:   None Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.  YES o NO
x Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act.  YES o NO x 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 o. 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.  x Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.  Large Accelerated Filer o Accelerated
Filer x
Non-Accelerated Filer o Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
YES o NO x 1   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 $269,483,902 (21,541,479 shares at $12.51 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 11,
2006, there were issued and outstanding 21,703,125 shares of the registrants Common
Stock.

DOCUMENTS INCORPORATED BY REFERENCE

1.
Portions of the Annual Report to Stockholders for the Fiscal Year
  Ended September 30, 2006  (Parts I and
  II)2.
Portions of the Proxy Statement for the 2007 Annual Meeting of
  Stockholders.  (Part III)2

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, sixteen branch offices located in South Carolina, and seven branch
offices located in North Carolina. The deposits of the Bank are insured by the
Federal Deposit Insurance Corporation (FDIC) under the Deposit Insurance Fund
(DIF).  The corporate offices of the
Company and the Bank are located at 2619 Oak Street, Myrtle Beach, South
Carolina, and the telephone number at that location is (843) 205-2000.

Coastal
Federals twenty four 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 loans, commercial
business loans, commercial real estate loans, residential mortgage loans, and
land and land development 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
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.

3

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 only.


Years
  Ended September 30,2004 Compared
  to 2003
  Increase (Decrease)
  Due to

2005
  Compared to 2004
  Increase (Decrease)
  Due to

2006
  Compared to 2005
  Increase (Decrease)Due toRate

Volume

Rate/
  Volume

Net

Rate

Volume

Rate/
  Volume

Net

Rate

Volume

Rate/
  Volume

Net(Dollars
  in thousands)Interest-earning
assets:Loans

$
(3,082
)
$
8,515

$
(626
)
$
4,807

$
2,506

$
7,170

$
385

$
10,061

$
8,575

$
9,150

$
1,381

$
19,106Mortgage-backed
securities/investments


(383
)

2,216


(49
)

1,784


478


2,160


54


2,692


638


1,312


39


1,989Total net change in income on
interest-earning assets


(3,465
)

10,731


(675
)

6,591


2,984


9,330


439


12,753


9,213


10,462


1,420


21,095Interest-bearing
liabilities:Deposits


(2,233
)

373


(115
)

(1,975
)

855


584


93


1,532


5,617


1,290


632


7,539Brokered CDs




















2,523


2,523


950


3,032


1,143


5,125FHLB advances


(971
)

2,942


(315
)

1,656


59


1,550


8


1,617


1,280


1,071


111


2,462Repurchase agreements


(344
)

925


(185
)

396


1,322


(626
)

(392
)

304


1,371


(928
)

(526
)

(83
)Other borrowings


(46
)

630


(135
)

449


230








230


300








300Total net change in expense on
interest-bearing liabilities


(3,594
)

4,870


(750
)

526


2,466


1,508


2,232


6,206


9,518


4,465


1,360


15,343Net change in net interest
income

$
129

$
5,861

$
75

$
6,065

$
518

$
7,822

$
(1,793
)
$
6,547

$
(305
)
$
5,997

$
60

$
5,752


4   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 only.

Years Ended September 30,2004

2005

2006Average
  Balance

Interest

Yield/
  Rate (2)

Average
  Balance

Interest

Yield/
  Rate (2)

Average
  Balance

Interest

Yield/
  Rate (2)(Dollars in thousands)Assets:Loans

$
757,633

$
46,765


6.17
%
$
873,797

$
56,826


6.50
%
$
1,014,501

$
75,932


7.48
%Mortgage-backed
securities/investments(1)(3)


403,610


19,040


4.72


449,402


21,732


4.84


476,536


23,721


4.98Total interest-earning
assets

$
1,161,243

$
65,805


5.67
%
$
1,323,199

$
78,558


5.94
%
$
1,491,037

$
99,653


6.68
%Liabilities:Transaction accounts
(4)


418,405


3,331


.80


505,340


4,457


.88


551,152


7,058


1.28Statement savings
accounts


50,509


405


.80


64,973


663


1.02


75,224


1,454


1.93Certificate accounts


250,211


6,288


2.51


241,310


6,436


2.67


265,080


10,583


3.99Brokered certificate
accounts











79,369


2,523


3.18


174,761


7,648


4.38FHLB advances


281,437


10,724


3.81


322,108


12,341


3.83


350,064


14,803


4.23Securities sold under
repurchase agreements


143,842


2,114


1.47


101,221


2,418


2.39


62,386


2,335


3.74Other borrowings


15,000


662


4.41


15,000


892


5.95


15,000


1,192


7.95Total interest-bearing
liabilities

$
1,159,404

$
23,524


2.03
%
$
1,329,321

$
29,730


2.24
%
$
1,493,667

$
45,073


3.01
%Net interest income/ interest
rate spread




$
42,281


3.64
%



$
48,828


3.70
%



$
54,580


3.67
%Net yield on interest earning
assets








3.64
%







3.69
%







3.66
%Ratio of interest earning
assets to interest-bearing liabilities








1.00








1.00








1.00(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 2004, 2005 and
  2006 are $101,298, $163,278 and $211,713, respectively.5

Lending Activities

General. The
principal lending activities
of Coastal Federal are the origination of consumer loans, commercial business
loans, commercial real estate loans, residential mortgage loans, and land and
land development 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
$1.1 billion at September 30, 2006, representing approximately 65.7% of its
total assets. On that date, approximately 34.6% 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, 2006,
adjustable rate loans constituted approximately $917.3 million (or 84.2%) of
the Banks net loan portfolio. Therefore, at such date, fixed rate loans
comprised only 15.8% 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 $162.5 million as September 30, 2006, and which is
included in Mortgage Loans  Land, land development and other, primarily
commercial real estate 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.

6

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.

At September 30,2002

2003

2004

2005

2006Amount

Percent

Amount

Percent

Amount

Percent

Amount

Percent

Amount

Percent(Dollars in thousands)Mortgage loans:Construction

$
45,544


7.99
%
$
81,227


11.16
%
$
93,292


11.23
%
$
142,959


14.56
%
$
203,755


17.96
%Single family to 4 family
units


261,296


45.88


308,293


42.37


337,533


40.62


371,014


37.79


392,425


34.59Land, land development and
other, primarily commercial real estate


202,117


35.49


263,688


36.24


312,460


37.60


369,714


37.66


437,968


38.60Commercial business
loans


18,377


3.23


24,475


3.36


32,101


3.86


38,691


3.94


38,656


3.41Consumer loans:Mobile home


3,446


0.61


4,607


0.63


4,618


0.56


4,308


0.44


5,194


0.46Automobiles


7,117


1.25


8,516


1.17


8,177


0.98


8,221


0.84


7,039


0.62Equity lines of
credit


24,273


4.26


26,639


3.66


30,906


3.72


34,019


3.47


40,331


3.55Other


7,378


1.29


10,234


1.41


11,905


1.43


12,777


1.30


9,178


0.81Total loans and loans held for
sale, gross

$
569,548


100.00
%
$
727,679


100.00
%
$
830,992


100.00
%
$
981,703


100.00
%
$
1,134,546


100.00
%Add (Subtract):Loans in process


(6,365
)




(16,570
)




(21,613
)




(28,345
)




(31,982
)Deferred loan costs,
net


245





556





674





771





246Allowance for loan
losses


(7,883
)




(9,832
)




(11,077
)




(11,748
)




(12,726
)Total loans and loans held for
sale, net

$
555,545




$
701,833




$
798,976




$
942,381




$
1,090,0847

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, provided that amounts in excess of 10% of assets
may be used only for small business loans.

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, 2006, the Bank had $38.7
million outstanding in commercial business loans, which represented
approximately 3.4% of its gross loan portfolio and 2.3% 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, 2006 this limited
Coastal Federals aggregate non-residential real estate loans to approximately
$519.2 million. At such date, the Bank had non-residential real estate loans
outstanding of $438.0 million compared to $369.7 million at September 30,
2005.  During fiscal 2003 through 2006,
the Bank has opened nine 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
commercial lending officers over the last three 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 generally 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.

8

Consumer
Loans.  The Bank is permitted by OTS regulations to invest up to 35% of
its total 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 $61.7 million, or 5.4% of
the gross loan portfolio, and 3.7% of total assets, at September 30, 2006.

Coastal
Federal offers consumer loans in order to provide a wider range of financial
services to its customers. These loans also 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 $52.6 million and
$27.5 million in 2005 and 2006, respectively. The securitized mortgage-backed
securities were generally sold in the secondary market within a few days of
securitization.

At
September 30, 2006, approximately $392.4 million or 34.6% of the Banks  gross loan portfolio, and 23.6% 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

9

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.

At
September 30, 2006, approximately $203.8 million (including $32.0 million of
loans in process) or 18.0% of the Banks gross loan portfolio consisted of
construction loans on both residential ($197.4 million) and commercial properties
($6.4 million).

Loan Maturity

The
following table sets forth certain information at September 30, 2006 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.

One Year 
  or Less

More than
  One Year
  Through
  Five Years

More than 
  Five Years

Totals(In thousands)First mortgage loans

$
248,496

$
193,338

$
122,364

$
564,198Land, land development and
other, primarily commercial real estate


181,722


196,833


59,413


437,968Equity lines of
credit


9,685


25,398


5,248


40,331Consumer loans


7,443


13,019


949


21,411Commercial loans


20,085


18,571





38,656Total loans,
net of LIP

$
467,431

$
447,159

$
187,974


1,102,564Add (subtract):Deferred loan
costs, net











246Allowance for
loan losses











(12,726
)Total loans,
net










$
1,090,08410

The
following table sets forth the dollar amount of all loans expected to be repaid
one year or later after September 30, 2006, which have fixed interest rates and
those which have floating or adjustable interest rates.

Fixed
  Rates

Floating or
  Adjustable
  Rates

Totals(In thousands)First mortgage loans

$
65,339

$
250,363

$
315,702Land, land development and
other, primarily commercial real estate


35,436


220,810


256,246Equity lines of
credit





30,646


30,646Consumer loans


10,525


3,443


13,968Commercial loans


8,755


9,816


18,571Total
loans

$
120,055

$
515,078

$
635,133Loan
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 its financial affairs.

11

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.

At September 30,2002

2003

2004

2005

2006(Dollars in thousands)Loans accounted for on a
non-accrual basis:Real estate
-Residential

$
785

$
3,538

$
3,852

$
998

$
1,707Commercial


18


2,816


1,106


1,048


767Commercial
business


2,423


793


783


488


468Consumer


288


302


115


107


48Total


3,514


7,449


5,856


2,641


2,990Accruing loans which are
contractually past due 90 days or more:Real estate
-Residential














Commercial














Commercial
business














Consumer














Total














Restructured loans


970


369


731


771


2,071Real estate owned,
net


1,046


1,627


785


818


571Other
  nonperforming assets














Total nonperforming
assets

$
5,530

$
9,445

$
7,372

$
4,230

$
5,632Total non-accrual loans to net
loans


0.63
%

1.06
%

0.73
%

0.28
%

0.27
%Total non-accrual loans to
total assets


0.37
%

0.63
%

0.45
%

0.17
%

0.18
%Total nonperforming assets to
total assets


0.58
%

0.80
%

0.56
%

0.27
%

0.34
%Total nonperforming assets,
excluding restructured loans which are
  generally performing under the restructured terms, to total assets


0.48
%

0.77
%

0.51
%

0.22
%

0.21
%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 $427,000 and $194,000 at September 30, 2005 and 2006,
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

12

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 five individually classified assets in excess of $1.6 million as of
September 30, 2006 totaling $29.3 million. At that date, classified assets
amounted to $47.7 million ($8.9 million substandard; $207,000 doubtful; and
$38.6 million special mention). Substandard assets consist primarily of sixteen
loans with aggregate balances of approximately $7.5 million at September 30,
2006. The largest amount to any one borrower was $2.3 million. Special mention
assets consist primarily of thirty one loans with aggregate balances of
approximately $37.6 million at September 30, 2006.

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 and risk grade 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.

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 2006 Annual Report to
Stockholders attached hereto and incorporated by reference.

13

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.

Years Ended September 30,2002

2003

2004

2005

2006(Dollars in thousands)Allowance at beginning of
period

$
7,159

$
7,883

$
9,832

$
11,077

$
11,748Provision for loan
losses


1,235


2,655


1,750


1,697


1,385Recoveries:Residential
loans


4











Commercial
loans





92


200


108


191Construction
loans














Consumer
loans


62


44


49


116


116Total
recoveries


66


136


249


224


307Charge-offs:Residential
loans





46





27


Commercial
loans


90


388


268


781


413Construction
loans














Consumer
loans


487


408


486


442


301Total
charge-offs


577


842


754


1,250


714Net
charge-offs


511


706


505


1,026


407Allowance at end of
period

$
7,883

$
9,832

$
11,077

$
11,748

$
12,726Ratio of allowance to net loans
outstanding at the end of the period


1.42
%

1.40
%

1.39
%

1.25
%

1.17
%Ratio of net charge-offs to
average loans outstanding during the
  period


0.10
%

0.11
%

0.07
%

0.12
%

0.04
%14

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.

September 30,2002

2003

2004Amount

As a %
  of out-
  standing
  loans in
  category

Loan Type
  As a %
  of out-
  standing
  loans

Amount

As a %
  of out-
  standing
  loans in
  category

Loan Type
  As a %
  of out-
  standing
  loans

Amount

As a %
  of out-
  standing
  loans in
  category

Loan Type
  As a %
  of out-
  standing
  loans(Dollars in thousands)Residential

$
2,272



0.72
%


57.08
%
$
1,992



0.61
%


55.61
%
$
1,007



0.23
%


53.78
%Commercial


5,273



2.39



39.69


7,229



2.51



41.06


9,222



2.68



43.13Consumer


338



1.88



3.23


611



2.62



3.33


848



3.43



3.09Total allowance forloan
losses

$
7,883



1.42
%


100.00
%
$
9,832



1.40
%


100.00
%
$
11,077



1.39
%


100.00
%September 30,2005

2006Amount

As a %
  of out-
  standing
  loans in
  category

Loan Type
  As a %
  of out-
  standing
  loans

Amount

As a %
  of out-
  standing
  loans in
  category

Loan Type
  As a %
  of out-
  standing
  loans(Dollars in thousands)Residential

$
980



0.19
%


53.91
%
$
1,985



0.34
%


54.31
%Commercial


9,794



2.39



43.40


10,130



2.13



43.72Consumer


974



3.85



2.69


611



2.85



1.96Total allowance forloan
losses

$
11,748



1.25
%


100.00
%
$
12,726

    

1.17
%


100.00
%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.

15

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 2006 Annual Report to Stockholders.

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, 2006 the Banks investment portfolio had a market
value of approximately $444.3 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.

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, 2006, 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 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.

16

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, 2006.

Amount DueUp to
  3 Months

Over 3
  through 6 months

Over 6
  through 12 months

Over 12
  Months

Total(In thousands)$
87,821



$
102,574



$
55,658



$
21,466



$
267,51917

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.

At September 30,2004

2005

2006Amount

Percent
  of Total

Increase
  (Decrease)

Amount

Percent
  of Total

Increase
  (Decrease)

Amount

Percent
  of Total

Increase
  (Decrease)(Dollars in thousands)NOW checking

$
110,802


14.71
%
$
12,631

$
139,810


13.05
%
$
29,008

$
126,373


11.89
%
$
(13,437
)Noninterest-bearing
checking


122,357


16.24


36,099


219,080


20.45


96,723


231,081


21.73


12,001233,159


30.95


48,730


358,890


33.50


125,731


357,454


33.62


(1,436
)Money market checking
accounts


224,437


29.79


18,427


213,078


19.89


(11,359
)

198,500


18.67


(14,578
)Statement savings
accounts


55,205


7.33


8,969


71,824


6.71


16,619


76,263


7.17


4,439Fixed-rate
certificates(original
maturity):3
months


3,865


.51


388


2,775


0.26


(1,090
)

3,138


0.30


3636
months


33,052


4.39


(49,297
)

93,805


8.76


60,753


65,020


6.12


(28,785
)9
months


51,159


6.79


44,457


17,204


1.61


(33,955
)

8,708


0.82


(8,496
)12
months


57,696


7.66


(81
)

56,980


5.32


(716
)

131,800


12.40


74,82018
months


37,978


5.04


(8,066
)

215,767


20.15


177,789


175,843


16.54


(39,924
)24
months


28,264


3.75


(8,049
)

21,795


2.04


(6,469
)

28,541


2.68


6,74630
months


2,673


.35


(250
)

2,684


0.25


11


2,213


0.21


(471
)36
months


11,559


1.53


(90
)

4,361


0.41


(7,198
)

4,257


0.40


(104
)48
months


11,662


1.55


1,554


9,444


0.88


(2,218
)

8,986


0.85


(458
)60
months








(20
)
















237,908


31.57


(19,454
)

424,815


39.68


186,907


428,506


40.32


3,691Variable rate
certificates:(original
maturity)12
months


161


.02


31


170


0.02


9


175


0.01


518
months


1,115


.15


(196
)

936


0.09


(179
)

1,134


0.11


19830
months


1,394


.19


(140
)

1,205


0.11


(189
)

1,073


0.10


(132
)Total variable


2,670


.36


(305
)

2,311


0.22


(359
)

2,382


0.22


71Total certificates


240,578


31.93


(19,759
)

427,126


39.90


186,548


430,888


40.54


3,762Total deposits

$
753,379


100.00
%
$
56,367

$
1,070,918


100.00
%
$
317,539

$
1,063,105


100.00
%
$
(7,813
)18

Borrowings.
Demand and time deposits are
the primary source of funds for Coastal Federals lending and investment
activities and other general business purposes. The Bank also relies 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, 2006, Coastal
Federal had advances totaling $380.6 million from the FHLB of Atlanta due on
various dates through 2018 with a weighted average interest rate of 4.43%.
Certain of these advances are subject to call provisions. Call provisions are
more likely to be exercised by the FHLB when rates rise. At
September 30, 2006, the Company had excess collateral pledged to the FHLB which
would support additional FHLB advance borrowings of $69.3 million. See Note 9
of the Notes to Consolidated Financial Statements of the 2006 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.

The
Bank also 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, 2006, the
Company had excess available collateral consisting of investment securities and
mortgage-backed securities to support additional borrowings of up to $129.0
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, 2006. For more information on these debentures, please see Note
11 of the Notes to Consolidated Financial Statements in the 2006 Annual Report
to Stockholders attached hereto and incorporated by reference.

19

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 30,2004

2005

2006(Dollars in thousands)Outstanding balance:Securities
sold under agreements to repurchase:Customer

$
12,931

$
31,937

$
42,095Broker


94,242


10,000


30,000Short-term
FHLB advances (1)


147,500


88,177


102,810Weighted average rate(at
  month end)paid on:Securities
sold under agreements to repurchase:Customer


1.42
%

2.82
%

3.79
%Broker


1.74


2.39


4.44Short-term
FHLB advances (1)


4.15


3.94


4.13Maximum amount of borrowings
outstanding At any month end:Securities
sold under agreements to repurchase:Customer

$
12,931

$
39,317

$
76,706Broker


184,129


109,958


30,000Short-term
FHLB advances (1)


159,735


216,200


140,727Approximate average short-term
borrowings outstanding with respect to:Securities
sold under agreements to repurchase:Customer

$
9,033

$
27,498

$
42,754Broker


134,809


73,723


19,632Short-term
FHLB advances (1)


103,360


146,150


107,661Weighted average rate (year to
date) paid on:Securities
sold under agreements to repurchase:Customer


1.01
%

2.43
%

3.76
%Broker


1.50


2.37


3.70Short-term
FHLB advances (1)


4.15


3.94


4.13(1)
Short-term FHLB advances include various advances which
  are subject to call by FHLB within one year.Competition

As
of June 30, 2006, the most recent date for which published data is available,
Coastal Federal held the largest share of deposits, a 15.7% share, in Horry
County, S.C. according to the Federal Deposit Insurance

20

Corporation.
Coastal Federal also held the third highest market share of deposits in
Brunswick County, N.C. with an 8.7% 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 115 offices of other financial
institutions in Horry County, and 37 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, 2006, the Company had 508 full-time Associates and 57
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 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)

21

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 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
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-

22

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, 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,
2006 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 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.
Deposits of Coastal Federal are insured by the Deposit Insurance Fund

23

(DIF) of the
FDIC. The FDIC determines insurance premiums based on a number of factors,
primarily the risk of loss that insured institutions pose to the DIF. Recent
legislation eliminated the minimum 1.25% reserve ratio for the insurance funds,
the mandatory assessments when the ratio falls below 1.25% and the prohibition
on assessing the highest quality banks when the ratio is above 1.25%. The FDIC
has the ability to adjust the new insurance funds reserve ratio between 1.15%
and 1.5%, depending on projected losses, economic changes and assessment rates
at the end of a calendar year. The FDIC has adopted regulations that set
assessment rates that took effect at the beginning of 2007. The new assessment
rates for most banks vary between five cents and seven cents for every $100 of
deposits. A change in insurance premiums could have an adverse effect on the
operating expenses and results of operations of Coastal Federal. The Bank
cannot predict what insurance assessment rates will be in the future.
Assessment credits have been provided to institutions that paid high premiums
in the past, and Coastal Federal will have credits of approximately $450,000 to
offset premiums in 2007.

Insurance
of deposits may be terminated by the FDIC 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 FDIC or the OTS. The Bank
does not know of any practice, condition or violation that might lead to
termination of its deposit insurance.

In
addition to the assessment for deposit insurance, institutions are required to
make payments on bonds issued in the late 1980s by the Financing Corporation to
recapitalize a predecessor deposit insurance fund.

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, 2006, the Banks limit on loans to one
borrower was $21.1 million, and the Banks largest aggregate outstanding
balance of loans to one borrower was $15.6 million.

QTL
Test. The Home
Owners Loan Act 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 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, 2006, 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

24

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, 2006 totaled $289,000.

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 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
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 of $20.3 million at September 30, 2006.

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

25

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 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 provision of information to
  credit reporting agencies;26

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

27

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.

Item 1.A. Risk Factors

Investing
in our common stock involves various risks which are particular to our Company,
our industry and our market area. Several risk factors regarding investing in
our common stock are discussed below. This listing should not be considered as
all-inclusive. If any of the following risks were to occur, we may not be able
to conduct our business as currently planned and financial condition or
operating results could be negatively impacted. These matters could cause the
trading price of our common stock to decline in future periods.


We are
  geographically concentrated along the coastlines of South Carolina and North
  Carolina. Changes in local economic conditions and catastrophic weather could
  have a significantly adverse impact on our profitability.We operate
  primarily along the coastlines of South Carolina and North Carolina and
  substantially all of our loan customers and most of our deposits and other
  customers live or have operations in these areas. Accordingly, our success
  significantly depends upon the growth in population, income levels, deposits
  and housing starts in the region, along with continued attraction of business
  ventures to the area. Our profitability is impacted by changes in economic
  conditions, particularly changes in the real estate and tourism industries.
  Exposure to changes in tourism or the real estate market, whether due to
  changing economic conditions or catastrophic weather, could reduce our growth
  rate, affect the ability of our customers to repay their loans to us, and
  generally affect our financial condition and results of operations.
If our loan
  customers do not pay us as they have contracted to, we may experience losses.Our
  principal revenue producing business is making loans. If our customers do not
  repay the loans, we will suffer losses. Even though we maintain an allowance
  for loan losses, the amount of the allowance may not be adequate to cover the
  losses we experience. We attempt to mitigate this risk by a thorough review
  of creditworthiness of loan customers. Nevertheless, there is risk that our
  credit evaluation will prove to be inaccurate due to changed circumstances or
  otherwise.
Fluctuations
  in interest rates could reduce our profitability.Changes in
  interest rates may affect our level of interest income, the primary component
  of our gross revenue, as well as the level of our interest expense. Interest
  rate fluctuations are caused by many factors which, for the most part, are
  not under our direct control. For example, national monetary policy plays a
  significant role in the determination of interest rates. Additionally,
  competitor pricing and the resulting negotiations that occur with customers
  also impact the rates we collect on loans and the rates we pay on deposits.As interest
  rates change, we expect we will periodically experience gaps in the
  interest rate sensitivities of our assets and liabilities, meaning that
  either our interest-bearing liabilities will be more sensitive to changes in
  market interest rates than our interest-earning assets, or vice versa. In
  either event, if market rates should move contrary to our position, this
  gap may work against us, and our earnings may be negatively affected.28

Changes in
  the level of interest rates also may negatively affect our ability to
  originate real estate loans, the value of our assets and our ability to
  realize gains from the sale of our assets, all ultimately affect our
  earnings. A decline in the market value of our assets may limit our ability
  to borrow additional funds. As a result, we could be required to sell some of
  our loans and investments under adverse market conditions, upon terms that
  are not favorable to us, in order to maintain our liquidity. If those sales
  are made at prices lower than the amortized cost of the investments, we will
  incur losses.
The banking
  industry is highly competitive.The banking
  industry in our market area is highly competitive. We compete with many
  different financial and financial services institutions. A substantial number
  of the banks in our market area are branches or subsidiaries of much larger
  organizations affiliated with statewide, regional, or national banking
  companies, and as a result, may have greater resources and lower costs of
  funds. These competitors aggressively solicit customers within their market
  area by advertising through direct mail, electronic media and other means.
  These competitors may offer services, such as international banking services,
  that we can offer only through correspondents, if at all. Additionally,
  larger competitors have greater capital resources and, consequently, higher
  lending limits.
We are
  dependent on key personnel and the loss of one or more of those key personnel
  may materially and adversely affect our prospects.Competition
  for qualified employees and personnel in the banking industry is intense and
  there are a limited number of qualified persons with knowledge and experience
  in the South Carolina banking industry. The process of recruiting personnel
  with a combination of skills and attributes required to carryout our
  strategies is often lengthy. Our success depends, to a significant degree,
  upon our ability to attract and retain qualified management, loan
  origination, finance, administrative, marketing and technical personnel. We
  are dependent upon a number of key executives who are integral to
  implementing our business plan. The loss of the services of any one of our
  senior executive management team or other key executives could have a
  material adverse effect on our business, financial condition, results of
  operations and cash flows.
Provisions
  in our articles of incorporation and Delaware law may discourage or prevent
  takeover attempts, and these provisions may have the effect of reducing the
  market price of our stock.Our articles
  of incorporation include several provisions that may have the effect of
  discouraging or preventing hostile takeover attempts, and therefore, making
  the removal of incumbent management difficult. The provisions include
  staggered terms for our board of directors and requirements of supermajority
  votes to approve certain business transactions. In addition, Delaware law
  contains several provisions that may make it more difficult for a third party
  to acquire control of us without the approval of the board of directors, and
  may make it more difficult or expensive for a third party to acquire a
  majority of our outstanding stock. To the extent that these provisions are
  effective in discouraging or preventing takeover attempts, they may tend to
  reduce the market price for our stock.
We are
  subject to governmental regulations which could change and increase our cost
  of doing business or have an adverse effect on our business.We operate
  in a highly regulated industry and are subject to examination, supervision
  and comprehensive regulation by various federal and state agencies. Our
  compliance with the requirements of these agencies is costly and may limit
  our growth and restrict certain of our activities, including payment of
  dividends, mergers and acquisitions, investments, loans and interest rates
  charged and location of offices. We are also subject to capitalization
  guidelines established by federal authorities and our failure to meet those
  guidelines could result, in an extreme case, in our bank being placed in
  receivership. Supervision, regulation and examination of banks and bank
  holding companies by financial institution regulatory agencies are intended
  for the protection of depositors and our other customers rather than the
  holders of our common stock.
Changes in
  accounting standards could impact reported earnings.The
  accounting standard setters, including FASB, SEC and other regulatory bodies,
  periodically change financial accounting and reporting standards that govern
  the preparation of our consolidated statements. These changes can be hard to
  predict and can materially impact how the Company records and reports its29

financial
  condition and results of operations. In some cases, we could be required to
  apply a new or revised accounting standard retroactively, resulting in the
  restatement of prior period financial statements.
We are
  susceptible to changes in monetary policy and other economic factors which
  may adversely affect our ability to operate profitably.Changes in
  governmental, economic and monetary policies may affect the ability of our
  bank to attract deposits and make loans. The rates of interest payable on
  deposits and chargeable on loans are affected by governmental regulation and
  fiscal policy as well as by national, state and local economic conditions.
  All of these matters are outside of our control and affect our ability to
  operate profitably.
The
  preparation of financial statements requires the use of estimates that may
  vary from actual results.Preparation
  of consolidated financial statements in conformity with accounting principles
  accepted in the United States of America requires management to make
  significant estimates that affect the financial statements. One of our most
  critical estimates is the level of the allowance for loan losses. Due to the
  inherent nature of this estimate, we cannot provide absolute assurance that
  we will not significantly increase allowances for losses that are
  significantly higher than the provided allowance.
We rely on
  communications, information, operating and financial control systems, and
  technology from third-party service providers, and we may suffer an
  interruption in those systems that may result in lost business. Further, we
  may not be able to substitute providers on terms that are as favorable if our
  relationships with our existing service providers are interrupted.We rely
  heavily on third-party service providers for much of our communications,
  information, operating and financial controls systems, and technology. Any
  failure or interruption or breach in security of these systems could result
  in failures or interruptions in our customer relationships management,
  general ledger, deposit, servicing and/or loan origination systems. We cannot
  assure you that such failures or interruptions will not occur or, if they do
  occur, that they will be adequately addressed by us or the third parties on
  which we rely. The occurrence of any failure or interruption could have a
  material adverse effect on our business, financial condition, results of
  operations and cash flows. If any of our third-party service providers
  experience financial, operational or technological difficulties, or if there
  is any other disruption in our relationships with them, we may be required to
  locate alternative sources of such services, and we cannot assure you that we
  could negotiate terms that are as favorable to us, or could obtain services
  with similar functionality as found in our existing systems, without the need
  to expend substantial resources, if at all. Any of these circumstances could
  have a material adverse effect on our business, financial condition, results
  of operations and cash flows.
If the
  business continuity and disaster recovery plans that we have in place are not
  adequate to continue our operations in the event of a disaster, the business
  disruption can adversely impact our operations.External
  events, including terrorist or military actions, or an outbreak of disease,
  such as Asian Influenza, or bird flu and resulting political and social
  turmoil could cause unforeseen damage to our physical facilities or could
  cause delays or disruptions to operational functions, including information
  processing and financial market settlement functions. Additionally, our
  customers, vendors and counterparties could suffer from such events. Should
  these events affect us, or our customers, or vendors or counterparties with
  which we conduct business, our results of operations could be adversely
  affected.
From time to
  time, we are subject to claims and litigation from customers and other
  individuals.Whether such
  claims and legal actions are founded or unfounded, if such claims and legal
  actions are not resolved in a manner favorable to us, they may result in
  significant financial liability and/or adversely affect the market perception
  of us and our products and services. Any financial liability or reputation
  damage could have a material adverse effect on our business and financial
  performance.
Even though
  our common stock is currently traded on the Nasdaq Stock Market, it has less
  liquidity than the average stock quoted on national stock exchanges.The trading
  volume in our common stock on the Nasdaq Stock Market has been relatively low
  when compared with larger companies on the Nasdaq National Market or national
  stock exchanges. As a result, it may be more difficult for stockholders to
  sell a substantial number of shares for the same price at which30

stockholders
  could sell a small number of shares. We also cannot predict the effect, if
  any, that future sales of our common stock in the market, or the availability
  of shares of common stock for sale in the market, will have on the market
  price of our common stock. We can give no assurance that sales of substantial
  amounts of common stock in the market, or the potential for large amounts
  of sales in the market, would not cause the price of our common stock to
  decline or impair our future ability to raise capital through sales of common
  stock. The market price of our common stock may fluctuate in the future, and
  these fluctuations may be unrelated to our performance. General market price
  declines or overall stock market volatility in the future could adversely
  affect the price of our common stock. Further, the current market price of
  our stock may not be indicative of future market prices.
Decline in
  home values in the Companys markets could adversely impact results from
  operations.Like all
  banks, the Company is subject to the effects of any economic downturn, and in
  particular, a significant decline in home values in the Companys markets
  could have a negative effect on the results of operations A significant
  decline in home values would likely lead to a decrease in new home equity
  loan originations and increased delinquencies and defaults in both the
  consumer home equity loan and the residential real estate loan
  portfolios and result in increased losses in these portfolios.
The Company
  is subject to federal and state income tax regulations.Income tax
  regulations are often complex and require interpretation. Changes in income
  tax regulations could negatively impact the Companys results of operations.
  If the Companys REIT affiliate fails to qualify as a REIT, or should states
  enact legislation taxing these or related entities, the Company will be
  subject to a higher consolidated effective tax rate. The REIT and related
  companies must meet specific provisions of the Internal Revenue Code (IRC)
  and state tax laws. If these companies fail to meet any of the required
  provisions of the federal and state tax laws, tax expense could increase. Use
  of these companies is and has been the subject of federal and state audits. See
  Managements Discussion and Analysis of Operations-Income Taxes for
  additional information.
The Company
  is subject to the USA Patriot and Bank Secrecy Acts.The USA
  Patriot and Bank Secrecy Acts require financial institutions to develop
  programs to prevent financial institutions from being used for money
  laundering and terrorist activities. If such activities are detected,
  financial institutions are obligated to file suspicious activity reports with
  the U.S. Treasury Departments Office of Financial Crimes Enforcement
  Network. These rules require financial institutions to establish procedures
  for identifying and verifying the identity of customers seeking to open new
  financial accounts. Failure to comply with these regulations could result in
  fines or sanctions. During the past year, several banking institutions have
  received large fines for non-compliance with these laws and regulations. The
  Company has developed policies and procedures designed to ensure compliance.
Our common
  stock is not insured, so you could lose your total investment.Our common
  stock is not a deposit or savings account, and will not be insured by the
  Federal Deposit Insurance Corporation any other government agency. Should our
  business decline or fail, you could lose your total investment.Item 1.B. Unresolved
Staff Comments

Not
applicable.

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, 2006, the Bank operated seventeen branches in South Carolina and
seven branches in North

31

Carolina. Of
these, two branches have land leases, four of the branches lease land and
building and eighteen are owned.

The
net book value of the Companys investment in office, properties and equipment
totaled $29.9 million at September 30, 2006. 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.

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, 2006 (Annual
Report) is incorporated herein by reference.

The
Company did not repurchase any of its outstanding shares of common stock during
the quarter and year ended September 30, 2006.

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

32

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 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, 2006 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 2007 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 2007 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 Company.
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 Directors and hold
office until their successors have been elected and qualified or until they are
removed from office.

33

Executive
  Officers of the RegistrantName, Age
  and Position

Business
  ExperienceMichael C.
  Gerald, 57 President, Chief Executive Officer and a Director

Mr. Gerald
  has been associated with Coastal Federal since 1974 and serves 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, 58, Executive Vice President and Chief Operations Officer

Mr. Graham
  serves as Executive Vice President and Chief Operations 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, 46, Executive Vice President and Chief Financial Officer

Mr. Rexroad
  joined the Company in April 1995 and is Executive Vice 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 Real Estate Investment Corporation and President of Coastal
  Federal Holding 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.Phillip G.
  Stalvey, 50, Executive Vice President and Banking Group Leader

Mr. Stalvey
  is Executive Vice President and Banking Group Leader for the Bank. He also
  serves as an Executive Vice President of the Corporation and is a director of
  Coastal Investor Services, Inc. He has been associated with Coastal Federal
  for the past 25 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, 55 Executive Vice President and Director of Marketing

Mr. Sherry
  joined the Company in May 1998 and is Executive Vice President and Director
  of Marketing for the Bank. He also serves as Executive Vice President and
  Chief Marketing Officer for Coastal Financial Corporation. He is active with
  a variety of local community groups and serves as the Chairman of the Board
  of Trustees of the Franklin G. Burroughs-Simeon B. Chapin Art Museum. Mr.
  Sherry holds numerous achievement awards for marketing and advertising.34

Susan J.
  Cooke, 56 Senior Vice President and Corporate Secretary

Ms. Cooke is
  Senior Vice President and Corporate Secretary for Coastal 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 nineteen years. She is a member of the
  American Society of Corporate Secretaries, Inc. and the National Association
  for Female Executives.Robert D.
  Douglas, 47 Executive Vice President Human Resources/Coastal Federal
  University Group

Mr. Douglas
  joined the corporation in June 1994 and serves as Executive Vice President of
  the Bank and Coastal 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 is required to disclose any amendments to 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 OwnersInformation
  required by this item is incorporated herein by reference to the section
  captioned Stock Ownership of the Proxy Statement.(b)
Security
  Ownership of ManagementInformation
  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.35

(d)
  Equity
  Compensation Plan Information as of September 30, 2006Plan Category
  (a)
  
  Number of securities to
  be issued upon exercise
  of outstanding options,
  warrants and rights
  (b)
  
  Weighted-average price
  of outstanding options,
  warrants and rights
  (c)
  
  Number of securities
  remaining available for future issuance under equity compensation
  plans (excluding
  securities reflected in 
  column (a))
  (d)Equity compensation plans
approved by
  security holders
  
  
  
  2,748,630
  
  
  
  $
  8.07
  
  
  
  
  127,920Equity compensation plans
not approved by
  security holders
  
  
  
  N/A
  
  
  
  
  N/A
  
  
  
  
  N/ATotal
  
  
  
  2,748,630
  
  
  
  $
  8.07
  
  
  
  
  127,920Item 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, 2005 and 2006.(b)
  Consolidated
  Statements of Operations for the Years Ended September 30, 2004, 2005 and
  2006.(c)
  Consolidated
  Statements of Stockholders Equity and Comprehensive Income for the Years
  Ended September 30, 2004, 2005 and 2006.(d)
  Consolidated
  Statements of Cash Flows for the Years Ended September 30, 2004, 2005 and
  2006.(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.
  Exhibits36

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)
  Certificate
  of Amendment to Certificate of Incorporation of Coastal Financial Corporation
  (7)3
  (d)
  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,
  200614
  Code of Ethics (6)21
  Subsidiaries of the Registrant23
  Consent of Independent Registered Public Accounting
Firm31
  1
  Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer31
  2
  Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer32
  1
  Section 1350 Certification of Chief Executive
Officer32
  2
  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, 1998.37

(6)
  Incorporated by reference
  to the September 30, 2003 Form 10-K filed with the Securities and Exchange
  Commission on December 22, 2003.(7)
  Incorporated by reference
  to the March 31, 2006 Form 10-Q filed with the Securities and Exchange
  Commission on May 10, 2006.38

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
  CORPORATIONDate:
  December 14, 2006
  By:
  /s/ Michael
  C. GeraldMichael C.
GeraldPresident/Chief ExecutiveOfficer(Duly
Authorized Representative)39

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. RexroadMichael C. Gerald
  President/Chief Executive
  Officer And a Director
  (Principal Executive
  Officer)
  
  Jerry L. Rexroad Executive
Vice President And Chief Financial Officer (Principal Financial and Accounting Officer)Date:
  December 14,
  2006
  
  December 14, 2006By:
  /s/ James T.
  Clemmons
  By:
  /s/ Frank A. Thompson, IIJames T. Clemmons Chairman of
the Board
  
  Frank A. Thompson, II
DirectorDate:
  December 14,
  2006
  Date:
  December 14, 2006By:
  /s/ William
  O. Marsh
  By:
  /s/ James P. CreelWilliam O. Marsh
  Director
  
  James P. Creel
  DirectorDate:
  December 14,
  2006
  Date:
  December 14, 2006By:
  /s/ G. David
  Bishop
  By:
  /s/ James H. DusenburyG. David Bishop
Director
  
  James H. Dusenbury
  DirectorDate:
  December 14,
  2006
  Date:
  December 14, 2006By:
  /s/ E.
  Lawton Benton
  By:
  /s/ J. Robert CallihamE. Lawton Benton
  Director
  
  J. Robert Calliham
  DirectorDate:
  December 14,
  2006
  Date:
  December 14, 2006By:
  /s/ W. Cecil
  Worsley, IIIW. Cecil Worsley, III
  DirectorDate:
  December 14,
  200640