UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                         ------------------------------

                                    FORM 10-Q

     (X)  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

          For the quarterly period ended December 31, 2005

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

          For the transition period from ________ to __________

                         Commission File Number: 0-19684

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

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

       2619 OAK STREET, MYRTLE BEACH, S. C.                     29577
     ----------------------------------------------------------------------
      (Address of principal executive offices)              (Zip Code)


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

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the  Securities  Exchange Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                    YES |X|      NO |_|

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

                    YES |X|      NO |_|

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)

                    YES |_|      NO |X|

     Indicate  the  number of  shares  outstanding  of each of the  registrant's
classes of common stock, as of January 31, 2006.

Common Stock $.01 Par Value Per Share                         19,505,604 Shares
--------------------------------------------------------------------------------
(Class)                                                          (Outstanding)

                                       1
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2005

TABLE OF CONTENTS                                                           PAGE
-----------------                                                           ----

PART I -  Financial Information
Item
     1.   Consolidated Financial Statements (unaudited):

          Consolidated Statements of Financial Condition
          as of September 30, 2005 and December 31, 2005                       3

          Consolidated Statements of Operations for the three
          months ended December 31, 2004 and 2005                              4

          Consolidated Statements of Stockholders' Equity
          and Comprehensive Income for the three months ended
          December 31, 2004 and 2005                                           5

          Consolidated Statements of Cash Flows for the three
          months ended December 31, 2004 and 2005                            6-7

          Notes to Consolidated Financial Statements                        8-14

     2.   Management's Discussion and Analysis of
          Financial Condition and Results of Operations                    15-25

     3.   Quantitative and Qualitative Disclosures About                   25-26
          Market Risk

     4.   Controls and Procedures                                             26


Part II - Other Information
Item
     1.   Legal Proceedings                                                   27

     1A.  Risk Factors 27

     2.   Unregistered Sales of Equity Securities and Use of Proceeds         27

     3.   Defaults Upon Senior Securities                                     27

     4.   Submission of Matters to a Vote of Securities Holders               27

     5.   Other Information                                                   27

     6.   Exhibits                                                         27-28

Signatures                                                                    29

Exhibits

    31(a) Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)   30

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

    32(a) Section 1350 Certification (Chief Executive Officer)               32

      (b) Section 1350 Certification (Chief Financial Officer)               33

                                       2
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 1.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                        September 30,    December 31,
                                                            2005            2005
                                                            ----            ----
<S>                                                      <C>            <C>
                                                                (Unaudited)
                                                               (In thousands)

ASSETS:
Cash and amounts due from banks                          $    52,592    $    43,487
Short-term interest-bearing deposits                          33,742          2,939
Federal funds sold                                             5,191             --
Investment securities available for sale                      25,616         19,928
Mortgage-backed securities available for sale                399,655        443,422
Investment securities held to maturity (market value
  $10,049 at September 30, 2005 and $10,042 at
  December 31, 2005                                           10,000         10,000
Loans receivable (net of allowance for loan
  losses of $11,748 at September 30, 2005 and
  $11,995 at December 31, 2005)                              924,260        973,839
Loans receivable held for sale                                18,121          8,031
Real estate acquired through foreclosure, net                    818            743
Office property and equipment, net                            22,758         24,163
Federal Home Loan Bank (FHLB) stock, at cost                  15,775         18,131
Accrued interest receivable on loans                           3,807          4,683
Accrued interest receivable on securities                      2,351          2,824
Bank-owned life insurance                                     22,574         22,814
Other assets                                                   6,199          6,050
                                                         -----------    -----------
                                                         $ 1,543,459    $ 1,581,054
                                                         ===========    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY:

LIABILITIES:
Deposits                                                 $ 1,070,918    $ 1,057,197
Securities sold under agreements to repurchase                41,937         48,548
Advances from FHLB                                           289,007        341,357
Junior subordinated debt                                      15,464         15,464
Drafts outstanding                                            12,890          3,541
Advances by borrowers for property taxes and insurance         1,221             83
Accrued interest payable                                       3,415          4,430
Other liabilities                                             11,386         11,226
                                                         -----------    -----------
     Total Liabilities                                     1,446,238      1,481,846
                                                         -----------    -----------

STOCKHOLDERS' EQUITY:
Serial preferred stock, 1,000,000 shares authorized
  and unissued                                                    --             --
Common stock, $.01 par value, 25,000,000 shares
  authorized; 19,457,492 shares at September 30, 2005
  and 19,491,789 shares at December 31, 2005 issued
  and outstanding                                                195            195
Additional paid-in capital                                    11,410         11,664
Retained earnings, restricted                                 86,723         90,192
Accumulated other comprehensive income, net of tax            (1,107)        (2,843)
                                                         -----------    -----------
  Total stockholders' equity                                  97,221         99,208
                                                         -----------    -----------
                                                         $ 1,543,459    $ 1,581,054
                                                         ===========    ===========
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       3
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 1.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 AND 2005

<TABLE>
<CAPTION>
                                                                   2004            2005
                                                                   ----            ----
<S>                                                            <C>            <C>
                                                                        (Unaudited)
                                                                      (In thousands,
                                                                     Except per share)
Interest income:
   Loans receivable                                            $     12,740    $     17,147
   Investment securities                                              1,144           1,615
   Mortgage-backed securities                                         4,006           4,109
   Other                                                                 67             167
                                                               ------------    ------------
Total interest income                                                17,957          23,038
                                                               ------------    ------------

Interest expense:
   Deposits                                                           2,507           5,870
   Securities sold under agreements to repurchase                       567             378
   Advances from FHLB                                                 3,168           3,245
   Other borrowings                                                     200             269
                                                               ------------    ------------
Total interest expense                                                6,442           9,762
                                                               ------------    ------------
   Net interest income                                               11,515          13,276
Provision for loan losses                                               350             400
                                                               ------------    ------------
   Net interest income after provision for loan losses               11,165          12,876
                                                               ------------    ------------

Other income:
   Fees and service charges on loan and deposit accounts              1,090           2,089
   Gain on sales of loans held for sale                                 310              92
   Gain (loss) on sales of investment securities, net                   149             (13)
   Gain (loss) on sales of mortgage-backed securities, net                9             (33)
   (Loss) from real estate acquired through foreclosure, net            (39)            (33)
   Income from sales of non-depository products                         460             405
   FHLB stock dividends                                                 137             200
   Income from ATM and debit card transactions                          296             501
   Bank-owned life insurance                                            240             239
   Other income                                                         115             141
                                                               ------------    ------------
     Total other income                                               2,767           3,588
                                                               ------------    ------------

General and administrative expenses:
   Salaries and employee benefits                                     4,423           5,378
   Net occupancy, furniture and fixtures and data
     processing expenses                                              1,142           1,451
   Depreciation                                                         599             802
   FDIC insurance premium                                                27              33
   Marketing expenses                                                   511             437
   Expense from ATM and debit card transactions                         228             329
   Other expense                                                        850           1,250
                                                               ------------    ------------
     Total general and administrative expense                         7,780           9,680
                                                               ------------    ------------
Income before income taxes                                            6,152           6,784
Income taxes                                                          2,107           2,341
                                                               ------------    ------------
Net income                                                     $      4,045    $      4,443
                                                               ============    ============

Net income per common share:
   Basic                                                       $       0.21    $       0.23
                                                               ============    ============
   Diluted                                                     $       0.20    $       0.22
                                                               ============    ============

Dividends declared per common share                            $      0.041    $       0.05
                                                               ============    ============

Weighted average common shares outstanding:
   Basic                                                         19,261,000      19,473,000
                                                               ============    ============
   Diluted                                                       20,364,000      20,375,000
                                                               ============    ============
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       4
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 1.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 AND 2005

<TABLE>
<CAPTION>
                                                                                   Accumulated
                                                                                      Other
                                                                                     Compre-
                                           Additional                                hensive        Total
                                Common      Paid-In      Retained      Treasury       Income     Stockholders'
                                Stock       Capital      Earnings        Stock        (Loss)        Equity
                              ----------   ----------   ----------    ----------    ----------    ----------
<S>                          <C>          <C>          <C>           <C>           <C>           <C>
                                                               (Unaudited)
                                                              (In thousands)

Balance at September
  30, 2004                    $      192   $   10,607   $   73,533    $   (1,182)   $    2,198    $   85,348
Net income                            --           --        4,045            --            --         4,045
Other comprehensive
 income:
 Unrealized losses arising
 during period, net of
 taxes of $266                        --           --           --            --           429            --
 Less: reclassification
 adjustment for gains
 included in net income,
 net of taxes of $60                  --           --           --            --           (98)           --
                                                                                    ----------
Other comprehensive loss              --           --           --            --           331           331
                                                                                    ----------    ----------
Comprehensive income                  --           --           --            --            --         4,376
                                                                                                  ----------

Exercise of stock
  options                             --          129         (242)          429            --           316
Cash dividends                        --           --         (789)           --            --          (789)
                              ----------   ----------   ----------    ----------    ----------    ----------
Balance at December
 31, 2004                     $      192   $   10,736   $   76,547    $     (753)   $    2,529    $   89,251
                              ==========   ==========   ==========    ==========    ==========    ==========

Balance at September
  30, 2005                    $      195   $   11,410   $   86,723    $       --    $   (1,107)   $   97,221

Net income                            --           --        4,443            --            --         4,443
Other comprehensive
 income:
 Unrealized losses arising
 during period, net of
 tax benefit of $1,082                --           --           --            --        (1,764)           --
 Less: reclassification
 adjustment for loss
 included in net income,
 net of taxes of $18                  --           --           --            --            28            --
                                                                                    ----------

Other comprehensive income            --           --           --            --        (1,736)       (1,736)
                                                                                    ----------    ----------
Comprehensive income                  --           --           --            --            --         2,707
                                                                                    ----------    ----------
Exercise of stock
  options                             --          229           --            --            --           229
Stock compensation expense,
   net of tax                         --           25           --            --            --            25
Cash dividends                        --           --         (974)           --            --          (974)
                              ----------   ----------   ----------    ----------    ----------    ----------
Balance at December
  31, 2005                    $      195   $   11,664   $   90,192    $       --    $   (2,843)   $   99,208
                              ==========   ==========   ==========    ==========    ==========    ==========
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       5
<PAGE>

Item 1.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 AND 2005

<TABLE>
<CAPTION>
                                                                    2004          2005
                                                                    ----          ----
<S>                                                               <C>          <C>
                                                                       (Unaudited)
                                                                      (In thousands)

Cash flows from operating activities:
Net income                                                        $   4,045    $   4,443
Adjustments to reconcile net income to net cash
Used in operating activities:
Depreciation                                                            599          802
Provision for loan losses                                               350          400
(Gain) loss on sale of investment securities
     available for sale                                                (149)          13
(Gain) loss on sale of mortgage-backed securities
     available for sale                                                  (9)          33
Stock option compensation expense                                        --           41
Origination of loans receivable held for sale                       (19,653)      (6,228)
Proceeds from sale of loans receivable held for sale                  4,084        5,584
Proceeds from securitization and sale of loans receivable
     held for sale                                                   10,878        5,970
(Increase) decrease in:
     Cash value of life insurance                                      (240)        (240)
     Other assets                                                       (53)         148
     Accrued interest receivable                                       (165)      (1,349)
Increase (decrease) in:
     Accrued interest payable                                           126        1,015
     Other liabilities                                                  660          888
                                                                  ---------    ---------
Net cash provided by operating activities                               473       11,520
                                                                  ---------    ---------

Cash flows from investing activities:
Proceeds from sales of investment securities available for sale         739        5,992
Proceeds from sale of mortgage-backed securities
     available for sale                                              29,662       34,570
Proceeds from issuer call of investment securities held
     to maturity                                                      7,840           --
Proceeds from maturities of investment securities
     available for sale                                               1,950           --
Purchases of investment securities available for sale                (2,150)        (710)
Purchases of investment securities held to maturity                 (10,000)          --
Purchases of mortgage-backed securities available for sale         (114,207)    (103,850)
Principal collected on mortgage-backed securities
     available for sale                                              21,010       23,073
Origination of loans receivable, net                               (139,522)    (199,575)
Purchase of loans receivable                                             --       (8,656)
Proceeds from sale of commercial loan participations                  5,842          966
Principal collected on loans receivable                             119,073      161,677
Proceeds from sales of real estate acquired through
     foreclosure, net                                                   524          447
Purchases of office properties and equipment                         (1,472)      (2,206)
Change in FHLB stock, net                                            (3,428)      (2,355)
                                                                  ---------    ---------
Net cash used in investing activities                               (84,139)     (90,627)
                                                                  ---------    ---------
</TABLE>

                                       6
<PAGE>

                                                                     (CONTINUED)
PART I.  FINANCIAL INFORMATION
Item 1.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 AND 2005 (CONTINUED)

<TABLE>
<CAPTION>
                                                                            2004          2005
                                                                            ----          ----
<S>                                                                       <C>          <C>
                                                                               (Unaudited)
                                                                              (In thousands)

Cash flows from financing activities:
Decrease in deposits, net                                                 $  (6,413)   $ (13,721)
Increase in securities sold under agreements to repurchase, net              13,737        6,611
Proceeds from FHLB advances                                                 195,500      233,750
Repayment of FHLB advances                                                 (126,800)    (181,400)
Decrease in advance payments by borrowers for
     property taxes and insurance, net                                       (1,212)      (1,138)
Decrease in drafts outstanding, net                                          (1,593)      (9,349)
Cash dividends to stockholders                                                 (789)        (974)
Proceeds from exercise of stock options                                         316          229
                                                                          ---------    ---------
Net cash provided by financing activities                                    72,746       34,008
                                                                          ---------    ---------
Net decrease in cash and cash equivalents                                   (10,920)     (45,099)
Cash and cash equivalents at beginning of period                             29,652       91,525
                                                                          ---------    ---------
Cash and cash equivalents at end of period                                $  18,732    $  46,426
                                                                          =========    =========

Supplemental information:
     Interest paid                                                        $   6,316    $   8,747
                                                                          =========    =========
     Income taxes paid                                                    $      --    $      98
                                                                          =========    =========

Supplemental schedule of non-cash investing and financing transactions:

Securitization of mortgage loans into mortgage-backed
     securities                                                           $  10,878    $   5,970
                                                                          =========    =========

Transfer of mortgage loans to real estate acquired
     through foreclosure                                                  $     413    $     372
                                                                          =========    =========


Change in unrealized gain (loss) in investment securities
     and mortgage-backed securities available for sale,
     net of tax                                                           $     429    $  (1,765)
                                                                          =========    =========

Transfer of loans held for sale to loans receivable                       $      --    $   4,764
                                                                          =========    =========
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       7
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 1.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) BASIS OF PRESENTATION

The accompanying  unaudited  consolidated  financial statements were prepared in
accordance with  instructions for Form 10-Q and,  therefore,  do not include all
disclosures  necessary  for a  complete  presentation  of  financial  condition,
results  of  operations,  cash  flows and  changes  in  stockholders'  equity in
conformity with accounting principles generally accepted in the United States of
America. All adjustments, consisting only of normal recurring accruals, which in
the opinion of management  are necessary  for fair  presentation  of the interim
financial  statements,  have been  included.  The results of operations  for the
three-month period ended December 31, 2005 are not necessarily indicative of the
results  that may be  expected  for the  entire  fiscal  year.  These  unaudited
consolidated  financial  statements  should be read in conjunction  with Coastal
Financial  Corporation and Subsidiaries'  (the "Company")  audited  consolidated
financial  statements  and related notes for the year ended  September 30, 2005,
included in the  Company's  2005 Annual  Report to  Stockholders.  The principal
business of the Company is conducted  by its  wholly-owned  subsidiary,  Coastal
Federal Bank (the "Bank"). The information presented herein, therefore,  relates
primarily to the Bank.

Certain prior period amounts have been  reclassified  to conform to current year
presentation.

(2) INVESTMENT SECURITIES AVAILABLE FOR SALE

The unrealized losses on investment securities were attributable to increases in
interest  rates,  rather  than  credit  quality.  The unrealized losses that had
continuous  losses  of  less than 12 months are comprised of seven securities at
September 30, 2005 totaling $18,000 and eighteen securities at December 31, 2005
totaling  $76,000. The unrealized losses that had continuous losses 12 months or
longer  are  comprised  of six securities at September 30, 2005 totaling $33,000
and  five  securities  at  December  31,  2005  totaling  $65,000.  None  of the
individual  investment  securities  had an unrealized loss that exceed 5% of its
amortized  cost  in  either period. At September 30, 2005 and December 31, 2005,
substantially all investment securities were rated AAA or higher.

(3) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE

Gross unrealized losses on mortgage-backed securities and the length of time the
securities have been in a continuous loss position were as follows:

<TABLE>
<CAPTION>
                                                       September 30, 2005
                          --------------------------------------------------------------------------
                           Less than 12 Months        12 Months or Longer               Total
                          ----------------------    ----------------------    ----------------------
                                                   (Dollars in thousands)
                            Fair       Unrealized     Fair       Unrealized     Fair       Unrealized
                            Value        Losses       Value        Losses       Value        Losses
                            -----        ------       -----        ------       -----        ------
<S>                       <C>               <C>        <C>            <C>        <C>          <C>
Collateralized Mortgage   $  55,560         (770)      19,518         (360)      75,078       (1,130)
  Obligations
FNMA                         78,664       (1,189)       5,893         (157)      84,557       (1,346)
GNMA                         32,787         (416)          --           --       32,787         (416)
FHLMC                        81,540         (988)       5,951          (99)      87,491       (1,087)
                          ---------    ---------    ---------    ---------    ---------    ---------
                          $ 248,551       (3,363)      31,362         (616)     279,913       (3,979)
                          =========    =========    =========    =========    =========    =========
</TABLE>
<TABLE>
<CAPTION>
                                                      December 31, 2005
                          --------------------------------------------------------------------------
                           Less than 12 Months        12 Months or Longer               Total
                          ----------------------    ----------------------    ----------------------
                                                   (Dollars in thousands)
                            Fair       Unrealized     Fair       Unrealized     Fair       Unrealized
                            Value        Losses       Value        Losses       Value        Losses
                            -----        ------       -----        ------       -----        ------
<S>                       <C>             <C>          <C>            <C>        <C>          <C>
Collateralized Mortgage   $  67,605       (1,046)      25,738         (557)      93,343       (1,603)
  Obligations
FNMA                        118,673       (1,942)       8,346         (197)     127,019       (2,139)
GNMA                         32,879         (443)          --           --       32,879         (443)
FHLMC                       112,777       (1,502)       9,733         (203)     122,510       (1,705)
                          ---------    ---------    ---------    ---------    ---------    ---------
                          $ 331,934       (4,933)      43,817         (957)     375,751       (5,890)
                          =========    =========    =========    =========    =========    =========
</TABLE>

                                       8
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 1.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONTINUED

(3) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE - CONTINUED

The  unrealized  losses  on  mortgage-backed  securities  were  attributable  to
increases  in  interest  rates,  rather  than  credit quality deterioration. The
unrealized  losses  are comprised of 72 securities at September 30, 2005 and 102
securities  at December 31, 2005 that have had continuous losses of less than 12
months.  There  were  10  securities  at September 30, 2005 and 15 securities at
December  31,  2005,  with  continuous  losses  15  months or longer. One of the
individual mortgage-backed securities had an unrealized loss that exceeded 5% of
its  amortized  cost  by  an immaterial amount at September 30, 2005. Two of the
mortgage-backed  securities  had  unrealized  losses  which exceeded 5% of their
amortized  costs  by  immaterial  amounts  at December 31, 2005. At December 31,
2005,  none  of  the Company's securities were considered impaired. At September
30, 2005 and December 31, 2005, all mortgage-backed securities were rated AAA or
higher.

(4) LOANS RECEIVABLE, NET

Loans receivable, net, consists of the following:

                                                  September 30,  December 31,
                                                      2005           2005
                                                  -----------    -----------
                                                          (Unaudited)
                                                    (Dollars in thousands)
First mortgage loans:
   Single family to four family units             $   352,893    $   380,557
   Land and land development                          121,170        137,234
   Residential lots                                    37,112         36,934
   Other, primarily commercial real estate            211,432        220,415
   Construction loans on residential properties       127,970        130,571
   Construction loans on commercial properties         14,989         16,510

Consumer and commercial loans:
   Installment consumer loans                          19,115         19,114
   Mobile home loans                                    4,308          3,944
   Savings account loans                                1,883          2,545
   Equity lines of credit                              34,019         33,568
   Commercial and other loans                          38,691         37,778
                                                  -----------    -----------
                                                      963,582      1,019,170
Less:
   Allowance for loan losses                           11,748         11,995
   Deferred loan costs, net                              (771)          (438)
   Undisbursed portion of loans in process             28,345         33,774
                                                  -----------    -----------
                                                  $   924,260    $   973,839
                                                  ===========    ===========

The changes in the  allowance  for loan losses  consist of the following for the
three months ended:
                                               Three Months Ended December 31,
                                               -------------------------------
                                                    2004           2005
                                                    ----           ----
                                                        (Unaudited)
                                                   (Dollars in thousands)

Allowance at beginning of period                $     11,077   $     11,748
Provision for loan losses                                350            400
                                                ------------   ------------
Recoveries:
 Residential loans                                        --             --
 Commercial loans                                         14            142
 Consumer loans                                           33             20
                                                ------------   ------------
   Total recoveries                                       47            162
                                                ------------   ------------
Charge-offs:
 Residential loans                                        --             --
 Commercial loans                                          5            216
 Consumer loans                                           57             99
                                                ------------   ------------
   Total charge-offs                                      62            315
                                                ------------   ------------
   Net charge-offs                                        15            153
                                                ------------   ------------
 Allowance at end of period                     $     11,412   $     11,995
                                                ============   ============

                                       9
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 1.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED

(4) LOANS RECEIVABLE, NET - CONTINUED

<TABLE>
<CAPTION>
                                                        Three Months Ended December 31,
                                                               2004       2005
                                                                 (Unaudited)
<S>                                                           <C>       <C>
Ratio of allowance to total net loans
     outstanding at the end of the period                       1.40%     1.22%
                                                              ======    ======

Ratio of net charge-offs to average
     total loans outstanding during the period (annualized)      .01%      .06%
                                                              ======    ======
</TABLE>

Non-accrual  loans,  which are  primarily  loans over  ninety  days  delinquent,
totaled  approximately  $5.6  million and $4.1  million at December 31, 2004 and
2005,  respectively.  For the three  months  ended  December  31, 2004 and 2005,
interest income,  which would have been recorded,  would have been approximately
$126,000  and  $83,000,  respectively,  had  non-accruing  loans been current in
accordance with their original terms.

At September 30, 2005 and December 31, 2005, impaired loans totaled $2.6 million
and  $3.7  million,  respectively.  Included in the allowance for loan losses at
September  30,  2005 was $434,000 related to impaired loans compared to $360,000
at  December 31, 2005. The average recorded investment in impaired loans for the
three  months ended September 30, 2005 was $3.6 million compared to $3.1 million
for  the  three  months  ended December 31, 2005. Interest income of $35,000 and
$38,000 was recognized on impaired loans for the three months ended December 31,
2004,  and  December  31,  2005,  respectively.

(5) DEPOSITS

Deposits consist of the following:
                                September 30, 2005     December 31, 2005
                               --------------------  ---------------------
                                           Weighted               Weighted
                                           Average                Average
                                 Amount      Rate      Amount      Rate
                                 ------      ----      ------      ----
                                               (Unaudited)
                                          (Dollars in thousands)
Checking accounts:
Noninterest-bearing            $  219,080      --    $  197,857      --
Interest-bearing                  139,810    0.52%      124,044    0.59%
                               ----------            ----------
     Total checking accounts      358,890    0.20       321,901    0.23
Money market accounts             213,078    2.26       222,490    2.59
Statement savings accounts         71,824    1.47        71,705    1.72
Certificate accounts              427,126    3.39       441,101    3.82
                               ----------            ----------
                               $1,070,918    1.97%   $1,057,197    2.32%
                               ==========            ==========

Included in certificate  accounts  ("CDs") are $169.9 million of brokered CDs at
September 30, 2005 and $195.5 million at December 31, 2005. The average rate and
remaining  term of brokered  CDs at December  31, 2005 was 4.05% and 4.0 months,
respectively.

(6) ADVANCES FROM FEDERAL HOME LOAN BANK

Advances from Federal Home Loan Bank ("FHLB") consist of the following:

                                     September 30, 2005     December 31, 2005
                                    --------------------  ---------------------
                                                Weighted               Weighted
                                                Average                Average
                                     Amount      Rate      Amount       Rate
                                     ------      ----      ------       ----
                                                    (Unaudited)
                                              (Dollars in thousands)
Fiscal Year Maturing:
Year 1                              $  4,177      2.79%   $ 31,527       4.22%
Year 2                                 3,560      2.83       3,560       2.83
Year 3                                 3,977      3.18       3,977       3.18
Year 4                                31,803      2.36      31,803       2.36
Year 5                                63,651      5.74      63,651       5.74
After Year 5                         181,839      3.64     206,839       3.67
                                    --------              --------
                                    $289,007      3.93%   $341,357       3.97%
                                    ========              ========

                                       10
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 1.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED

(6) ADVANCES FROM FEDERAL HOME LOAN BANK (continued)

At September  30,  2005,  and  December  31,  2005,  the Bank had pledged  first
mortgage  loans  and   mortgage-backed   securities   with  unpaid  balances  of
approximately $362.5 million and $407.9 million, respectively, as collateral for
FHLB advances.

At December 31, 2005,  included in the one,  two,  three,  four,  and after five
years  maturities were advances of $216.0 million,  with a weighted average rate
of 3.54%, subject to call provisions. Callable advances at December 31, 2005 are
summarized as follows:  $84.0 million  callable in fiscal 2006,  with a weighted
average rate of 3.99%;  $45.0 million  callable in fiscal 2007,  with a weighted
average rate of 3.17%;  $37.0 million  callable in fiscal 2008,  with a weighted
average  rate of 2.98%;  $25.0  million  callable in fiscal 2009 with a weighted
average rate of 3.13%, and $25.0 million callable in fiscal 2011 or later,  with
a  weighted  average  rate of  3.93%.  Call  provisions  are more  likely  to be
exercised by the FHLB when market  interest rates rise. If called,  the Bank may
be required to replace these advances with higher cost funds.

(7)  EARNINGS PER SHARE

Basic  earnings per share for the three months ended  December 31, 2004 and 2005
are  computed by  dividing  net income by the  weighted  average  common  shares
outstanding  during the respective  periods.  Diluted earnings per share for the
three  months  ended  December  31, 2004 and 2005 are  computed by dividing  net
earnings  by  the  weighted  average  dilutive  shares  outstanding  during  the
respective   periods.  At  December  31,  2005,  the  Company  had  antidilutive
securities of approximately  227,000 options to purchase shares by Directors and
Associates. The average exercise price was approximately $15.25 per share.

The  following  is a  reconciliation  of  average  shares  outstanding  used  to
calculate basic and fully diluted earnings per share.

<TABLE>
<CAPTION>
                                             For the Quarter Ended December 31,
                                             ----------------------------------
                                                         (Unaudited)

                                      2004               2004   2005               2005
                                      -----------------------   -----------------------
                                      BASIC           DILUTED   BASIC           DILUTED
                                      -----------------------   -----------------------
<S>                                   <C>          <C>          <C>          <C>
Weighted average shares outstanding   19,261,000   19,261,000   19,473,000   19,473,000

Effect of dilutive securities-
stock options                                 --    1,103,000           --      902,000
                                      -----------------------   -----------------------
                                      19,261,000   20,364,000   19,473,000   20,375,000
                                      =======================   =======================
</TABLE>

(8)  STOCK BASED COMPENSATION

In December 2004, the FASB issued SFAS No. 123 (revised),  "Share-Based Payment"
("SFAS 123(R)").  SFAS 123(R) replaces SFAS No. 123, "Accounting for Stock-Based
Compensation"  ("SFAS 123"), and supersedes APB Opinion No. 25,  "Accounting for
Stock Issued to Employees" ("APB 25"). SFAS 123(R) requires  compensation  costs
related to share-based  payment  transactions  to be recognized in the financial
statements over the period that an employee provides service in exchange for the
award.  Public  companies  are  required  to adopt,  and the Company has adopted
effective October 1, 2005, the new standard using a modified prospective method.
Under  the  modified  prospective  method,   companies  are  allowed  to  record
compensation cost for new and modified awards over the related vesting period of
such awards  prospectively  and record  compensation  cost  prospectively on the
nonvested portion, at the date of adoption, of previously issued and outstanding
awards over the  remaining  vesting  period of such  awards.  No change to prior
periods presented is permitted under the modified prospective method.

At  December  31,  2005,  the  Company  had one  stock-based  payment  plan  for
directors, officers and other key Associates, which is described below. Prior to
October 1, 2005, the Company, as permitted under SFAS 123, applied the intrinsic
value method under APB 25, and related  interpretations  in  accounting  for its
stock-based compensation plan.

Effective  October 1, 2005,  the Company  adopted the  provisions of SFAS 123(R)
thereby expensing employee stock-based  compensation using the fair value method
prospectively for all awards granted,  modified,  or settled on or after October

                                       11
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 1.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED

(8) STOCK BASED COMPENSATION, (continued)

1,  2005. The fair value at date of grant of the stock option is estimated using
the  Black-Scholes  option-pricing  model  based on assumptions noted in a table
below.  The  dividend  yield  is  based on estimated future dividend yields. The
risk-free  rate  for  periods within the contractual term of the share option is
based  on the U.S. Treasury yield curve in effect at the time of grant. Expected
volatilities  are  generally based on historical volatilities. The expected term
of  share  options  granted  is  generally  derived  from historical experience.
Compensation  expense  is  recognized  on  a  straight-line basis over the stock
option vesting period. The impact of adoption of the fair value based method for
expense  recognition  of  employee  awards resulting in expense of approximately
$25,000,  net  of  tax benefit of approximately $15,000 during the quarter ended
December 31, 2005.

The Company's  stock option plan ("the Plan"),  which is  stockholder  approved,
provides for stock options to be granted  primarily to  directors,  officers and
other  key  Associates.  Options  granted  under the  stock  option  plan may be
incentive stock options or non-incentive stock options.  Share option awards are
generally  granted with an exercise  price equal to, or higher than,  the market
price of the Company's shares at the date of grant.  Options vest ratably over a
five-year  period and expire  after ten years from the date of grant,  except as
discussed below.  Share options awards provide for accelerated  vesting if there
is a change in control,  as defined in the Plan.  The remaining  shares of stock
reserved  for  the  stock   option  plan  at  December  31,  2005   amounted  to
approximately 107,000 shares.

Options  awarded  prior to  September  21,  2005 vest  ratably  over a five-year
period.  Effective  September  21, 2005,  the vesting  period for  approximately
731,000 options awarded during the fiscal 2003, 2004 and 2005 through  September
20,  2005 that would  otherwise  vest at various  time  through  fiscal 2010 was
accelerated,  as more fully  described in note 1(p) of the 2005 Annual Report to
Stockholders.  All other terms and conditions of the accelerated  options remain
unchanged as a result of the acceleration.  In addition,  in September 2005, the
Company  granted options to employees,  officers and directors of  approximately
390,000  shares,  without a vesting  requirement.  All options  expire ten years
after the date of grant.

The  weighted  average  fair  value of all of the  options  granted  during  the
quarters  ended  December  31  have  been  estimated  using  the   Black-Scholes
option-pricing model with the following assumptions (unaudited):

                                                       2004    2005
                                                       ----    ----
            Dividend yield                              1.1%    --%
            Weighted average risk-free interest rate   4.21%    --%
            Weighted average expected volatility       35.2%    --%
            Weighted average expected life in years     7.5     --

No options were granted during the quarter ended December 31, 2005.

A summary of share  option  activity  for the quarter  ended  December  31, 2005
follows (Dollars in thousands, except share data):

<TABLE>
<CAPTION>
                                                                 Weighted
                                                   Weighted       Average
                                       Number       Average      Remaining    Aggregate
                                         Of        Exercise     Contractual   Intrinsic
                                       Shares        Price     Life (Years)     Value
                                       ------        -----     ------------     -----
<S>                                  <C>          <C>            <C>        <C>

                                                         (Unaudited)

Outstanding at September 30, 2005    2,811,609    $     8.52
Granted                                     --            --
Exercised                              (34,228)   $     4.32
Forfeited or expired                        --            --
                                     ---------
Outstanding at December 31, 2005     2,777,381    $     8.58          6.1   $   14,244
                                     =========                              ==========

Exercisable at December 31, 2005     2,719,983    $     8.65          6.1   $   13,771
                                     =========                              ==========
</TABLE>

                                       12
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 1.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED

(8) STOCK BASED COMPENSATION, (continued)

The weighted average grant-date fair value of options granted during the quarter
ended December 31, 2004 is $5.48 per share. The total intrinsic value of options
exercised  during the quarters ended December 31, 2004 and 2005 was $490,000 and
$337,000, respectively.

A summary of the status of the  Company's  nonvested  options as of December 31,
2005, and changes during the quarter then ended, is presented below (unaudited):

                                                                      Weighted
                                                       Number         Average
                                                     Of Shares       Grant-Date
                                                   (In thousands)    Fair Value
                                                    ------------     ----------
     Nonvested at September 30, 2005                  145,389        $     2.09
     Granted                                               --                --
     Vested                                           (87,991)             1.79
     Forfeited                                             --                --
                                                      -------
     Nonvested at December 31, 2005                    57,398        $     2.56
                                                      =======

Fair values have been  retroactively  restated for all stock dividends since the
date the option was granted.

As of December 31, 2005, there was approximately  $117,000 of total unrecognized
compensation cost related to nonvested  share-based  compensation  arrangements.
That  cost is  expected  to be  recognized  over a  weighted  average  period of
approximately one year.

The Company  generally  issues  authorized  but  previously  unissued  shares to
satisfy option exercises.

Had the compensation cost for the Company's  stock-based  compensation plan been
determined  under the fair  value-based  method,  the  Company's  net income and
earnings per share would have been  adjusted to the pro forma  amounts below for
the quarters ended December 31 (in thousands, except per share data)(unaudited):

                                                               2004       2005
                                                               ----       ----

Information as reported in the Financial Statements:

Net income                                                    $ 4,045   $ 4,443
                                                              =======   =======
Basic earnings per share                                      $  0.21   $  0.23
                                                              =======   =======
Diluted earnings per share                                    $  0.20   $  0.22
                                                              =======   =======
Share-based compensation cost, net of related tax effects     $    --   $    25
                                                              =======   =======

Information  calculated  as if fair value  method  had been
     applied to all awards:

Net income, as reported                                       $ 4,045   $ 4,443
Add: Stock-based compensation expense recognized during
     the period, net of related tax effects                        --        25
Less:  Stock-based compensation expense determined under the
     fair value-based method, net of related tax effects         (176)      (25)
                                                              -------   -------
Pro forma net income                                          $ 3,869   $ 4,443
                                                              =======   =======

Pro forma basic earnings per share                            $  0.20   $  0.23
                                                              =======   =======
Pro forma diluted earnings per share                          $  0.19   $  0.22
                                                              =======   =======

                                       13
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 1.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED


(9) COMMON STOCK DIVIDEND

On July 30, 2004,  December 15, 2004 and October 26, 2005, the Company  declared
10%  stock  dividends,   aggregating  approximately  1,442,000,   1,594,000  and
1,770,000  shares,  respectively.  All  share  and  per  share  data  have  been
retroactively restated for the stock dividends.

(10) GUARANTEES

Standby  letters  of credit  obligate  the  Company  to meet  certain  financial
obligations of its customers,  if, under the contractual terms of the agreement,
the  customers  are unable to do so.  Payment  is only  guaranteed  under  these
letters of credit upon the borrower's  failure to perform its obligations to the
beneficiary.  The  Company  can  seek  recovery  of the  amounts  paid  from the
borrower.  These  standby  letters  of  credit  are  generally   collateralized.
Commitments  under  standby  letters of credit are usually one year or less.  At
December  31,  2005,  the Company  has  recorded  no  liability  for the current
carrying  amount of the  obligation  to  perform  as a  guarantor.  The  maximum
potential  amount of undiscounted  future payments related to standby letters of
credit  at  December  31,  2004  and 2005 was  $7.3  million  and $5.3  million,
respectively.

(11) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITES

The Bank originates  certain fixed rate residential  loans with the intention of
selling  these  loans in the  secondary  market.  Between the time that the Bank
enters  into an interest  rate lock or a  commitment  to  originate a fixed rate
residential loan with a potential borrower and the time the closed loan is sold,
the  Company is subject to  variability  in the market  prices  related to these
commitments  due to potential  changes in interest rates.  The Company  believes
that it is prudent to limit the variability of expected  proceeds from the sales
through  forward sales of "to be issued"  mortgage-backed  securities  and loans
("forward   sales   commitments").   The  commitment  to  originate  fixed  rate
residential  loans and forward sales  commitments  are  freestanding  derivative
instruments.  Since  such  instruments  do  not  qualify  for  hedge  accounting
treatment,  their  fair  value  adjustments  are  recorded  through  the  income
statement  in net gains on sales of loans  held for  sale.  The  commitments  to
originate fixed rate conforming loans totaled $4.3 million at December 31, 2005.
The fair value of the loan commitments was an asset of approximately  $37,000 at
December 31, 2005. As of December 31, 2005, the Company had sold $8.0 million in
forward commitments to deliver fixed rate mortgage-backed securities, which were
recorded as a derivative liability of $44,000.

(12) SUBSEQUENT EVENT

On January  31,  2006,  at the  Annual  Meeting  of  Shareholders,  stockholders
approved an amendment to the Company's  Certificate of Incorporation to increase
the  Company's  authorized  common  stock from 25  million  shares to 50 million
shares.

                                       14
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 1A. RISK FACTORS

Not Applicable.

PART I.  FINANCIAL INFORMATION
Item 2.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS

The following  discussion and analysis  should be read in  conjunction  with the
consolidated   financial   statements  of  Coastal  Financial   Corporation  and
Subsidiaries and the notes thereto.

FORWARD LOOKING STATEMENTS
--------------------------

This report may contain certain "forward-looking  statements" within the meaning
of  Section  27A of the  Securities  Exchange  Act of  1934,  as  amended,  that
represent the Company's  expectations or beliefs  concerning future events.  All
forward-looking  statements  are  based on  assumptions  and  involve  risks and
uncertainties,  many of which are beyond  the  Company's  control  and which may
cause its actual results,  performance or achievements to differ materially from
the results,  performance or achievements  contemplated  by the  forward-looking
statements.  Forward-looking  statements can be identified by the fact that they
do not relate strictly to historical or current facts.  They often include words
such as "believe," "expect," "anticipate," "intend," "plan," "estimate" or words
of similar  meaning,  or future or  conditional  verbs such as "will,"  "would,"
"should," "could" or "may." Forward-looking statements speak only as of the date
they are made. Such risks and uncertainties include, among other things:

     o    Competitive   pressures   among   depository   and   other   financial
          institutions in the Company's market areas may increase significantly.

     o    Adverse  changes  in  the  economy  or  business  conditions,   either
          nationally  or  in  the  Company's   market  areas,   could   increase
          credit-related losses and expenses and/or limit growth.

     o    Increases  in  defaults by  borrowers  and other  delinquencies  could
          result in increases in the Company's provision for losses on loans and
          related expenses.

     o    The Company's  inability to manage growth  effectively,  including the
          successful expansion of the Company's Customer support, administrative
          infrastructure and internal management systems, could adversely affect
          the Company's results of operations and prospects.

     o    Fluctuations  in interest  rates and market  prices  could  reduce the
          Company's  net  interest  margin  and asset  valuations  and  increase
          expenses.

     o    The  consequences  of continued bank  acquisitions  and mergers in the
          Company's  market  areas,  resulting  in  fewer  but much  larger  and
          financially  stronger  competitors,  could  increase  competition  for
          financial services to the Company's detriment.

     o    The Company's  continued  growth will depend in part on its ability to
          enter  new  markets   successfully  and  capitalize  on  other  growth
          opportunities.

     o    Changes in legislative or regulatory  requirements,  or actions by the
          Securities and Exchange Commission ("SEC"),  the Financial  Accounting
          Standards Board ("FASB"),  or the Public Company Accounting  Oversight
          Board,  applicable to the Company and its subsidiaries  could increase
          costs,  limit  certain  operations  and  adversely  affect  results of
          operations.

     o    Changes in tax requirements,  including tax rate changes, new tax laws
          and revised tax law  interpretations  may increase the  Company's  tax
          expense or adversely affect its Customers' businesses.

     o    Company  initiatives  now in place or  introduced  in the future,  not
          producing  results  consistent  with historic  growth rates or results
          which justify their costs.

                                       15
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 2.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS - CONTINUED

FORWARD LOOKING STATEMENTS-CONTINUED
------------------------------------

In light of these risks,  uncertainties  and  assumptions,  you should not place
undue  reliance on any  forward-looking  statements in this report.  The Company
undertakes   no  obligation   to  publicly   update  or  otherwise   revise  any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.

OVERVIEW
--------

Coastal  Financial  Corporation  (the  "Company")  is a unitary  thrift  holding
company  incorporated  in Delaware  with one  wholly-owned  banking  subsidiary,
Coastal  Federal Bank (the "Bank" or "Coastal  Federal").  The Company also owns
Coastal Planners Holding  Corporation,  whose  subsidiary,  Coastal  Retirement,
Estate and Tax  Planners,  Inc.,  offers  fee-based  financial  planning and tax
preparation  services.  The  primary  business  activities  of the  Company  are
conducted by the Bank. The Company and Bank's  principal  executive  offices are
located in Myrtle Beach, South Carolina.


Coastal Federal is a full service  financial  services  company with 21 branches
located in four counties  throughout  the coastal  regions of South Carolina and
North Carolina.  The Bank has thirteen offices in Horry County,  South Carolina;
one office in  Georgetown  County,  South  Carolina;  four  offices in Brunswick
County, North Carolina; and three offices in New Hanover County, North Carolina.

The Bank's primary  market areas are located along the coastal  regions of South
Carolina and North Carolina and predominately center around the Metro regions of
Myrtle  Beach,  South  Carolina  and  Wilmington,   North  Carolina,  and  their
surrounding  counties.  Coastal Federal's primary market is Horry County,  South
Carolina,  where the Bank has the number one market share of deposits as of June
30, 2005 (the most recent date for which published data is available) with 17.9%
of deposits as reported by the FDIC  Summary of Deposits  Report.  The Bank also
has the third highest  market share of deposits as of June 30, 2005 in Brunswick
County, North Carolina, with 8.1% of deposits as reported by the FDIC Summary of
Deposits Report.

The primary business  activities in Horry County are centered around the tourism
industry.  To the extent that Horry  County  businesses  rely heavily on tourism
business,  decreased tourism would have a significant  adverse effect on Coastal
Federal's primary deposit base and lending area. Moreover, the Bank would likely
experience a higher  degree of loan  delinquencies  should the local  economy be
materially and adversely affected.

Through  its  branch  locations,  the Bank  provides  a wide  range  of  banking
products, including interest-bearing and non-interest bearing checking accounts;
business sweep accounts;  business cash management  services;  statement savings
accounts;  money market accounts;  certificate of deposit  accounts;  individual
retirement accounts;  merchant services;  commercial,  business,  personal, real
estate,  residential  mortgage and home equity loans;  safe deposit  boxes;  and
electronic banking services.  The Bank has six ATMs at off-site locations and an
ATM at each  branch.  The Bank also makes  available  a wide range of  financial
products  through  its  relationship  with  Raymond  James  Financial  Services,
including stocks,  bonds,  mutual funds,  annuities,  insurance,  and retirement
products.

In the  fourth  fiscal  quarter  of 2004,  the Bank  began two  significant  new
initiatives. The first was "The Experience of FANtastic! Customer Service". This
initiative  focuses on Customer service and convenience.  The Bank is continuing
the process of redesigning its infrastructure,  software and products to improve
Customer  service and convenience and Associate  productivity.  In addition,  in
order  to  improve  Customer   service  and  convenience,   the  Bank  added  an
extended-hours  Call Center and introduced "6 Day Branch  Banking" with extended
operating  hours.  The  Call  Center  employs  15 to  20  Associates.  The  Bank
experienced  increased  salary and benefit  expenses in fiscal 2005 and 2006 and
anticipates these expenses will continue thereafter  associated with the hiring,
training and placement of these new Associates.

The  second  initiative  was  "Totally  Free  Checking  With A  Gift"  that  was
introduced in September 2004. The Bank has incurred, and will continue to incur,
significant  marketing costs associated with this strategy.  In the first fiscal
quarter of 2006,  marketing  expenses were $437,000  compared to $511,000 in the
comparable 2005 period.  The Bank expects to realize  significant  benefits from
this strategy consisting of increased Bank

                                       16
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 2. COASTAL  FINANCIAL  CORPORATION  AND  SUBSIDIARIES
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS - CONTINUED

OVERVIEW-CONTINUED
------------------

lobby traffic,  increased  number of personal  checking  accounts and higher fee
income as a result of those  checking  accounts.  In the first fiscal quarter of
2006, checking account balances grew approximately 31% when compared to the same
period a year ago.  This rate of growth  necessitates  the hiring of  additional
Associates to open and service these  accounts.  The Associates  being hired for
these two initiatives are expected to have total compensation  averaging between
$28,000 and $35,000 per Associate.

In the latter part of fiscal 2005,  the Company began  preparations  to increase
lending  production in mortgage  originations.  The Company has hired leadership
and support  staff as well as additional  mortgage  lending  officers.  As a net
result of these plans, the Company has increased  support staff by approximately
ten personnel and added  approximately  four  residential  lending  officers and
staffing  as of  December  31,  2005.  The Company  anticipates  increasing  its
residential  lending staff by  approximately  ten to fifteen  additional  people
during the second and third  quarters of fiscal  2006.  It is expected  that the
majority of this increase  will be in mortgage  lending  originators.  Increased
lending  volumes  from these  lending  personnel  are not  expected  to increase
significantly until the third and fourth fiscal quarters of 2006.  Further,  the
amount of  increased  revenues in relation to the  increased  expense  cannot be
accurately predicted at this time.

During  the  first  quarter of fiscal 2006, the Bank opened two branches; in Oak
Island,  North Carolina and at Stephens Crossroads in Longs, South Carolina. The
Bank  anticipates  that  it will open four additional branches during the second
half  of  fiscal 2006. The opening of these branches will increase compensation,
occupancy  and  other  expenses  as  well  as  related  marketing  expenditures.
Generally,  the  Bank  will  hire  personnel three to six months in advance of a
branch  opening  to  ensure that they are properly trained. As a result of these
openings, the Bank expects to invest approximately $9 million in land, buildings
and  equipment  costs  as  well  as  experience  increase  lease  expenses  of
approximately $200,000.

CRITICAL ACCOUNTING POLICIES
----------------------------

The Company's  accounting policies are in accordance with accounting  principles
generally  accepted in the United  States of America and with  general  practice
within the banking  industry.  In order to understand  the  Company's  financial
condition  and results of  operations,  it is important to  understand  the more
critical  accounting policies and the extent to which judgment and estimates are
used in applying those policies.  The Company  considers its policies  regarding
the  allowance  for  loan  losses  and  income  taxes  to be its  most  critical
accounting  policies due to the significant degree of the levels of subjectivity
and  management  judgment  necessary  to account  for these  matters.  Different
assumptions  in the  application  of these  policies  could  result in  material
changes  in the  Company's  consolidated  financial  statements.  The  Company's
accounting  policies  are set  forth  in  Note 1 of the  Notes  to  Consolidated
Financial  Statements in the Company's 2005 Annual Report to  Stockholders.  For
additional  discussion  concerning  the Company's  allowance for loan losses and
related  matters,  see  "Allowance  for Loan Losses" and see "Income  Taxes" for
additional  discussion  concerning  income  taxes in the  Company's  2005 Annual
Report to Stockholders.

OFF-BALANCE SHEET ARRANGEMENTS
------------------------------

In the  normal  course of  operations,  the  Company  engages  in a  variety  of
financial  transactions that, in accordance with generally  accepted  accounting
principles, are recorded in amounts that differ from the notional amounts. These
transactions  involve,  to varying  degrees,  elements of credit risk,  interest
rate, and liquidity risk. Such  transactions are used by the Company for general
corporate purposes or to satisfy customer needs.  Corporate purpose transactions
are used to help manage customers' requests for funding.  The Bank's off-balance
sheet   arrangements,   which  principally   include  lending   commitments  and
derivatives, are described below.

Lending  Commitments.  Lending  Commitments  include loan  commitments,  standby
letters of credit,  unused business and personal  credit card lines,  and unused
business and personal lines of credit. These instruments are not recorded in the
consolidated  balance  sheet

                                       17
<PAGE>

PART I.   FINANCIAL  INFORMATION
Item  2.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS - CONTINUED

OFF-BALANCE SHEET ARRANGEMENTS-CONTINUED
----------------------------------------

until funds are advanced under the commitments.  The Bank provides these lending
commitments to customers in the normal course of business. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee.  Since many of the  commitments  expire  without being drawn upon, the
total commitment amounts do not necessarily  represent future cash requirements.
The Company  applies  essentially  the same credit  policies and standards as it
does in the lending  process when making these  loans.  For business  customers,
commercial  loan  commitments  generally  take  the  form  of  revolving  credit
arrangements to finance  customers' working capital  requirements.  For personal
customers,  loan commitments are generally lines of credit that are unsecured or
are secured by  residential  property.  Standby  letters of credit  obligate the
Company to meet certain  financial  obligations of its customers,  if, under the
contractual  terms of the agreement,  the customers are unable to do so. Payment
is only guaranteed under these letters of credit upon the borrower's  failure to
perform its obligations to the beneficiary. The Company can seek recovery of the
amounts  paid  from the  borrower.  Standby  letters  of  credit  are  generally
collateralized and are usually one year or less.

At December 31, 2005, the Company recorded no liability for the current carrying
amount of the  obligation  to perform as a  guarantor,  as such  amounts are not
considered material.

The maximum potential amount of undiscounted  future payments related to standby
letters of credit at  September  30, 2005 and December 31, 2005 was $5.8 million
and $5.3 million, respectively.

A summary of loans receivable with  undisbursed  commitments to extend credit at
September 30, 2005 and December 31, 2005 follows:

<TABLE>
<CAPTION>
                                                         September 30, December 31,
                                                              2005        2005
                                                              ----        ----
<S>                                                         <C>        <C>
                                                                (Unaudited)
                                                           (Dollars In thousands)

Residential mortgage loans in process                      $  28,345   $  33,774
Business and consumer credit card lines                       14,065      13,954
Consumer home equity lines                                    43,388      45,275
Other consumer lines of credit                                 4,547       5,413
Standby letters of credit                                      5,777       5,330
Commercial real estate and construction
     and land development                                    107,731     116,181
Other commercial lines of credit                              10,527       8,901
                                                           ---------   ---------
     Total loans receivable with undisbursed commitments   $ 214,380   $ 228,828
                                                           =========   =========
</TABLE>

Derivatives  and Hedging  Activities.  The Bank  originates  certain  fixed rate
residential  loans with the intention of selling  these loans.  Between the time
that the Bank enters into an interest  rate lock or a commitment  to originate a
fixed rate  residential  loan with a potential  borrower and the time the closed
loan is sold, the Company is subject to variability in the market prices related
to these  commitments due to potential  changes in interest  rates.  The Company
believes that it is prudent to limit the  variability of expected  proceeds from
the sales through forward sales of "to be issued" mortgage-backed securities and
loans  ("forward  sales  commitments").  The commitment to originate  fixed rate
residential  loans and forward sales  commitments  are  freestanding  derivative
instruments.  Since  such  instruments  do  not  qualify  for  hedge  accounting
treatment,  their  fair  value  adjustments  are  recorded  through  the  income
statement in net gains on sale of loans. The commitments to originate fixed rate
conforming  loans  totaled $4.3 million at December 31, 2005.  The fair value of
the loan commitments was an asset of approximately $37,000 at December 31, 2005.
As of  December  31,  2005,  the  Company  had  sold  $8.0  million  in  forward
commitments  to  deliver  fixed  rate  mortgage-backed  securities,  which  were
recorded as a derivative liability of $44,000.

                                       18
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 2.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS - CONTINUED

DISCUSSION OF FINANCIAL  CONDITION  CHANGES FROM  SEPTEMBER 30, 2005 TO DECEMBER
--------------------------------------------------------------------------------
31, 2005
--------

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

Historically,  the Company has  maintained  its liquidity at levels  believed by
management  to be  adequate  to meet  the  requirements  of  normal  operations,
potential  deposit  out-flows and strong loan demand and still allow for optimal
investment of funds and return on assets. The principal sources of funds for the
Company  are cash flows from  operations,  consisting  mainly of loan  payments,
Customer  deposits,   advances  from  the  FHLB,  securitization  of  loans  and
subsequent  sales,  and  loan  sales.  The  principal  use of cash  flows is the
origination  of loans  receivable  and purchase of  investment  securities.  The
Company originated loans receivable of $159.2 million for the three months ended
December  31,  2004,  compared  to $205.8  million  for the three  months  ended
December 31, 2005. Loan principal  repayments  amounted to $119.1 million in the
first  fiscal  quarter of 2005  compared to $161.7  million for the three months
ended  December 31, 2005.  In addition,  the Company  sells certain loans in the
secondary  market to finance future loan  originations.  In the first quarter of
fiscal 2005, the Company sold mortgage  loans or  securitized  and sold mortgage
loans totaling $15.0 million that compares to $11.6 million for the three months
ended December 31, 2005. In addition,  the Bank sold $966,000 of commercial loan
participations  in the quarter ended  December 31, 2005 compared to $5.8 million
for the same period in 2004.

During  the  three month period ended December 31, 2005, the Company securitized
$6.0  million  of  mortgage  loans  and  concurrently sold these mortgage-backed
securities  to  outside  third  parties  and  recognized  a  net gain on sale of
$40,000,  which  included $83,000 related to mortgage servicing rights. The gain
is  included  in  gains  on  sales  of  loans  held for sale in the consolidated
statement  of operations. The Company has no retained interest in the securities
that were sold other than servicing rights.

For the three-month period ended December 31, 2005, the Company purchased $104.6
million in investment and mortgage-backed securities. For the three-month period
ended December 31, 2004, the Company  purchased $116.4 million in investment and
mortgage-backed securities.  These purchases during the three-month period ended
December  31, 2005 were  primarily  funded by  borrowings,  repayments  of $23.1
million within the securities portfolio and sales of mortgage-backed  securities
of $34.6 million.

Total customer deposits, which exclude certificates of deposits obtained through
brokers,  decreased  $39.4  million  between September 30, 2005 and December 31,
2005.  Money  market  and  checking accounts decreased from approximately $572.0
million at September 30, 2005 to $544.4 million at December 31, 2005, a decrease
of  $27.6  million  or  4.8%.  Core  deposits (defined as money market accounts,
checking  accounts and statement savings accounts) decreased from $643.8 million
at  September  30,  2005  to  $616.1 million at December 31, 2005, a decrease of
4.3%.  The Company believes these decreases are generally seasonal as there is a
significant  decrease  in tourism activity during fall and winter months as well
as  a decrease in real estate activities in the fall and winter months resulting
in  decreased  balances  in  checking  trust  accounts  related  to  real estate
activities.

At December 31, 2005, the Company had $402.2 million of certificates of deposits
("CDs")  that were due to mature  within  one year.  Included  in these CDs were
brokered CDs totaling  $195.5  million.  Based on past  experience,  the Company
believes  that the majority of the  non-brokered  certificates  of deposits will
renew with the Company.  At December 31, 2005,  the Company had  commitments  to
originate  $22.0  million  in  residential  mortgage  loans,  $59.6  million  in
undisbursed  business  and  retail  lines of  credit,  $14.0  million  in unused
business and personal  credit card lines,  and $116.2 million in commercial real
estate and construction  and land development  which the Company expects to fund
from normal  operations.  At December  31, 2005,  the Company had  approximately
$50.6 million available in FHLB advances. In addition, the Company had unpledged
collateral that would support  approximately  $209 million in additional reverse
repurchases. At December 31, 2005, the Company also had an outstanding available
line for federal funds of $20.0 million.

As a result of $4.4  million  in net  income,  less the cash  dividends  paid to
stockholders of approximately $974,000,  proceeds of approximately $229,000 from
the exercise of stock

                                       19
<PAGE>

PART I. FINANCIAL  INFORMATION
Item 2. COASTAL  FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS - CONTINUED

LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
------------------------------------------

options,  and  the  net  increase in unrealized loss on securities available for
sale,  net  of  income  tax of $1.7 million, stockholders' equity increased from
$97.2 million at September 30, 2005 to $99.2 million at December 31, 2005.

OTS  regulations  require  that  the  Bank  calculate  and  maintain  a  minimum
regulatory capital requirement on a quarterly basis and satisfy such requirement
as of the calculation  date and throughout the quarter.  The Bank's capital,  as
calculated  under OTS regulations,  is approximately  $115.9 million at December
31, 2005,  exceeding the core capital  requirement by $52.4 million. At December
31, 2005, the Bank's risk-based capital of approximately $126.9 million exceeded
its current  risk-based  capital  requirement  by $51.0  million.  (For  further
information see Regulatory Capital Matters).

The table below  summarizes  future  contractual  obligations as of December 31,
2005 (unaudited):
                                        Payments Due by Period
                         ----------------------------------------------------
                             1 Year and          2-3        4-5      After 5
                           Total     Less       Years      Years      Years
                         --------   --------   --------   --------   --------
Time deposits            $441,101   $402,154   $ 35,102   $  3,150   $    695
Short-term borrowings      60,075     60,075         --         --         --
Long-term debt            345,294         --      7,537     95,454    242,303
Construction contracts        965        965         --         --         --
Operating leases            2,225        490        907        645        183
                         --------   --------   --------   --------   --------
Total contractual cash
     obligations         $849,660   $463,684   $ 43,546   $ 99,249   $243,181
                         ========   ========   ========   ========   ========

Purchase  commitments.  The  Company  signed a  non-binding  letter of intent to
purchase land for approximately $2.8 million,  which is expected to close during
the third fiscal quarter.

Lease  commitments.  The Company has entered into a land lease for a new branch.
Lease payments  aggregate $2.6 million for the initial term of 30 years with six
five-year  renewal options.  Lease payments during the renewal periods aggregate
$5.9  million.  Construction  of the branch is  scheduled to begin in the second
fiscal quarter.

EARNINGS SUMMARY
----------------

Net income increased from $4.0 million, or $.20 per diluted share, for the three
months  ended  December  31, 2004 to $4.4 million, or $.22 per diluted share for
the  three  months  ended  December  31,  2005. This 9.8% increase in net income
resulted  from  increased  net  interest  income  of  $1.8 million, or 15.3%, an
increase  in  other  income  of $821,000, offset by increased provision for loan
losses  of  $50,000,  increased  general  and  administrative  expenses  of $1.9
million, and increased income taxes of $234,000.

As  a  result of growth in loans receivable and investments and an increased net
interest  margin,  net  interest income increased 15.3%. The net interest margin
increased  from  3.66% for the three months ended December 31, 2004 to 3.70% for
the three months ended December 31, 2005. The increase in net interest income is
primarily  attributable  to  an  increase  in  average  earning assets of $187.0
million,  or  14.9%.  Average  loans receivable increased $130.7 million for the
three months ended December 31, 2005 compared to December 31, 2004. In addition,
average balances of investment securities increased approximately $53.0 million.
The  investment  securities  were  primarily funded with advances from FHLB. The
Company's  customer  deposits  average balances increased from $762.9 million at
December  31, 2004 to $879.9 million at December 31, 2005, excluding brokered CD
average  balances  of  $187.8  million and $1.7 million at December 31, 2005 and
2004, respectively.

The Company's  provision for loan losses increased  $50,000 for the three months
ended  December  31,  2005 when  compared to the prior year  primarily  due to a
significant increase in the commercial real estate loan portfolio as result of a
robust  real  estate  market  and the risk  factors  related  to the  underlying
portfolio.  The  allowance for loan losses as a percentage of loans was 1.22% at
December 31, 2005 as compared to 1.40% at December 31, 2004.

                                       20
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 2.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS - CONTINUED

EARNINGS SUMMARY-CONTINUED
--------------------------

Other income increased from $2.8 million for the three months ended December 31,
2004 to $3.6 million for the three months  ended  December 31, 2005.  This was a
result of an increase in fees and service  charges on loan and deposit  accounts
of $999,000 and  increased  Federal  Home Loan Bank stock  dividends of $63,000,
offset by a decrease in gains on sales of loans held for sale of  $218,000.  The
Company also had loss on sales of  securities  available for sale of $46,000 for
the three months ended December 31, 2005,  compared to gains of $158,000 for the
three months ended December 31, 2004.

General  and  administrative  expenses increased from $7.8 million for the three
months  ended  December  31,  2004  to  $9.7  million for the three months ended
December  31,  2005.  Compensation  increased  from  $4.4  million for the first
quarter  of  fiscal  2005  to  $5.4 million in the first quarter of fiscal 2006,
primarily due to an increase in the number of banking Associates in business and
residential  banking,  Associates  in  the Company's expanded hours call center,
Associates  in new branches and normal salary increases. Marketing expenses were
$511,000  for the three months ended December 31, 2004, compared to $437,000 for
the  three  months  ended  December  31,  2005.  In  addition, other expense was
$850,000  for the three months ended December 31, 2004, compared to $1.3 million
for the three months ended December 31, 2005.

MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF OPERATIONS  FOR THE THREE MONTHS ENDED
--------------------------------------------------------------------------------
DECEMBER 31, 2004 AND 2005
--------------------------

INTEREST INCOME
---------------

Interest income for the three months ended December 31, 2005, increased to $23.0
million as compared to $18.0  million for the three  months  ended  December 31,
2004.  The earning asset yield for the three months ended December 31, 2005, was
6.39%  compared to 5.73% for the three  months  ended  December  31,  2004.  The
average yield on loans  receivable for the three months ended December 31, 2005,
was 7.15%  compared to 6.15% for three  months  ended  December  31,  2004.  The
increased  yield on loans is primarily due to the increased  yield on commercial
loans with interest  rates tied to the prime  lending  rate.  The prime rate was
7.25% at December 31, 2005, compared to 5.25% at December 31, 2004. The yield on
investments  decreased to 4.89% for the three  months  ended  December 31, 2005,
from 4.91% for the three months ended  December  31,  2004.  Long-term  interest
rates have  remained  relatively  constant  during the last year despite  rising
short-term  rates,  resulting in a flat yield curve.  Consequently,  most of the
cash flows  received  from the  investment  portfolio  have been  reinvested  at
approximately  the same interest rate.  Should short-term rates continue to rise
more quickly than  long-term  rates,  it is possible  that the yield curve would
become  inverted.  A flat yield curve or inverted yield curve would likely cause
the Bank's net  interest  margin to decline and reduce  opportunities  for using
securities to leverage capital. Total average  interest-earning assets were $1.4
billion for the quarter ended  December 31, 2005 as compared to $1.3 billion for
the quarter  ended  December  31,  2004,  an increase of 14.9%.  The increase in
average interest-earning assets is primarily due to an increase in average loans
receivable of approximately  $130.7 million,  resulting primarily from growth in
the commercial loan portfolio.

INTEREST EXPENSE
----------------

Interest expense on interest-bearing  liabilities was $9.8 million for the three
months ended December 31, 2005, as compared to $6.4 million for the three months
ended December 31, 2004. The average cost of deposits for the three months ended
December  31,  2005,  was 1.84%  compared  to 1.30% for the three  months  ended
December 31, 2004. The cost of  interest-bearing  liabilities  was 2.69% for the
three  months  ended  December  31, 2005  compared to 2.07% for the three months
ended December 31, 2004. The cost of brokered  CD's,  FHLB advances,  repurchase
and reverse  repurchase  agreements and other borrowings was 3.88% 4.03%,  3.38%
and 7.17%,  respectively,  for the three months ended December 31, 2005. For the
three months ended December 31, 2004, the cost of brokered CD's,  FHLB advances,
reverse repurchase  agreements and other borrowings was 2.88%,  3.67%, 1.87% and
5.33%,  respectively.  The increased cost of funds on other borrowings is due to
the increased short-term interest rates. At December 31, 2005, the federal funds
rate  was  4.09%  compared  to  1.97%  at  December  31,  2004.   Total  average
interest-bearing liabilities increased from $1.2 billion at December 31, 2004 to
$1.4 billion at December 31, 2005.

                                       21
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 2.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS - CONTINUED

MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF OPERATIONS  FOR THE THREE MONTHS ENDED
--------------------------------------------------------------------------------
DECEMBER 31, 2004 AND 2005 - CONTINUED
--------------------------------------

INTEREST EXPENSE-CONTINUED
--------------------------

The increase in average  interest-bearing  liabilities  is due to an increase in
average  deposits  of  approximately  $117.0  million,  decreased  average  FHLB
advances of $23.8 million and decreased average Customer  repurchase  agreements
of $78.8 million.  This was partially  offset by an increase in average  reverse
repurchase agreements of $2.3 million. Brokered CD's increased by $186.2 million
in average  balances  when  comparing the two periods and were used to fund loan
and investment security growth.

NET INTEREST INCOME
-------------------

Net interest  income was $13.3  million for the three months ended  December 31,
2005, as compared to $11.5 million for the three months ended December 31, 2004.
The net interest  margin was 3.70% for the three months ended December 31, 2005,
compared to 3.66% for the three months ended December 31, 2004.

The following table  summarizes the average balance sheet and the related yields
on  interest-earning  assets and  deposits and  borrowings  for the three months
ended December 31, 2004 and 2005:

<TABLE>
<CAPTION>
                                            Three Months Ended December 31,
                                            -------------------------------
                                         2005                               2004
                                         ----                               ----
                           Average      Income/    Yield/     Average      Income/     Yield/
                         Balance (1)    Expense    Rate     Balance (1)    Expense     Rate
                         -----------    -------    ----     -----------    -------     ----
<S>                        <C>           <C>       <C>     <C>          <C>           <C>
                                                      (Unaudited)
                                                 (Dollars in Thousands)

Assets
Earning assets
  Loans (2)                 959,498       17,147    7.15%   $  828,793   $   12,740    6.15%
  Investment
    Securities, MBS
    Securities and
    Other (3)               481,452        5,891    4.89%      425,130        5,217    4.91%
                          ---------   ----------            ----------   ----------
Total earning assets      1,440,950       23,038    6.39%   $1,253,923   $   17,957    5.73%
                          =========   ----------            ==========   ----------
Liabilities
  Deposits                  879,901        4,047    1.84%      762,872        2,495    1.31%
  Brokered CD's             187,823        1,823    3.88%        1,664           12    2.88%
  Borrowings                381,596        3,892    4.08%      481,957        3,935    3.27%

Total interest-bearing
                          ---------   ----------            ----------   ----------
  Liabilities             1,449,320        9,762    2.69%   $1,246,493        6,442    2.07%
                          =========   ----------            ==========   ----------

Net interest income                   $   13,276                         $   11,515
                                      ==========                         ==========
Net interest margin                                 3.70%                              3.66%
Net yield on earning
  Assets                                            3.69%                              3.67%
</TABLE>

     (1)  The average balances are derived from monthly balances.
     (2)  Nonaccrual   loans  are   included  in  average   balances  for  yield
          computations.
     (3)  Investment securities include taxable and tax-exempt  securities.  Net
          interest  income has not been  adjusted  to  produce a  tax-equivalent
          yield.

PROVISION FOR LOAN LOSSES
-------------------------

The Company's  provision for loan losses  increased  from $350,000 for the three
months ended  December 31, 2004, to $400,000 for the three months ended December
31, 2005 primarily due to growth in loan balances,  particularly commercial loan
balances, at December 31, 2005. The allowance for loan losses as a percentage of
loans was 1.22% at December  31, 2005 as compared to 1.40% at December 31, 2004.
The allowance as a percentage of loans declined

                                       22
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 2.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS - CONTINUED

MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF OPERATIONS  FOR THE THREE MONTHS ENDED
--------------------------------------------------------------------------------
DECEMBER 31, 2004 AND 2005 - CONTINUED
--------------------------------------

PROVISION FOR LOAN LOSSES-CONTINUED
-----------------------------------

due to  improving  economic  conditions  and the  risk  factors  related  to the
underlying portfolio. Loans delinquent 90 days or more were $4.1 million or .42%
of total loans at December 31,  2005,  compared to $5.6 million or .69% of total
loans at December  31, 2004 and $2.6 million or .28% of total loans at September
30, 2005. The allowance for loan losses was 293% of loans  delinquent  more than
90 days at December 31, 2005,  compared to 203% at December 31, 2004 and 445% at
September 30, 2005. Net charge-offs for the three months ended December 31, 2005
were $152,000 compared to $15,000 for the three months ended December 31, 2004.

Management  believes  that the current level of the allowance for loan losses at
December 31, 2005 is adequate considering the composition of the loan portfolio,
the portfolio's loss experience,  delinquency trends, current regional and local
economic conditions and other factors at that date.

OTHER INCOME
------------

For  the  three  months  ended  December 31, 2005, other income was $3.6 million
compared  to $2.8 million for the three months ended December 31, 2004. Fees and
service  charges  from  deposit  accounts  increased  $999,000  or 91.7% to $2.1
million  for  the three months ended December 31, 2005, compared to $1.1 million
for  the  three months ended December 31, 2004. The majority of this increase is
due  to  fee  income  from  increased  number  of personal and business checking
accounts.  Gain  on sale of loans was $92,000 for the quarter ended December 31,
2005,  compared  to $310,000 for the quarter ended December 31, 2004. During the
quarter  ended  December  31, 2005, the Company sold $11.5 million in loans held
for  sale compared to $15.0 million in the comparable prior year period. Margins
on  sales  of  conforming  mortgage  loans declined in fiscal 2006 due to rising
interest  rates.  Losses  on sales of securities available for sale were $46,000
for  the  quarter ended December 31, 2005, compared to gains of $158,000 for the
quarter  ended  December  31,  2004.  Income  from  Federal Home Loan Bank Stock
dividends  increased  from  $137,000  to  $200,000  due  to  increased dividends
resulting  from  higher  interest  rates. In addition, income from ATM and debit
card transactions increased 69.3% to $501,000 during the first quarter of fiscal
2006, primarily due to increased personal checking accounts.

GENERAL AND ADMINISTRATIVE EXPENSES
-----------------------------------

General and  administrative  expenses  were $9.7  million for the quarter  ended
December 31, 2004  compared to $7.8 million for the quarter  ended  December 31,
2005.  Salaries  and  employee  benefits  were $4.4 million for the three months
ended  December 31, 2004, as compared to $5.4 million for the three months ended
December  31,  2005,  an increase  of 21.6%.  Increased  compensation  is due to
increased  numbers of Associates,  normal salary  increases and increased health
care  costs.  The  Company's  average  number of  Associates  has  increased  by
approximately 100 Associates,  or 24.4%. The increase in Associates is primarily
due to three new  branches,  increased  Associates  in the  expanded  hours call
center and deposit servicing, increased Associates in existing branches to serve
extended banking hours and increased checking volumes,  and increased Associates
in residential banking. Also as a result of new branches, equipment purchased to
improve Customer  convenience and increased  checking  activity,  net occupancy,
furniture  and  fixtures  and data  processing  expenses  increased by $309,000,
including  increased  depreciation of $203,000,  when comparing the two periods.
Marketing  expenses were $511,000 for the three months ended  December 31, 2004,
compared to $437,000 for the three months ended  December 31, 2005. The decrease
from the prior period results from  decreased  initial  startup  expense for the
Bank's  "Totally Free Checking With A Gift"  initiative and the  introduction of
Penny  Pavilion,  the Bank's free coin  counting  service.  Other  expenses were
$850,000 for the quarter  ended  December 31, 2004  compared to $1.3 million for
the quarter ended  December 31, 2005.  Other expense  increased  $400,000 due to
increased audit and accounting  costs incurred  primarily  related to compliance
with Sarbanes-Oxley of $58,000, increased

                                       23
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 2.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS - CONTINUED

MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF OPERATIONS  FOR THE THREE MONTHS ENDED
--------------------------------------------------------------------------------
DECEMBER 31, 2004 AND 2005 - CONTINUED
--------------------------------------

GENERAL AND ADMINISTRATIVE EXPENSES-CONTINUED
---------------------------------------------

deposit account losses of $59,000,  reduced  recoveries of prior period mortgage
servicing  impairments of $76,000,  and increased  charitable  contributions  of
$76,000.  The  increase  in  deposit  account  losses  is tied  directly  to the
increased number of personal  checking  accounts and overdraft losses associated
with those accounts.

INCOME TAXES
------------

Income  taxes  were  $2.3  million  for the three months ended December 31, 2005
compared  to  $2.1  million  for  the  three months ended December 31, 2004. The
effective income tax rate as a percentage of pretax income was 34.51% and 34.25%
for  the  quarters ended December 31, 2005 and 2004, respectively. The effective
income  tax  rate  differs  from  the  statutory  rate  primarily  due to income
generated  by  bank-owned  life  insurance, municipal securities that are exempt
from  federal  and certain state taxes. The Company's effective income tax rates
take into consideration certain assumptions and estimates made by management. No
assurance  can  be  given that either the tax returns submitted by management or
the  income  tax  reported  on the consolidated financial statements will not be
adjusted  by  either  adverse  rulings by the U.S. Tax court, changes in the tax
code,  or  assessments  made  by  the  Internal  Revenue Service. The Company is
subject  to  potential  adverse  adjustments,  including  but not limited to: an
increase  in  the  statutory  federal  or  state income tax rates, the permanent
non-deductibility  of  amounts  currently considered deductible either now or in
future  periods,  and  the  dependency  on  the generation of the future taxable
income, in order to ultimately realize deferred income tax assets.

REGULATORY CAPITAL MATTERS
--------------------------

To be  categorized  as "Well  Capitalized"  under the prompt  corrective  action
regulations  adopted by the Federal Banking  Agencies,  the Bank must maintain a
total  risk-based  capital ratio as set forth in the following  table and not be
subject to a capital directive order.

<TABLE>
<CAPTION>
                                                                             Categorized as "Well
                                                                             Capitalized" under
                                                         For Capital          Prompt Corrective
                                      Actual          Adequacy Purposes        Action Provision
                                      ------          -----------------        ----------------
                                Amount       Ratio     Amount       Ratio     Amount       Ratio
                                ------       -----     ------       -----     ------       -----
<S>                            <C>           <C>      <C>            <C>     <C>           <C>
                                                    (Dollars In Thousands)

As of December 31, 2005:
 Total Capital:                $126,880      13.38%   $ 75,858       8.00%   $ 94,823      10.00%
   (To Risk Weighted Assets)
 Tier 1 Capital:               $115,861      12.22%        N/A        N/A    $ 56,894       6.00%
   (To Risk Weighted Assets)
 Tier 1 Capital:               $115,861       7.31%   $ 47,473       3.00%   $ 79,124       5.00%
   (To Total Assets)
 Tangible Capital:             $115,861       7.31%   $ 23,737       1.50%        N/A        N/A
   (To Total Assets)
</TABLE>

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------

In May 2005,  the  Financial  Accounting  Standards  Board  issued  Statement of
Financial  Accounting  Standard  (SFAS) No.  154,  Accounting  Changes and Error
Corrections. This Statement replaces APB Opinion No. 20, Accounting Changes, and
FASB  Statement  No.  3,  Reporting  Accounting  Changes  in  Interim  Financial
Statements.  SFAS 154 carries  forward the guidance  contained in Opinion 20 for
reporting the correction of an error in previously  issued financial  statements
and a change in accounting estimate.  However, SFAS 154 changes the requirements
for the accounting and reporting of a change in accounting principle.

                                       24
<PAGE>

PART I.  FINANCIAL INFORMATION
Item 2.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS - CONTINUED

MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF OPERATIONS  FOR THE THREE MONTHS ENDED
--------------------------------------------------------------------------------
DECEMBER 31, 2004 AND 2005 - CONTINUED
--------------------------------------

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS-CONTINUED
---------------------------------------------------

Under this Statement,  every voluntary change in accounting  principle  requires
retrospective  application to prior periods' financial statements,  unless it is
impracticable.   It  also   applies  to  changes   required  by  an   accounting
pronouncement  in the unusual instance that the  pronouncement  does not include
specific  transition   provisions.   When  a  pronouncement   includes  specific
transition  provisions,  those provisions should be followed.  This Statement is
effective for accounting  changes and corrections of errors made in fiscal years
beginning after December 15, 2005, although earlier application is permitted for
changes and corrections made in fiscal years beginning after June 1, 2005.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
------------------------------------------

In December 2004, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting Standard No. 123R,  Share-Based Payment which revised SFAS
No. 123, Accounting for Stock-Based Compensation.  This Statement supersedes APB
Opinion  No.  25,  Accounting  for  Stock  Issued  to  Employees,   and  related
implementation  guidance  and amends SFAS No. 95,  Statement  of Cash Flows.  It
requires  that all  stock-based  compensation  now be measured at fair value and
recognized as expense in the income statement. This Statement also clarifies and
expands  guidance  on  measuring  fair  value  of stock  compensation,  requires
estimation of forfeitures when determining expense, and requires that excess tax
benefits be shown as financing  cash inflows versus a reduction of taxes paid in
the  Statement  of Cash Flows.  Various  other  changes are also  required.  The
Company adopted this Statement  effective beginning October 1, 2005. The Company
experienced no significant effect on its financial statements as a result of the
adoption  of  this  Statement.   See  note  8  of  the  accompanying   unaudited
consolidated financial statements for additional discussion.

EFFECT ON INFLATION AND CHANGING PRICES
---------------------------------------

The accompanying  unaudited consolidated financial statements have been prepared
in accordance with generally  accepted  accounting  principles which require the
measurement  of  financial  position  and  results  of  operations  in  terms of
historical dollars,  without  consideration of change in the relative purchasing
power over time due to inflation.  Unlike most industrial  companies,  virtually
all of the assets and  liabilities  of a financial  institution  are monetary in
nature.  As a  result,  interest  rates  have a  more  significant  impact  on a
financial  institution's  performance  than the effects of  inflation.  Interest
rates do not necessarily  change in the same magnitude as the price of goods and
services.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------

The Bank's Asset Liability  Management Committee ("ALCO") monitors and considers
methods of managing exposure to interest rate risk. The ALCO consists of members
of the  Board of  Directors  and  Senior  Leadership  of the  Company  and meets
quarterly.  The Bank's  exposure to interest rate risk is reviewed on at least a
quarterly  basis by the ALCO.  Interest  rate risk  exposure is  measured  using
interest rate  sensitivity  analysis to determine  the  Company's  change in net
portfolio value in the event of hypothetical changes in interest rates. The ALCO
is charged with the  responsibility  to maintain the level of sensitivity of the
Bank's net portfolio value with Board approved limits.

Net portfolio value (NPV) represents the market value of portfolio equity and is
equal to the market value of assets minus the market value of liabilities,  with
adjustments made for off-balance  sheet items over a range of assumed changes in
market  interest  rates.  The Bank's Board of Directors  has adopted an interest
rate risk policy which  establishes  maximum  allowable  decreases in NPV in the
event of a sudden  and  sustained  one  hundred  to three  hundred  basis  point
increase or decrease in market interest rates.  The following table presents the
Bank's  change in NPV as computed by the OTS for various rate shock levels as of
December 31, 2005 (Dollars in thousands).

                                       25
<PAGE>

PART I.  FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK-CONTINUED
-----------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                         Market
                                             Board                 Board                Market           Value
                                             Limit                 Limit                Value           Portfolio
                                          Minimum NPV             Maximum             Of Assets          Equity           NPV
     Change in interest rates                Ratio            Decline in NPV           12/31/05         12/31/05         Ratio
------------------------------------    ----------------    --------------------    --------------    --------------    ---------
<S>                                          <C>                  <C>                  <C>                 <C>             <C>
300 basis point rise                         5.00%                400 BPS              $1,563,003          $141,004        9.02%
200 basis point rise                         6.00%                300 BPS              $1,588,676          $155,100        9.76%
100 basis point rise                         6.00%                250 BPS              $1,613,947          $164,844       10.21%
No change                                    6.00%                                     $1,637,848          $177,678       10.85%
100 basis point decline                      6.00%                250 BPS              $1,657,751          $186,135       11.23%
200 basis point decline                      6.00%                300 BPS              $1,670,827          $183,585       10.99%
300 basis point decline                      6.00%                350 BPS                     N/A               N/A          N/A

</TABLE>

The  preceding  table  indicates  that at December 31,  2005,  in the event of a
sudden and sustained  increase in prevailing  market interest rates,  the Bank's
Net Portfolio  Value (NPV) would be expected to decrease,  and that in the event
of a sudden decrease in prevailing  market interest rates,  the Bank's NPV would
be expected to increase  minimally.  A value for the 300 basis point  decline is
not  indicated  due to the level of interest  rates at  December  31,  2005.  At
December 31, 2005,  the Bank's  estimated  changes in NPV were within the limits
established by the Board of Directors.

Computation of  prospective  effects of  hypothetical  interest rate changes are
based on numerous  assumptions,  including  relative  levels of market  interest
rates,  loan  prepayments  and deposit  decay,  and should not be relied upon as
indicative of actual results.  Further,  the computations do not contemplate any
actions the ALCO could undertake in response to sudden changes in interest rates

Item 4.  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)  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  material  changes  in the  Company's
internal  control over  financial  reporting  occurred  during the quarter ended
December  31, 2005 that has  materially  affected,  or is  reasonably  likely to
materially affect, the Company's internal control over financial reporting.

                                       26
<PAGE>

PART II.  OTHER INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

Item 1.  Legal Proceedings
         -----------------

     The Company is a  defendant  in one lawsuit  related to  activities  in the
Bank,  arising out of the normal course of business.  The  subsidiaries are also
defendants in lawsuits arising out of the normal course of business.  Based upon
current  information  received  from  counsel  representing  the Company and its
subsidiaries in these matters,  the Company  believes none of the lawsuits would
have a  material  impact on the  Company's  financial  condition  or  results of
operations.

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

     Not Applicable.

Item 3.  Defaults Upon Senior Securities
         -------------------------------

     Not Applicable.

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

     Not Applicable.

Item 5.  Other Information
         -----------------

     Not Applicable.

Item 6.  Exhibits
         --------

         Exhibits

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

               (b)  Certificate of Amendment to Certificate of  Incorporation of
                    Coastal Financial Corporation (4)

               (c)  Bylaws of Coastal Financial Corporation (1)

          10   (a)  Employment Agreement with Michael C. Gerald (6)

               (b)  Employment Agreement with Jerry L. Rexroad (6)

               (c)  Employment Agreement with Phillip G. Stalvey (6)

               (d)  Employment Agreement with Jimmy R. Graham (6)

               (e)  Employment Agreement with Steven J. Sherry (6)

               (f)  1990 Stock Option Plan (2)

               (g)  Directors Performance Plan (3)

               (h)  Coastal Financial Corporation 2000 Stock Option Plan (5)

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

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

          32   (a)  Section 1350 Certification (Chief Executive Officer)

               (b)  Section 1350 Certification (Chief Financial Officer)

                                       27
<PAGE>

PART II.  OTHER INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES - CONTINUED

Item 6.  Exhibits, Continued
         -------------------
-------------------------------------------

     (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 definitive  proxy  statement for the
          1996 Annual Meeting of Stockholders.

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

     (5)  Incorporated  by reference to the definitive  proxy  statement for the
          2000 Annual Meeting of Stockholders filed December 22, 1999.

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


                                       28
<PAGE>

                                   SIGNATURES


Pursuant  to the  requirement  of the  Securities  Exchange  Act  of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                           COASTAL FINANCIAL CORPORATION

       February 9, 2006                     /s/ Michael C. Gerald
       ----------------                    ----------------------
       Date                                Michael C. Gerald
                                           President and Chief Executive Officer

       February 9, 2006                     /s/ Jerry L. Rexroad
       ----------------                    ---------------------
       Date                                Jerry L. Rexroad
                                           Executive Vice President and
                                           Chief Financial Officer



                                       29