# COASTAL BANKING COMPANY, INC.

Exhibit 13ACompany's Amended 2003 Annual Report

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Exhibit 13A

REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS

Board of DirectorsCoastal
Banking Company, Inc.Beaufort,  South Carolina

We
have audited the accompanying consolidated balance sheets of Coastal Banking Company, Inc.
(the Company) and Subsidiary as of December 31, 2003 and 2002 and the related
consolidated statements of earnings, changes in shareholders equity, comprehensive
income and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Coastal Banking Company, Inc. and
Subsidiary at December 31, 2003 and 2002 and the results of their operations and cash
flows for the years then ended in conformity with accounting principles generally accepted
in the United States of America.

/s/ Elliott Davis, LLCElliott
Davis, LLC

Greenville, South CarolinaJanuary 30,
2004, except for Note 16, as to            which
the date is February 19, 2004

18

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COASTAL BANKING
COMPANY, INC.

Consolidated Balance
Sheets

|                                                                             | December 31, | 
|---------------------------------------------------------------------------- | ------------ | 
|
|Assets                                                                       |              | 
|Cash and due from banks                                                      |              | 
|Federal funds sold                                                           |              | 
|                                                                             |              | 
|Cash and cash equivalents                                                    |              | 
|Investment securities available for sale                                     |              | 
|Investment securities held to maturity (fair value of $3,352,500 in 2003 and |              | 
|$100,183 in 2002)                                                            |              | 
|Other investments, at cost                                                   |              | 
|Loans held for sale                                                          |              | 
|Loans, net                                                                   |              | 
|Premises and equipment, net                                                  |              | 
|Accrued interest receivable and other assets                                 |              | 
|                                                                             |              | 
|Total assets                                                                 |              | 
|                                                                             |              | 
|Liabilities and Shareholders' Equity                                         |              | 
|Deposits:                                                                    |              | 
|Demand                                                                       |              | 
|Money market and NOW accounts                                                |              | 
|Savings                                                                      |              | 
|Time                                                                         |              | 
|Time over $100,000                                                           |              | 
|                                                                             |              | 
|Total deposits                                                               |              | 
|Federal funds purchased                                                      |              | 
|Accrued interest payable and other liabilities                               |              | 
|                                                                             |              | 
|Total liabilities                                                            |              | 
|                                                                             |              | 
|Commitments and contingencies - Notes 5, 9 and 11                            |              | 
|Shareholders' equity:                                                        |              | 
|Preferred stock, $.01 par value; 10,000,000 shares                           |              | 
|authorized; no shares issued and outstanding                                 |              | 
|Common stock, par value $.01; 10,000,000 shares authorized; 995,695 and      |              | 
|948,281 shares issued and outstanding in 2003 and 2002, respectively         |              | 
|Additional paid-in capital                                                   |              | 
|Retained earnings                                                            |              | 
|Accumulated other comprehensive income                                       |              | 
|                                                                             |              | 
|Total shareholders' equity                                                   |              | 
|                                                                             |              | 
|Total liabilities and shareholders' equity                                   |              | 
|                                                                             |              | 

See accompanying notes to
consolidated financial statements.

19

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COASTAL BANKING
COMPANY, INC.

Consolidated Statements
of Earnings

|                                                    | For the years ended December 31,
|--------------------------------------------------- | --------------------------------
|
|Interest income:                                    |                                 
|Loans and fees on loans                             |                                 
|Investment securities                               |                                 
|Federal funds sold                                  |                                 
|Interest-bearing deposits                           |                                 
|                                                    |                                 
|Total interest income                               |                                 
|                                                    |                                 
|Interest expense:                                   |                                 
|Deposits                                            |                                 
|Other                                               |                                 
|                                                    |                                 
|Total interest expense                              |                                 
|                                                    |                                 
|Net interest income                                 |                                 
|Provision for loan losses                           |                                 
|                                                    |                                 
|Net interest income after provision for loan losses |                                 
|                                                    |                                 
|Other income:                                       |                                 
|Service charges on deposit accounts                 |                                 
|Residential mortgage origination fees               |                                 
|Gain on sale of securities                          |                                 
|Other income                                        |                                 
|                                                    |                                 
|Total other income                                  |                                 
|                                                    |                                 
|Other expenses:                                     |                                 
|Salaries and employee benefits                      |                                 
|Occupancy and equipment                             |                                 
|Other operating                                     |                                 
|                                                    |                                 
|Total other expenses                                |                                 
|                                                    |                                 
|Earnings before income taxes                        |                                 
|Income tax expense                                  |                                 
|                                                    |                                 
|Net earnings                                        |                                 
|                                                    |                                 
|Basic earnings per share                            |                                 
|                                                    |                                 
|Diluted earnings per share                          |                                 
|                                                    |                                 

See accompanying notes to
consolidated financial statements.

20

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COASTAL BANKING
COMPANY, INC.

Consolidated Statements
of Comprehensive Income

|                                                            | For the years ended December 31,
|----------------------------------------------------------- | --------------------------------
|
|Net earnings                                                |                                 
|                                                            |                                 
|Other comprehensive income (loss), net of tax:              |                                 
|Unrealized gains (losses) on investment securities          |                                 
|available for sale arising during the period, net of        |                                 
|tax of $61,704 in 2003 and $119,289 in 2002                 |                                 
|Reclassification adjustment for gains included in net       |                                 
|earnings, net of tax of $14,371 in 2003 and $11,488 in 2002 |                                 
|                                                            |                                 
|Total other comprehensive income (loss), net of tax         |                                 
|                                                            |                                 
|Comprehensive income                                        |                                 
|                                                            |                                 

See accompanying notes to
consolidated financial statements.

21

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COASTAL BANKING
COMPANY, INC.

Consolidated Statements
of Changes in Shareholders Equity

For the Years Ended
December 31, 2003 and 2002

|                            |  |  |  | Retained | Accumulated |  
|--------------------------- |  |  |  | -------- | ----------- | -
|
|
|
|Balance, December 31, 2001  |  |  |  | 948,281  |             | $
|Change in unrealized gain   |  | 
|on securities available for |  | 
|sale, net of tax            |  |  |  | -        |             |  
|Net earnings                |  |  |  | -        |             |  
|                            |  |  |  |          |             |  
|Balance, December 31, 2002  |  |  |  | 948,281  |             |  
|Change in unrealized gain   |  | 
|on securities available for |  | 
|sale, net of tax            |  |  |  | -        |             |  
|Stock dividend              |  |  |  | 47,414   |             |  
|Net earnings                |  |  |  | -        |             |  
|                            |  |  |  |          |             |  
|Balance, December 31, 2003  |  |  |  | 995,695  |             | $
|                            |  |  |  |          |             |  

See accompanying notes to
consolidated financial statements.

22

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COASTAL BANKING
COMPANY, INC.

Consolidated Statements
of Cash Flows

|                                                                | For the years ended December 31,
|--------------------------------------------------------------- | --------------------------------
|
|Cash flows from operating activities:                           |                                 
|Net earnings                                                    |                                 
|Adjustments to reconcile net earnings to net                    |                                 
|cash provided by operating activities:                          |                                 
|Depreciation, amortization and accretion                        |                                 
|Provision for loan losses                                       |                                 
|Provision for deferred income taxes (benefit)                   |                                 
|Gain on sale of securities available for sale                   |                                 
|Disbursements for loans held for sale                           |                                 
|Proceeds from sale of loans held for sale                       |                                 
|Change in other assets and other liabilities                    |                                 
|                                                                |                                 
|Net cash provided by operating activities                       |                                 
|                                                                |                                 
|Cash flows from investing activities:                           |                                 
|Net change in interest-bearing deposits                         |                                 
|Proceeds from calls and maturities of investment securities     |                                 
|Available for sale                                              |                                 
|Proceeds from sales of investment securities available for sale |                                 
|Purchases of investment securities available for sale           |                                 
|Purchases of investment securities held to maturity             |                                 
|Purchases of other investments                                  |                                 
|Net change in loans                                             |                                 
|Purchase of premises and equipment                              |                                 
|                                                                |                                 
|Net cash used by investing activities                           |                                 
|                                                                |                                 
|Cash flows from financing activities:                           |                                 
|Net change in deposits                                          |                                 
|Net change in federal funds purchased                           |                                 
|                                                                |                                 
|Net cash provided by financing activities                       |                                 
|                                                                |                                 
|Net change in cash and cash equivalents                         |                                 
|Cash and cash equivalents at beginning of year                  |                                 
|                                                                |                                 
|Cash and cash equivalents at end of year                        |                                 
|                                                                |                                 
|Supplemental schedule of noncash investing and financing        |                                 
|activities consisting of change in unrealized gain/loss         |                                 
|on investment securities available for sale, net of tax         |                                 
|Supplemental disclosures of cash flow information:              |                                 
|Cash paid during the year for interest                          |                                 
|Cash paid during the year for income taxes                      |                                 

See accompanying notes to
consolidated financial statements.

23

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COASTAL BANKING
COMPANY, INC.

Notes to Consolidated
Financial Statements

(1)    Summary of Significant Accounting Policies

| | Basis of Presentation and Nature of Operations
The consolidated financial statements include the accounts of Coastal Banking Company, Inc.
(the Company) and its wholly owned subsidiary, Lowcountry National Bank (the
Bank). All significant intercompany accounts and transactions have been
eliminated in consolidation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Bank commenced business on May 10, 2000 upon receipt of its banking charter from the
Office of the Comptroller of the Currency (the OCC). The Bank is primarily
regulated by the OCC and undergoes periodic examinations by this regulatory agency. The
Company is regulated by the Federal Reserve Bank and also is subject to periodic
examinations. The Bank provides a full range of commercial and consumer banking services
throughout the Beaufort County area in South Carolina.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
accounting principles followed by the Company and the Bank, and the methods of applying
these principles, conform with accounting principles generally accepted in the United
States of America (GAAP) and with general practices in the banking industry.
In preparing the financial statements in conformity with GAAP, management is required to
make estimates and assumptions that affect the reported amounts in the financial
statements. Actual results could differ significantly from these estimates. Material
estimates common to the banking industry that are particularly susceptible to significant
change in the near term include, but are not limited to, the determination of the
allowance for loan losses, the valuation of real estate acquired in connection with or in
lieu of foreclosure on loans, and valuation allowances associated with the realization of
deferred tax assets, which are based on future taxable income.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash and Cash Equivalents
Cash
equivalents include amounts due from banks, interest-bearing demand deposits with banks
and federal funds sold. Generally, federal funds are sold for one-day periods.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investment Securities
The
Company classifies its securities in one of three categories: trading, available for sale,
or held to maturity. Trading securities are bought and held principally for the purpose of
selling them in the near term. Held to maturity securities are those securities for which
the Company has the ability and intent to hold until maturity. All securities not included
in trading or held to maturity are classified as available for sale. The Company has no
trading securities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Trading
and available for sale securities are recorded at fair value. Held to maturity securities
are recorded at cost, adjusted for the amortization or accretion of premiums or discounts.
Unrealized gains and losses on trading securities are recognized in earnings. Unrealized
holding gains and losses, net of the related tax effect, on securities available for sale
are excluded from earnings and are reported as a separate component of shareholders
equity until realized. Transfers of securities between categories are recorded at fair
value at the date of transfer.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
decline in the market value of any available for sale or held to maturity security below
cost that is deemed other than temporary is charged to earnings and establishes a new cost
basis for the security.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Premiums
and discounts are amortized or accreted over the life of the related securities as
adjustments to the yield. Realized gains and losses for securities classified as available
for sale and held to maturity are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other Investments
Other
investments include equity securities with no readily determinable fair value. These
investments are carried at cost. The Bank, as a member institution, is required to own
certain stock investments in the Federal Home Loan Bank of Atlanta (FHLB) and
the Federal Reserve Bank (FRB). The stock is generally pledged against any
borrowings from these institutions. No ready market exists for the stock and it has no
quoted market price. However, redemption of these stocks has historically been at par
value.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

24

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COASTAL BANKING
COMPANY, INC.

Notes to Consolidated
Financial Statements, continued

(1)    Summary of Significant Accounting Policies,
continued

| | Loans
originated and intended for sale in the secondary market are carried at the lower of
aggregate cost or market value. The amount by which cost exceeds market value is accounted
for as a valuation allowance. Changes, if any, in the valuation allowance are included in
the determination of net earnings in the period in which the change occurs. The Company
has recorded no valuation allowance related to its loans held for sale as their cost
approximates market value.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Loans and Allowance for Loan Losses
Loans
are stated at principal amount outstanding, net of the allowance for loan losses. Interest
on loans is calculated by using the interest method based upon the principal amount
outstanding. Loan origination and commitment fees and direct loan origination costs are
deferred and amortized over the contractual life of the related loan or commitments as an
adjustment of the related loan yields.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
loan is considered impaired when, based on current information and events, it is probable
that all amounts due according to the contractual terms of the loan agreement will not be
collected. Impaired loans are measured based on the present value of expected future cash
flows discounted at the loans effective interest rate, or at the loans
observable market price, or at the fair value of the collateral of the loan if the loan is
collateral dependent. Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and collection efforts that
the borrowers financial condition is such that collection of interest is doubtful.
When the ultimate collectibility of an impaired loans principal is in doubt, wholly
or partially, all cash receipts are applied to principal.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
allowance for loan losses is established through a provision for loan losses charged to
expense. Loans are charged against the allowance for loan losses when management believes
that the collectibility of the principal is unlikely. The allowance represents an amount,
which, in managements judgment, will be adequate to absorb probable losses on
existing loans that may become uncollectible.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Managements
judgment in determining the adequacy of the allowance is based on evaluations of the
collectibility of loans. These evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, current economic conditions that may
affect the borrowers ability to pay, overall portfolio quality and review of
specific problem loans. In determining the adequacy of the allowance for loan losses
management uses four different methods as indicators of the reasonableness of the
allowance. The methods used include a risk method (using internal classifications along
with regulatory classifications), historical charge-offs, comparison to a peer group, and
current classifications based on the loan grading system. The combination of these results
are compared quarterly to the recorded allowance for loan losses for reasonableness and
material differences are adjusted by increasing or decreasing the provision for loan
losses. Management uses an external loan review program to challenge and corroborate the
internal loan grading system and provide additional analysis in determining the adequacy
of the allowance and the future provisions for estimated loan losses.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
believes that the allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review the
Banks allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on judgments different than those of management.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Non-performing Assets
Loans
are placed in a non-accrual status when, in the opinion of management, the collection of
additional interest is questionable. Thereafter, no interest is taken into income unless
received in cash or until such time as the borrower demonstrates the ability to pay
principal and interest.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

25

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COASTAL BANKING
COMPANY, INC.

Notes to Consolidated
Financial Statements, continued

(1)     Summary of Significant Accounting Policies,
continued

| | Premises and Equipment
Premises
and equipment are stated at cost less accumulated depreciation. Costs incurred for
maintenance and repairs that do not extend the useful life of the asset are expensed as
incurred.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation
expense is computed using the straight-line method over the following estimated useful
lives:
| | ----------------------------------------------------------------------------------------------------------

|                          | 
|------------------------- | 
|
|
|
|Building and improvements | 
|Furniture and equipment   | 

| | Advertising Costs
The
Company expenses all advertising costs as incurred. Advertising costs for the Company were
approximately $64,000 and $50,000 for the years ended December 31, 2003 and 2002.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment
date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the event the future tax consequences of differences between the financial reporting bases
and the tax bases of the assets and liabilities results in deferred tax assets, an
evaluation of the probability of being able to realize the future benefits indicated by
such asset is required. A valuation allowance is provided for the portion of the deferred
tax asset when it is more likely than not that some portion or all of the deferred tax
asset will not be realized. In assessing the realizability of the deferred tax assets,
management considers the scheduled reversals of deferred tax liabilities, projected future
taxable income, and tax planning strategies.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock-Based Compensation
At
December 31, 2003, the Company sponsors stock-based compensation plans, which are
described more fully in Note 12. The Company accounts for these plans under the
recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net earnings, as all options
granted under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates the effect
on net earnings and earnings per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation for
the years ended December 31, 2003 and 2002.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                        | For the Year Ended
|------------------------------------------------------- | ------------------
|
|
|Net earnings as reported                                |                   
|Deduct: Total stock-based employee compensation expense |                   
|determined under fair-value based method for all awards |                   
|                                                        |                   
|Pro forma net earnings                                  |                   
|                                                        |                   
|Basic earnings per share:                               |                   
|As reported                                             |                   
|                                                        |                   
|Pro forma                                               |                   
|                                                        |                   
|Diluted earnings per share:                             |                   
|As reported                                             |                   
|                                                        |                   
|Pro forma                                               |                   
|                                                        |                   

26

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COASTAL BANKING
COMPANY, INC.

Notes to Consolidated
Financial Statements, continued

(1)    Summary of Significant Accounting Policies,
continued

| | Net Earnings Per Common Share
The
Company is required to report earnings per common share with and without the dilutive
effects of potential common stock issuances from instruments such as options, convertible
securities and warrants on the face of the statements of earnings. Basic earnings per
common share are based on the weighted average number of common shares outstanding during
the period, which was 995,695 in 2003 and 2002, while the effects of potential common
shares outstanding during the period are included in diluted earnings per share.
Additionally, the Company must reconcile the amounts used in the computation of both
basic earnings per share and diluted earnings per share. For the
year ended December 31, 2002, the potential effect of outstanding options would be
antidilutive, and therefore is not presented. Antidilutive potential common shares totaled
298,636 at December 31, 2002. Earnings per common share amounts for the year ended
December 31, 2003 are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                              | Net Earnings | Common Share | Per Share
|--------------------------------------------- | ------------ | ------------ | ---------
|
|Basic earnings per share                      |              |              | $        
|Effect of dilutive securities - stock options |              |             
|and warrants                                  |              |              |          
|                                              |              |              |          
|Diluted earnings per share                    |              |              | $        
|                                              |              |              |          

| | Recent Accounting Pronouncements
In
December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, Accounting for Stock-based CompensationTransition and Disclosure, an
amendment of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, Interim
Financial Reporting, to require disclosure in the summary of significant accounting
policies of the effects of an entitys accounting policy with respect to stock-based
employee compensation on reported net income and earnings per share in annual and interim
financial statements. While SFAS No. 148 does not amend SFAS No. 123 to require
companies to account for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB Opinion No. 25. The provisions of SFAS No. 148 are effective for
annual financial statements for fiscal years ending after December 15, 2002, and for
financial reports containing condensed financial statements for interim periods beginning
after December 15, 2002. The Company has elected to account for its stock-based
compensation using the intrinsic value method of APB Opinion No. 25 and the adoption of
SFAS No. 148 did not have a material impact on the financial condition or operating
results of the Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in other
contracts and loan commitments that relate to the origination of mortgage loans held for
sale, and for hedging activities under SFAS No. 133. SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003. The adoption of
SFAS No. 149 did not have a material impact on the financial condition or operating
results of the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in some
circumstances.) Many of those instruments were previously classified as equity. SFAS
No. 150 is generally effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have
a material impact on the financial condition or operating results of the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27

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COASTAL BANKING
COMPANY, INC.

Notes to Consolidated
Financial Statements, continued

(1)    Summary of Significant Accounting Policies,
continued

| | Recent Accounting Pronouncements, continued
In
November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN No. 45 requires a company, at the time it issues
a guarantee, to recognize an initial liability for the fair value of obligations assumed
under the guarantee and elaborates on existing disclosure requirements related to
guarantees and warranties. The initial recognition requirements of FIN No. 45 are
effective for guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of periods ending after December 15,
2002. The adoption of FIN No. 45 did not have a material impact on the Companys
financial position or results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
November 2003, the Emerging Issues Task Force (EITF) reached a consensus that
certain quantitative and qualitative disclosures should be required for debt and
marketable equity securities classified as available for sale or held to maturity under
SFAS No. 115 and SFAS No. 124 that are impaired at the balance sheet date but for which an
other-than-temporary impairment has not been recognized. Accordingly the EITF issued EITF
No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. This issue addresses the meaning of other-than-temporary impairment and its
application to investments classified as either available for sale or held to maturity
under SFAS No. 115 and provides guidance on quantitative and qualitative disclosures. EITF
No. 03-1 is effective for fiscal years ending after December 15, 2003. Adopting the
disclosure provisions of EITF No. 03-1 did not have a material impact on the
Companys financial position or results of operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Risks
and Uncertainties
In
the normal course of its business, the Company encounters two significant types of risk:
economic and regulatory. There are three main components of economic risk: interest rate
risk, credit risk and market risk. The Company is subject to interest rate risk to the
degree that its interest-bearing liabilities mature or reprice at different speeds, or on
different bases, than its interest-earning assets. Credit risk is the risk of default on
the Companys loan portfolio that results from borrowers inability or
unwillingness to make contractually required payments. Market risk reflects changes in the
value of collateral underlying loans receivable, the valuation of real estate held by the
Company, and the valuation of loans held for sale and mortgage-backed securities available
for sale.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is subject to the regulations of various government agencies. These regulations
can and do change significantly from period to period. The Company also undergoes periodic
examinations by the regulatory agencies, which may subject it to further changes with
respect to asset valuations, amounts of required loss allowances, and operating
restrictions, resulting from the regulators judgments based on information available
to them at the time of their examination.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Concentrations
of Credit Risk
The
Company, through its subsidiary, makes loans to individuals and businesses in and around
Beaufort County, South Carolina for various personal and commercial purposes. The Company
has a diversified loan portfolio and the borrowers ability to repay their loans is
not dependent upon any specific economic sector.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

28

---

COASTAL BANKING
COMPANY, INC.

Notes to Consolidated
Financial Statements, continued



|(1) | Summary of Significant Accounting Policies, continuedReclassifications
Certain
reclassifications have been made to the 2002 financial statements to conform with
classifications used for 2003. All such reclassifications had no effect on the prior
years net income or retained earnings as previously reported.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Restrictions on Cash
and Due From BanksThe
Bank is required to maintain average reserve balances, computed by applying prescribed
percentages to its various types of deposits, either at the Bank or on deposit with the
Federal Reserve Bank. At December 31, 2003 and 2002, these required reserves were met by
vault cash.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Investment SecuritiesInvestment
securities at December 31, 2003 and 2002 are as follows:
|--- | ----------------------------------------------------------------------------------------

|                             |  | December 31, 2003 |  
|---------------------------- |  | ----------------- | -
|
|
|
|Federal agencies             |  |                   | $
|Mortgage-backed securities   |  |                   |  
|                             |  |                   |  
|                             |  |                   | $
|                             |  |                   |  
|Held to maturity             |  |                  
|State, county and municipals |  |                   | $
|                             |  |                   |  

|                             |  | December 31, 2002 |  
|---------------------------- |  | ----------------- | -
|
|
|
|Federal agencies             |  |                   | $
|Mortgage-backed securities   |  |                   |  
|                             |  |                   |  
|                             |  |                   | $
|                             |  |                   |  
|Held to maturity             |  |                  
|State, county and municipals |  |                   | $
|                             |  |                   |  

| | At
December 31, 2003, unrealized losses in the investment portfolio related to federal
agencies and mortgage-backed securities. The unrealized losses on these securities arose
due to changing interest rates and market conditions and are considered to be temporary
because of acceptable investment grades where the repayment sources of principal and
interest are largely backed by federal agencies. At December 31, 2003, twenty-seven out of
thirty-seven federal agency securities contained unrealized losses, eight out of twelve
mortgage-backed securities contained unrealized losses and eleven out of fourteen state,
county and municipal securities contained unrealized losses.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

29

---

COASTAL BANKING
COMPANY, INC.

Notes to Consolidated
Financial Statements, continued

|(3) | Investment Securities, continuedThe
following table shows gross unrealized losses and fair value, aggregated by investment
category, and length of time that individual securities have been in a continuous
unrealized loss position, at December 31, 2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Investment
securities available for sale:

|                           | Less than 12 Months | 12 Months or More | Total
|-------------------------- | ------------------- | ----------------- | -----
|
|
|Federal agencies           |                     |                   | $    
|Mortgage-backed securities |                     |                   |      
|                           |                     |                   |      
|Total                      |                     |                   | $    
|                           |                     |                   |      

| | No
individual securities were in a continuous loss position for twelve months or more. The
Company has the ability and intent to hold these securities until such time as the value
recovers or the securities mature. The Company believes, based on industry analyst reports
and credit ratings, that the deterioration in value is attributable to changes in market
interest rates and not in the credit quality of the issuer and therefore, these losses are
not considered other-than-temporary.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Investment
securities held to maturity:

|                             | Less than 12 Months | 12 Months or More | Total
|---------------------------- | ------------------- | ----------------- | -----
|
|
|
|State, county and municipals |                     |                   | $    
|                             |                     |                   |      

| | No
individual securities were in a continuous loss position for twelve months or more. The
Company has the ability and intends to hold these securities to maturity. The Company
believes, based on industry analyst reports and credit ratings, that the deterioration in
value is attributable to changes in market interest rates and not in the credit quality of
the issuer and therefore, these losses are not considered other-than-temporary.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amortized cost and estimated fair value of investment securities at December 31, 2003, by
contractual maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers have the right to call or prepay obligations with or without
call or prepayment penalties.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                             | Amortized | Estimated
|---------------------------- | --------- | ---------
|
|Available for sale           |           |          
|Federal agencies             |           |          
|Within 1 year                |           |          
|1 to 5 years                 |           |          
|5 to 10 years                |           |          
|More than 10 years           |           |          
|Mortgage-backed securities   |           |          
|                             |           |          
|                             |           |          
|                             |           |          
|Held to maturity             |           |          
|State, county and municipals |           |          
|5 to 10 years                |           |          
|More than 10 years           |           |          
|                             |           |          
|                             |           |          
|                             |           |          

| | Proceeds
from sales of securities available for sale during 2003 and 2002 totaled approximately
$2,110,000 and $741,000, respectively. Gross gains of $45,232 were realized on those sales
during 2003 and gross losses of $2,964 were realized on sales during 2003. Gross gains of
$33,788 were realized on those sales during 2002 and no losses were realized on sales
during 2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Securities
with an amortized cost and fair value pledged to secure public deposits and for other
purposes as required by law as of December 31, 2003 and 2002 were $2,829,000 and
$2,863,000 and $7,807,000 and $8,029,000, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

30

---

COASTAL BANKING
COMPANY, INC.

Notes to Consolidated
Financial Statements, continued

|(4) | Loans and allowance for loan lossesMajor
classifications of loans at December 31, 2003 and 2002 are summarized as follows:
|--- | --------------------------------------------------------------------------------------------------------------------------

|                                       | 2003 | 2002
|-------------------------------------- | ---- | ----
|Commercial, financial and agricultural |      |     
|Real estate - construction             |      |     
|Real estate - mortgage                 |      |     
|Consumer and other                     |      |     
|                                       |      |     
|                                       |      |     
|Less:  Allowance for loan losses:      |      |     
|                                       |      |     
|                                       |      |     
|                                       |      |     

| | The
Bank grants loans and extensions of credit to individuals and a variety of businesses and
corporations located in its general trade area of the city of Beaufort, Beaufort County,
South Carolina and adjoining counties. Although the Bank has a diversified loan portfolio,
a substantial portion of the loan portfolio is collateralized by improved and unimproved
real estate and is dependent upon the real estate market.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

An
analysis of the activity in the allowance for loan losses for the years ended December 31,
2003 and 2002 is presented below:

|                                | 2003 | 2002
|------------------------------- | ---- | ----
|Balance at beginning of year    |      |     
|Provision charged to operations |      |     
|Loans charged off               |      |     
|Recoveries                      |      |     
|                                |      |     
|Balance at end of year          |      |     
|                                |      |     

| | At
December 31, 2003 and 2002, nonaccrual loans were approximately $46,600 and $97,000,
respectively. Foregone interest income on nonaccrual loans in 2003 and 2002 was an
insignificant amount. At December 31, 2003 and 2002, there were no impaired loans. At
December 31, 2003 and 2002, criticized and classified loans amounted to $781,867 and
$468,442, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Premises and EquipmentMajor
classifications of premises and equipment are summarized as follows:
|--- | ------------------------------------------------------------------------------------------------

|                              | 2003 | 2002
|----------------------------- | ---- | ----
|Land and improvements         |      |     
|Building and improvements     |      |     
|Furniture and equipment       |      |     
|                              |      |     
|                              |      |     
|Less accumulated depreciation |      |     
|                              |      |     
|                              |      |     
|                              |      |     

Depreciation
expense amounted to $135,332 and $135,808 in 2003 and 2002, respectively.

31

---

COASTAL BANKING
COMPANY, INC.

Notes to Consolidated
Financial Statements, continued

(5)    
Premises and Equipment, continued

| | The
Bank has entered into a non-cancelable operating lease related to land and buildings which
expires in 2008. At December 31, 2003, future minimum lease payments under non-cancelable
operating leases with initial or remaining terms of one year or more are as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 

| | Total
rental expense amounted to $28,050 for the year ended December 31, 2003. Total rental
expense was zero for the year ended December 31, 2002. Monthly expenses range from $2,550
to $3,150.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(6)    
Deposits

Maturities
of time deposits at December 31, 2003 are as follows:

| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 
| | 

Interest
expense on time deposits greater than $100,000 totaled $384,885 and $441,148 in 2003 and
2002, respectively.

(7)     Other Operating
Expenses

| | Components
of other operating expenses, which are greater than 1% of interest income and other
operating income for the years ended December 31, 2003 and 2002 are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  | 2003 | 2002
|----------------- | ---- | ----
|Professional fees |      |     
|Insurance         |      |     
|Data processing   |      |     
|Advertising       |      |     
|Office supplies   |      |     
|Other             |      |     
|                  |      |     
|                  |      |     
|                  |      |     

(8)    Income Taxes

The
components of income tax expense (benefit) for the years ended December 31, 2003 and 2002
are as follows:

|                               | 2003 | 2002
|------------------------------ | ---- | ----
|Currently payable              |      |     
|Deferred tax expense (benefit) |      |     
|                               |      |     
|                               |      |     
|                               |      |     

32

---

COASTAL BANKING
COMPANY, INC.

Notes to Consolidated
Financial Statements, continued

(8)    Income Taxes,
continued

| | The
differences between income tax expense and income tax expense computed by applying the
statutory federal income tax rate to earnings before taxes for the years ended December
31, 2003 and 2002 are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                           | 2003 | 2002
|------------------------------------------ | ---- | ----
|Tax expense at statutory rate              |      |     
|Add (deduct):                              |      |     
|State income taxes, net of federal benefit |      |     
|Non-deductible expenses                    |      |     
|Other                                      |      |     
|                                           |      |     
|                                           |      |     
|                                           |      |     

The
following summarizes the components of deferred taxes at December 31, 2003 and 2002.

|                                                 | 2003 | 2002
|------------------------------------------------ | ---- | ----
|Deferred income tax assets:                      |      |     
|Allowance for loan losses                        |      |     
|Pre-opening expenses                             |      |     
|Other                                            |      |     
|                                                 |      |     
|Total deferred tax assets                        |      |     
|Less valuation allowance                         |      |     
|                                                 |      |     
|Net deferred income tax assets                   |      |     
|                                                 |      |     
|Deferred income tax liabilities:                 |      |     
|Premises and equipment                           |      |     
|Unrealized gain on securities available for sale |      |     
|Total gross deferred tax liabilities             |      |     
|                                                 |      |     
|Net deferred tax asset (liability)               |      |     
|                                                 |      |     

| | The
net deferred tax asset (liability) is included in other liabilities or other assets in the
consolidated balance sheets. The future tax consequences of the differences between the
financial reporting and tax basis of the Companys assets and liabilities resulted in
a net deferred tax asset for 2003. A valuation allowance has been established for a
portion of the net deferred tax asset, as management has determined that it is not more
likely than not that the entire deferred tax asset will be realized.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(9)     Financial Instruments
with Off-Balance-Sheet Risk

| | The
Bank is a party to financial instruments with off-balance-sheet risk in the normal course
of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit, standby letters of credit and loans sold with
limited recourse. These instruments involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the consolidated balance sheet. The contractual
amounts of those instruments reflect the extent of involvement the Bank has in particular
classes of financial instruments.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Commitments
to extend credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Bank evaluates each
customers creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
managements credit evaluation of the counterparty. The Banks loans are
primarily collateralized by residential and other real properties, automobiles, savings
deposits, accounts receivable, inventory and equipment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

33

---

COASTAL BANKING
COMPANY, INC.

Notes to Consolidated
Financial Statements, continued

(9)    
          Financial Instruments with Off-Balance-Sheet Risk, continued

| | Standby
letters of credit are written conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. Those guarantees are primarily issued to
support public and private borrowing arrangements. Most letters of credit extend for less
than one year. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Loans
sold with limited recourse are 1-4 family residential mortgages originated by the Bank and
sold to various other financial institutions. These loans are sold with the agreement that
a loan may be returned to the Bank within 90 days of any one of the loans first four
payments being missed. The Banks exposure to credit loss in the event of
nonperformance by the other party to the loan is represented by the contractual notional
amount of the loan. The Bank uses the same credit policies in making loans held for sale
as it does for on-balance-sheet instruments.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Banks exposure to credit loss in the event of non-performance by the other party to
the financial instrument for commitments to extend credit, standby letters of credit and
loans sold with limited recourse is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. In most cases, the Bank requires
collateral to support financial instruments with credit risk.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                             | December 31,
|-------------------------------------------- | ------------
|
|Financial instruments whose contract amounts |             
|represent credit risk:                       |             
|Commitments to extend credit                 |             
|Standby letters of credit                    |             
|Loans sold with limited recourse             |             

(10)    Unused Lines of
Credit

| | At
December 31, 2003, the Bank had $5,050,000 of availability on lines of credit to purchase
federal funds from unrelated banks including an increase in one of the lines in January
2004. These lines of credit are available on a one to seven day basis for general
corporate purposes of the Bank. All of the lenders have reserved the right to withdraw
these lines at their option.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2003, the Bank had the ability to borrow an additional $10,787,000 or ten
percent of total assets from the FHLB. The borrowings are available by pledging collateral
and purchasing additional stock in the FHLB.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(11)    Legal Contingencies

| | The
Company has, from time to time, various lawsuits and claims arising from the conduct of
its business. Such items are not expected to have any material adverse effect on the
financial position or results of operations of the Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(12)    Employee and
Director Benefit Programs

| | In
connection with the Companys initial public stock offering, the directors received
warrants to purchase 212,100 shares of the Companys common stock at a price of $9.52
per share. The warrants vest equally over a three-year period beginning December 2, 1999
and expire on December 2, 2010 or 120 days after the warrant holder ceased to serve as a
member of the board of directors. During 2003, 17,850 of these warrants expired due to the
fact that the holder ceased to serve as a member of the board of directors, leaving
194,250 warrants outstanding as of December 31, 2003. As of December 31, 2003, all of the
warrants are exercisable. Also in connection with the Companys initial public stock
offering, the Company issued 10,500 options at $9.52 per share to a consultant. These
options vested immediately and expire on December 2, 2010.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted a Stock Incentive Plan in 2000 covering up to 149,354 shares of the
Companys common stock. The Plan is administered by a committee of the Board of
Directors and provides for the granting of options to purchase shares of common stock to
officers, directors, employees or consultants of the Company and Bank. The exercise price
of each option granted under the Plan will not be less than the fair market value of the
shares of common stock subject to the option on the date of grant as determined by the
Board of Directors. Options are exercisable in whole or in part upon such terms as may be
determined by the committee, and are exercisable no later than ten years after the date of
grant. As of December 31, 2003, 21,133 shares were available for grant under this plan.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

34

---

COASTAL BANKING
COMPANY, INC.

Notes to Consolidated
Financial Statements, continued

(12)    Employee and
Director Benefit Programs, continued

| | A
summary status of the Companys stock option plan as of December 31, 2003 and 2002,
and changes during the years, are presented below:
| | ----------------------------------------------------------------------------------------------------------------------------------------

|                                | 2003 |  | 2002 |        
|------------------------------- | ---- |  | ---- | -------
|
|
|
|
|Outstanding, beginning of year  |      |  |      | 86,536 
|Granted during the year         |      |  |      | 41,685 
|Cancelled during the year       |      |  |      | -      
|                                |      |  |      |        
|Outstanding, end of year        |      |  |      | 128,221
|                                |      |  |      |        
|Options exercisable at year end |      |  |      | 52,971 
|                                |      |  |      |        

The
weighted average remaining contractual life of these stock options was seven years as of
December 31, 2003.

| | The
fair value of each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions for grants in 2003:
dividend yield of $0 per share, expected volatility from 0.2526% to 0.5098%, risk-free
interest rate of 4.0% and expected life of seven years. The Company granted no options in
2002.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company sponsors the Lowcountry National Bank Retirement Savings Plan (the
Plan) for the benefit of all eligible employees. The Company contributes to
the Plan annually upon approval by the Board of Directors. Contributions made to the Plan
in 2003 and 2002 amounted to $18,764 and $15,744, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(13)    
Related Party Transactions

| | In
the normal course of business, officers and directors of the Bank, and certain business
organizations and individuals associated with them, maintain a variety of banking
relationships with the Bank. Transactions with officers and directors are made on terms
comparable to those available to other Bank customers. At December 31, 2003 and 2002,
deposits from directors, executive officers, and their related interests aggregated
approximately $1,348,000 and $1,397,000, respectively. The following summary reflects
related party loan activity for the years ended December 31, 2003 and 2002:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  | 2003 | 2002
|----------------- | ---- | ----
|Beginning balance |      |     
|New loans         |      |     
|Repayments        |      |     
|                  |      |     
|Ending balance    |      |     
|                  |      |     

(14)    Regulatory Matters

| | The
Company and the Bank are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the financial statements. Under certain
adequacy guidelines and the regulatory framework for prompt corrective action, specific
capital guidelines that involve quantitative measures of the assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices must
be met. The capital amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Quantitative
measures established by regulation to ensure capital adequacy require the Company and the
Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and
Tier 1 Capital (as defined in the regulations) to risk-weighted assets (as defined), and
of Tier 1 Capital (as defined) to average assets (as defined). Management believes, as of
December 31, 2003, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2003, the most recent notification from the Federal Deposit Insurance
Corporation categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

35

---

COASTAL BANKING
COMPANY, INC.

Notes to Consolidated
Financial Statements, continued

(14)    
Regulatory Matters, continued

| | the
Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that notification that
management believes have changed the Banks category.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
actual capital amounts and ratios are also presented in the table below.

|                          |  |  |   |           | To Be Well
|------------------------- |  |  | - | --------- | ----------
|
|
|
|
|As of December 31, 2003:  |  |  |   |           |           
|Total Capital             |  |  | $ | 8,769,000 |           
|(to Risk Weighted Assets) |  | 
|Tier 1 Capital            |  |  |   | 7,903,000 |           
|(to Risk Weighted Assets) |  | 
|Tier 1 Capital            |  |  |   | 7,903,000 |           
|(to Average Assets)       |  | 
|As of December 31, 2002:  |  | 
|Total Capital             |  | 
|(to Risk Weighted Assets) |  |  | $ | 7,632,000 |           
|Tier 1 Capital            |  | 
|(to Risk Weighted Assets) |  |  |   | 7,008,000 |           
|Tier 1 Capital            |  | 
|(to Average Assets)       |  |  |   | 7,008,000 |           

| | Dividends
paid by the Bank are the primary source of funds available to the Company. Banking
regulations limit the amount of dividends that may be paid without prior approval of the
regulatory authorities. These restrictions are based on the level of regulatory classified
assets, the prior years net earnings, and the ratio of equity capital to total
assets. As of December 31, 2003, the Bank is substantially restricted from paying
dividends to the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(15)    Shareholders
Equity

| | Shares
of preferred stock may be issued from time to time in one or more series as established by
resolution of the Board of Directors of the Company, up to a maximum of 10,000,000 shares.
Each resolution shall include the number of shares issued, preferences, special rights and
limitations as determined by the Board.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(16)    Share and Per Share
Restatement

| | In
February 2004, the Company declared a five percent stock dividend. As a result of this
stock dividend, the Company will issue approximately 47,414 shares of common stock to
shareholders of record as of March 12, 2004. All financial statement and footnote
references to the number of common shares, including per share amounts, have been restated
to reflect this stock dividend.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(17)    Fair Value of
Financial Instruments

| | SFAS
No. 107,Disclosures about Fair Value of Financial Instruments requires disclosure of fair
value information, whether or not recognized in the balance sheets, when it is practical
to estimate the fair value. SFAS No. 107 defines a financial instrument as cash, evidence
of an ownership interest in an entity or contractual obligation, which require the
exchange of cash or other financial instruments.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Certain
items are specifically excluded from the disclosure requirements, including the
Companys common stock, premises and equipment and other assets and liabilities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fair
value approximates carrying value for the following financial instruments due to the
short-term nature of the instrument: cash and due from banks, federal funds sold,
interest-bearing deposits, federal funds purchased, demand deposit accounts, and
interest-bearing accounts with no fixed maturity date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

36

---

COASTAL BANKING
COMPANY, INC.

Notes to Consolidated
Financial Statements, continued

(17)      Fair Value of
Financial Instruments, continued

| | Securities
are valued using quoted market prices. Fair values for the Companys off-balance
sheet lending commitments are based on fees currently charged to enter into similar
arrangements; taking into account the remaining terms of the agreement and the
counterparties credit standing.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fair
value for fixed rate loans maturing after one year is based on the discounted present
value of the estimated future cash flows. Discount rates used in these computations
approximate the rates currently offered for similar loans of comparable terms and credit
quality.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fair
value for Certificate of Deposit accounts are valued by discounting at rates currently
available on similar account types.

| | The
Company has used managements best estimate of fair value based on the above
assumptions. Thus, the fair values presented may not be the amounts which could be
realized in an immediate sale or settlement of the instrument. In addition, any income
taxes or other expenses which would be incurred in an actual sale or settlement are not
taken into consideration in the fair value presented.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
estimated fair values of the Companys financial instruments are as follows:

|                                         |  | December 31, |  
|---------------------------------------- |  | ------------ | -
|
|
|
|Financial assets:                        |  |              |  
|Cash and due from banks                  |  |              | $
|Federal funds sold                       |  |              |  
|Investment securities available for sale |  |              |  
|Investment securities held to maturity   |  |              |  
|Loans held for sale                      |  |              |  
|Loans, net                               |  |              |  
|Other investments                        |  |              |  
|Financial liabilities:                   |  |             
|Deposits                                 |  |              |  
|Federal funds purchased                  |  |              |  

|                               | Notional | Fair | Notional | Fair        
|------------------------------ | -------- | ---- | -------- | ------------
|
|Off-balance-sheet instruments: |          |      |          |             
|Commitments                    |          |      |          | $ 19,372,000
|Stand-by letters of credit     |          |      |          | 117,360     

(18)    
          Coastal Banking Company, Inc. (Parent Company Only) Financial Information

Condensed Balance Sheets

|                                     | December 31,
|------------------------------------ | ------------
|
|Assets                               |             
|Cash                                 |             
|Investment in Bank                   |             
|Premises and equipment               |             
|Other assets                         |             
|                                     |             
|                                     |             
|                                     |             
|Liabilities and Shareholders' Equity |             
|Shareholders' equity                 |             
|                                     |             

37

---

COASTAL BANKING
COMPANY, INC.

Notes to Consolidated
Financial Statements, continued

(18)    
          Coastal Banking Company, Inc. (Parent Company Only) Financial Information,
          continued

Condensed Statements of Earnings

|                                             | For the years ended December 31, | 
|-------------------------------------------- | -------------------------------- | 
|
|Other operating income                       |                                  | 
|                                             |                                  | 
|Other operating expenses                     |                                  | 
|                                             |                                  | 
|Loss before equity in undistributed earnings |                                  | 
|of Bank and income taxes                     |                                  | 
|Equity in undistributed earnings of Bank     |                                  | 
|Income tax benefit                           |                                  | 
|                                             |                                  | 
|Net earnings                                 |                                  | 
|                                             |                                  | 

Condensed Statements of Earnings

|                                                       | For the years ended December 31, | 
|------------------------------------------------------ | -------------------------------- | 
|
|Cash flows from operating activities     Net earnings  |                                  | 
|Adjustments to reconcile net earnings to net cash used |                                  | 
|by operating activities:                               |                                  | 
|Equity in undistributed earnings of Bank               |                                  | 
|Change in other assets                                 |                                  | 
|Change in other liabilities                            |                                  | 
|                                                       |                                  | 
|Net cash used by operating activities                  |                                  | 
|                                                       |                                  | 
|Cash and cash equivalents at beginning of year         |                                  | 
|                                                       |                                  | 
|Cash and cash equivalents at end of year               |                                  | 
|                                                       |                                  | 

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