**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-KSB**

 
| **ý** | ** ** | **Annual Report Pursuant To  Section 13 Or 15(d) of The Securities Exchange Act Of 1934**                                                                                                                                                                                                                                                                     |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **For The Fiscal Year December 31, 2004**                                                                                                                                                                                                                                                                                                                     |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                    |
| **Or**     |
| ** ** |
| **o**      | ** ** | **Transition Report Pursuant To  Section 13 Or 15 (d) of The Securities Exchange Act Of 1934**                                                                                                                                                                                                                                                                |
| ** ** | ** ** | **For the Transition Period  from                         to                           ** |

 

**Commission file number 000-28333**

 

**Coastal BankingCompany, Inc.**

(Exact name of registrant as specified in its charter)

 

| **South  Carolina**                        | ** ** | **58-2455444**                        |
|--------------------------------------------|------------|---------------------------------------|
| (State of  Incorporation)                  |       | (I.R.S.  Employer Identification No.) |
|                                       |       |                                  |
| **36 Sea  Island Parkway, Beaufort, S.C.** | ** ** | **29901**                             |
| (Address of  principal executive offices)  |       | (Zip Code)                            |

 

| **(843) 522-1228**                                                                  |
|-------------------------------------------------------------------------------------|
| (Telephone Number)                                                                  |
|                                                                                |   |   |
| **Not Applicable**                                                                  |
| (Former name, former address and  former fiscal year, if changed since last report) |
|                                                                                |   |   |
| Securities  registered pursuant to Section 12(b) of the Act: **None**               |
| Securities  registered pursuant to Section 12(g) of the Act: **Common  Stock**      |

 

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

 

Check if there is no disclosure of delinquentfilers in response to Item 405 of Regulation S-B in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSB or any amendment to this Form 10-KSB.  o

 

The issuer’s revenues (total interest income plusnoninterest income) for its most recent fiscal year was $7,721,250.  As of March 28, 2005, 1,010,395 shares ofCommon Stock were issued and outstanding.

 

The estimated aggregate market value of theCommon Stock held by non-affiliates (shareholders holding less than 5% of anoutstanding class of stock, excluding directors and executive officers) of theCompany on March 18, 2005 is $12,454,626. This calculation is based upon anestimate of the fair market value of the Common Stock of $18.05 per share,which was the price of the last trade of which management is aware prior tothis date.

 

Transitional Small Business DisclosureFormat.  (Check one):       Yes  o      No  ý

 

**DOCUMENTS INCORPORATED BYREFERENCE**

 

TheCompany’s Annual Report to Shareholders for the year ended December 31, 2004 isincorporated by reference in this Form 10-KSB in Part II, Items 5, 6 and 7.

 

 

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**Part I**

**Item 1. Business**

 

This Report contains statements which constitute forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933 andthe Securities Exchange Act of 1934. These statements are based on manyassumptions and estimates and are not guarantees of future performance.  Our actual results may differ materially fromthose projected in any forward-looking statements, as they will depend on manyfactors about which we are unsure, including many factors which are beyond ourcontrol.  The words “may,”  “would,” “could,” “will,” “expect,” “anticipate,”“believe,” “intend,” “plan,” and “estimate,” as well as similar expressions,are meant to identify such forward-looking statements.  Potential risks and uncertainties include,but are not limited to those described below under “Risk Factors.”

 

**General**

 

Coastal Banking Company, Inc. was incorporated in June1999 to operate as a bank holding company pursuant to the Federal Bank HoldingCompany Act of 1956 and the South Carolina Banking and Branching EfficiencyAct, and to purchase 100% of the issued and outstanding stock of LowcountryNational Bank, an association organized under the laws of the UnitedStates.  The bank opened for business onMay 10, 2000.  We conduct a generalcommercial and retail banking business principally in Beaufort County, SouthCarolina.

 

**Risk Factors**

 

***Our recent operating results may not be indicative of our futureoperating results.***

 

We may not be able to sustain our historical rate of growth and may noteven be able to grow our business at all. Because of our relatively small size and short operating history, itwill be difficult for us to generate similar earnings growth as we continue toexpand, and consequently our historical results of operations will notnecessarily be indicative of our future operations.  Various factors, such as economic conditions,regulatory and legislative considerations, and competition, may also impede ourability to expand our market presence. If we experience a significant decrease in our historical rate ofgrowth, our results of operations and financial condition may be adverselyaffected because a high percentage of our operating costs are fixed expenses.

 

***Our decisions regarding credit risk andreserves for loan losses may materially and adversely affect our business.***

 

Making loans and other extensions of credit is an essential element ofour business.  Although we seek tomitigate risks inherent in lending by adhering to specific underwritingpractices, our loans and other extensions of credit may not be repaid.  The risk of nonpayment is affected by anumber of factors, including:

 

•                  theduration of the credit;

•                  creditrisks of a particular customer;

•                  changesin economic and industry conditions; and

•                  inthe case of a collateralized loan, risks resulting from uncertainties about thefuture value of the collateral.

 

We attempt to maintain an appropriate allowance for loan losses toprovide for potential losses in our loan portfolio.  We periodically determine the amount of theallowance based on consideration of several factors, including:

 

•                  anongoing review of the quality, mix, and size of our overall loan portfolio;

•                  ourhistorical loan loss experience;

•                  evaluationof economic conditions;

•                  regularreviews of loan delinquencies and loan portfolio quality; and

•                  theamount and quality of collateral, including guarantees, securing the loans.

 

There is no precise method of predicting credit losses; therefore, weface the risk that charge-offs in future periods will exceed our allowance forloan losses and that additional increases in the allowance for loan losses willbe required.  Additions to the allowancefor loan losses would result in a decrease of our net income, and possibly our capital.

 

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***Lack of seasoning of our loan portfolio mayincrease the risk of credit defaults in the future.***

 

Due to the growth of our bank over the past several years and our shortoperating history, a large portion of the loans in our loan portfolio and ofour lending relationships are of relatively recent origin.  In general, loans do not begin to show signsof credit deterioration or default until they have been outstanding for someperiod of time, a process we refer to as “seasoning.”  As a result, a portfolio of older loans willusually behave more predictably than a newer portfolio.  Because our loan portfolio is relatively new,the current level of delinquencies and defaults may not be representative ofthe level that will prevail when the portfolio becomes more seasoned, which maybe higher than current levels.  Ifdelinquencies and defaults increase, we may be required to increase ourprovision for loan losses, which would adversely affect our results ofoperations and financial condition.

 

***An economic downturn, especially oneaffecting the Beaufort County area, could reduce our customer base, our levelof deposits, and demand for financial products such as loans.***

 

Our success significantly depends upon the growth in population, incomelevels, deposits, and housing starts in our markets, especially in BeaufortCounty, South Carolina.  If thecommunities in which we operate do not grow or if prevailing economic conditionslocally or nationally are unfavorable, our business may not succeed.  An economic downturn would likely contributeto the deterioration of the quality of our loan portfolio and reduce our levelof deposits, which in turn would hurt our business.  Interest received on loans represented approximately80% of our interest income for the year ended December 31, 2004.  If an economic downturn occurs in the economyas a whole, or especially in the Beaufort County area, borrowers may be lesslikely to repay their loans as scheduled. Moreover, the value of real estate or other collateral that may secureour loans could be adversely affected. Unlike many larger institutions, we are not able to spread the risks ofunfavorable local economic conditions across a large number of diversifiedeconomies.  An economic downturn could,therefore, result in losses that materially and adversely affect our business.

 

***Changes in prevailing interest rates mayreduce our profitability.***

 

Our results of operations depend in large part upon the level of ournet interest income, which is the difference between interest income frominterest-earning assets, such as loans and mortgage-backed securities, andinterest expense on interest-bearing liabilities, such as deposits and otherborrowings.  Depending on the terms andmaturities of our assets and liabilities, a significant change in interestrates could have a material adverse effect on our profitability.  Many factors cause changes in interest rates,including governmental monetary policies and domestic and internationaleconomic and political conditions.  Whilewe intend to manage the effects of changes in interest rates by adjusting theterms, maturities, and pricing of our assets and liabilities, our efforts maynot be effective and our financial condition and results of operations couldsuffer.  After operating in ahistorically low interest rate environment, the Federal Reserve began raisingshort-term interest rates in the second quarter of 2004.  We anticipate that our net interest incomewill decline in a rising interest rate environment.  However, no assurance can be given that theFederal Reserve will actually continue to raise interest rates or that theresults we anticipate will actually occur.

 

***We are dependent on key individuals and theloss of one or more of these key individuals could curtail our growth andadversely affect our prospects.***

 

Randolph C. Kohn, ourpresident and chief executive officer, has extensive and long-standing tieswithin our industry and he has contributed significantly to our growth.  If we lose the services of Mr. Kohn, he wouldbe difficult to replace and our business and development could be materiallyand adversely affected.

 

Our success also depends,in part, on our continued ability to attract and retain experienced loan originators,as well as other management personnel. The loss of the services of several of such key personnel couldadversely affect our growth strategy and prospects to the extent we are unableto replace such personnel.

 

***We are subject to extensive regulation thatcould limit or restrict our activities.***

 

We operate in a highly regulated industry and aresubject to examination, supervision, and comprehensive regulation by variousregulatory agencies.  Our compliance withthese regulations is costly and restricts certain of our activities, includingpayment of dividends, mergers and acquisitions, investments, loans and interestrates charged, interest rates paid on deposits, and locations of offices.  We are also subject to capitalizationguidelines established by our regulators, which require us to maintain adequatecapital to support our growth.

 

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The laws and regulations applicable to the bankingindustry could change at any time, and we cannot predict the effects of thesechanges on our business and profitability. Because government regulation greatly affects the business and financialresults of all commercial banks and bank holding companies, our cost ofcompliance could adversely affect our ability to operate profitably.

 

The Sarbanes-Oxley Act of 2002, and the relatedrules and regulations promulgated by the Securities and Exchange Commissionthat are now applicable to us, have increased the scope, complexity, and costof corporate governance, reporting, and disclosure practices.  We have experienced, and we expect tocontinue to experience, greater compliance costs, including costs related tointernal controls, as a result of the Sarbanes-Oxley Act.

 

***Our continued pace of growth may require usto raise additional capital in the future, but that capital may not beavailable when it is needed.***

 

We are required by regulatory authorities tomaintain adequate levels of capital to support our operations.  To support our continued growth, we may needto raise additional capital.  Our abilityto raise additional capital, if needed, will depend in part on conditions inthe capital markets at that time, which are outside our control.  Accordingly, we cannot assure you of ourability to raise additional capital, if needed, on terms acceptable to us.  If we cannot raise additional capital whenneeded, our ability to further expand our operations through internal growthand acquisitions could be materially impaired. In addition, if we decide to raise additional equity capital, yourinterest could be diluted.

 

***We face strong competition forcustomers, which could prevent us from obtaining customers and may cause us topay higher interest rates to attract customers.***

 

The banking business is highly competitive, and weexperience competition in our market from many other financialinstitutions.  We compete with commercialbanks, credit unions, savings and loan associations, mortgage banking firms,consumer finance companies, securities brokerage firms, insurance companies,money market funds, and other mutual funds, as well as other super-regional,national, and international financial institutions that operate offices in ourprimary market areas and elsewhere.  Wecompete with these institutions both in attracting deposits and in makingloans.  In addition, we have to attractour customer base from other existing financial institutions and from newresidents.  Many of our competitors arewell-established, larger financial institutions.  These institutions offer some services, suchas extensive and established branch networks, that we do not provide.  There is a risk that we will not be able tocompete successfully with other financial institutions in our market, and thatwe may have to pay higher interest rates to attract deposits, resulting inreduced profitability.  In addition,competitors that are not depository institutions are generally not subject tothe extensive regulations that apply to us.

 

***We will face risks with respect to future expansion and acquisitions ormergers.***

 

We may seek toacquire other financial institutions or parts of those institutions.  We may also expand into new markets or linesof business or offer new products or services. These activities would involve a number of risks, including:

 

•                  thepotential inaccuracy of the estimates and judgments used to evaluate credit,operations, management, and market risks with respect to a target institution;

 

•                  thetime and costs of evaluating new markets, hiring or retaining experienced localmanagement, and opening new offices and the time lags between these activitiesand the generation of sufficient assets and deposits to support the costs ofthe expansion;

 

•                  theincurrence and possible impairment of goodwill associated with an acquisitionand possible adverse effects on our results of operations; and

 

•                  therisk of loss of key employees and customers.

 

**MarketingFocus**

 

The bank focuses on thelocal community, emphasizing personal service to individuals and businesses inBeaufort County, South Carolina.  Our primaryservice area includes a large portion of Beaufort County.  Our target market primarily consists ofindividuals and small- to medium-sized businesses who desire a consistent andprofessional

 

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relationship with a localbanker.  We encourage relationships withindividuals and companies in his area to more effectively market the service ofthe bank.  We offer a personal banking relationshipto our customers that is not available through larger banks.

 

**Location and Service Area**

 

Our primary service area consists of the portion of Beaufort Countywithin a 20 mile radius of our main office. This area covers a large portion of Beaufort County, including Beaufort,Bluffton, Burton, Callawassie Island, Coosaw, Dataw Island, Harbor Island,Hilton Head Island, Hunting Island, Fripp Island, Ladys Island, Port Royal,Spring Island, St. Helena Island, and the rapidly growing Sun City, which isexpected to contain 8,900 homes upon completion.

 

**Lending Activities**

 

*General*.  We emphasize a range of lending services,including real estate, commercial, and consumer loans to individuals and small-to medium-sized businesses and professional firms that are located in orconduct a substantial portion of their business in the bank’s market area.

 

*Loan Approval and Review.*  The bank’s loan approval policies provide forvarious levels of officer lending authority. When the amount of aggregate loans to a single borrower exceeds anindividual officer’s lending authority, the loan request will be considered andapproved by an officer with a higher lending limit or the directors’ loancommittee.  Loans in excess of thedirectors’ loan committee’s limits must be approved by the full board ofdirectors.  The bank will not make anyloans to any director, officer, or employee of the bank unless the loan isapproved by the board of directors of the bank and is made on terms not morefavorable to such person than would be available to a person not affiliatedwith the bank.  The bank currentlyadheres to Federal National Mortgage Association and Federal Home Loan MortgageCorporation guidelines in its mortgage loan review process, but may choose toalter this policy in the future.  Thebank currently sells its mortgage loans on the secondary market, but may chooseto hold them in the portfolio in the future.

 

*Lending Limits.*  The bank’s lending activities are subject toa variety of lending limits imposed by federal law.  In general, the bank is subject to a legallimit on loans to a single borrower equal to 15% of the bank’s capital andunimpaired surplus.  Different limits mayapply in certain circumstances based on the type of loan or the nature of theborrower, including the borrower’s relationship to the bank.  These limits will increase or decrease as thebank’s capital increases or decreases. Based upon the bank’s current tier 2 capitalization of $13,157,000, thebank has a self-imposed loan limit of $1,776,000 which represents 90% of ouranticipated legal lending limit of $1,974,000. Unless the bank is able to sell participations in its loans to otherfinancial institutions, the bank will not be able to meet all of the lendingneeds of loan customers requiring aggregate extensions of credit above theselimits.

 

*Real Estate and Mortgage Loans*.  Loans secured by first or second mortgages onreal estate make up approximately 91% of the bank’s loan portfolio.  These loans generally fall into one of threecategories: commercial real estate loans, construction and development loans,or residential real estate loans.  Eachof these categories is discussed in more detail below, including their specificrisks.  Home equity loans are notincluded because they are classified as consumer loans, which are discussedbelow.  Interest rates for all categoriesmay be fixed or adjustable, and will more likely be fixed for shorter-termloans.  The bank generally charges anorigination fee for each loan.

 

Real estate loans are subject to the same general risks as otherloans.  They are particularly sensitive tofluctuations in the value of real estate, which is generally the underlyingsecurity for real estate loans. Fluctuations in the value of real estate, as well as other factorsarising after a loan has been made, could negatively affect a borrower’s cash flow,creditworthiness, and ability to repay the loan.

 

We have the ability to originate real estate loans for sale into thesecondary market.  We can limit ourinterest rate and credit risk on these loans by locking the interest rate foreach loan with the secondary investor and receiving the investor’s underwritingapproval prior to originating the loan.

 

•                  *Commercial Real Estate Loans*.  Commercial real estate loans generally haveterms of five years or less, although payments may be structured on a longeramortization basis.  We evaluate eachborrower on an individual basis and attempt to determine its business risks andcredit profile.  We attempt to reducecredit risk in the commercial real estate portfolio by emphasizing loans onowner-occupied office and retail buildings where the loan-to-value ratio,established by independent appraisals, does not exceed 80%.  We generally require that debtor cash flowexceed 115% of monthly debt service obligations.  We typically

 

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review all of the personal financial statements of the principal ownersand require their personal guarantees. These reviews generally reveal secondary sources of payment andliquidity to support a loan request.

 

•                  *Construction and Development Real Estate Loans. *We offer adjustable and fixed rateresidential and commercial construction loans to builders and developers and toconsumers who wish to build their own home. The term of construction and development loans generally is limited to eighteenmonths, although payments may be structured on a longer amortizationbasis.  Most loans will mature andrequire payment in full upon the sale of the property.  Construction and development loans generallycarry a higher degree of risk than long term financing of existingproperties.  Repayment depends on theultimate completion of the project and usually on the sale of theproperty.  Specific risks include:

 

•                  costoverruns;

•                  mismanagedconstruction;

•                  inferioror improper construction techniques;

•                  economicchanges or downturns during construction;

•                  adownturn in the real estate market;

•                  risinginterest rates which may prevent sale of the property; and

•                  failureto sell completed projects in a timely manner.

 

We attempt to reduce risk by obtaining personal guarantees wherepossible, and by keeping the loan-to-value ratio of the completed project belowspecified percentages.  We also mayreduce risk by selling participations in larger loans to other institutionswhen possible.

 

•                  *Residential Real Estate Loans*.  Residential real estate loans generally havelonger terms up to 30 years.  We offerfixed and adjustable rate mortgages.  Wehave limited credit risk on these loans as most are sold to third parties soonafter closing.

 

*Commercial Loans*.  The bank makes loans for commercial purposesin various lines of businesses. Commercial loans are generally considered tohave greater risk than first or second mortgages on real estate because theymay be unsecured, or if they are secured, the value of the security may bedifficult to assess and more likely to decrease than real estate.

 

Equipment loans typically are made for a term of five years or less atfixed or variable rates, with the loan fully amortized over the term andsecured by the financed equipment and with a loan-to-value ratio of 80% orless.  We focus our efforts on commercialloans less than $500,000.  Workingcapital loans typically have terms not exceeding one year and usually aresecured by accounts receivable, inventory, or personal guarantees of theprincipals of the business.  For loanssecured by accounts receivable or inventory, principal typically be repaid asthe assets securing the loan are converted into cash, and in other casesprincipal typically be due at maturity. Asset based lending, leasing, and factoring are offered through thirdparty vendors who can handle the paper work and servicing and generally assumemost of the credit risk.  Trade lettersof credit, standby letters of credit, and foreign exchange are handled through acorrespondent bank as agent for the bank.

 

We offer small business loans utilizing government enhancements such asthe Small Business Administration’s 7(a) program and SBA’s 504 programs.  These loans typically are partiallyguaranteed by the government, which may help to reduce the bank’s risk.  Government guarantees of SBA loans will notexceed 80% of the loan value and will generally be less.

 

The well established banks in the Beaufort County area makeproportionately more loans to medium to large-sized businesses than we do.  Many of the bank’s commercial loans are madeto small- to medium-sized businesses which may be less able to withstandcompetitive, economic, and financial conditions than larger borrowers.

 

*Consumer Loans*.  The bank makes a variety of loans toindividuals for personal and household purposes, including secured andunsecured installment loans and revolving lines of credit.  Installment loans typically carry balances ofless than $50,000 and are amortized over periods up to 60 months.  Consumer loans may be offered on a singlematurity basis where a specific source of repayment is available.  Revolving loan products typically requiremonthly payments of interest and a portion of the principal.  Consumer loans are generally considered tohave greater risk than first or second mortgages on real estate because theymay be unsecured, or if they are secured, the value of the security may bedifficult to assess and more likely to decrease than real estate.

 

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We also offer home equity loans. Our underwriting criteria for and the risks associated with home equityloans and lines of credit generally are the same as those for first mortgageloans.  Home equity lines of credit willtypically have terms of 15 years or less, will typically carry balances lessthan $125,000, and may extend up to 90% of the available equity of eachproperty.

 

**SUPERVISION AND REGULATION**

 

Both the company and the bank are subject to extensive state andfederal banking laws and regulations that impose specific requirements orrestrictions on and provide for general regulatory oversight of virtually allaspects of our operations.  These lawsand regulations are generally intended to protect depositors, notshareholders.  The following summary isqualified by reference to the statutory and regulatory provisionsdiscussed.  Changes in applicable laws orregulations may have a material effect on our business and prospects.  Beginning with the enactment of the FinancialInstitutions Reform Recovery and Enforcement Act in 1989 and followed by theFDIC Improvement Act in 1991 and the Gramm-Leach-Bliley Act in 1999, numerousadditional regulatory requirements have been placed on the banking industry inthe past several years, and additional changes have been proposed.  Our operations may be affected by legislativechanges and the policies of various regulatory authorities.  We cannot predict the effect that fiscal ormonetary policies, economic control, or new federal or state legislation mayhave on our business and earnings in the future.

 

The following discussion is not intended to be acomplete list of all the activities regulated by the banking laws or of theimpact of such laws and regulations on our operations.  It is intended only to briefly summarize somematerial provisions.

 

**USA PATRIOT Act of 2002**

 

In October 2002, the USA PATRIOT Act of 2002was enacted in response to the terrorist attacks in New York, Pennsylvania, andWashington D.C. that occurred on September 11, 2001.  The PATRIOT Act is intended to strengthenU.S. law enforcement’s and the intelligence communities’ abilities to workcohesively to combat terrorism on a variety of fronts.  The potential impact of the PATRIOT Act onfinancial institutions is significant and wide ranging.  The PATRIOT Act contains sweeping anti-moneylaundering and financial transparency laws and imposes various regulations,including standards for verifying client identification at account opening, andrules to promote cooperation among financial institutions, regulators, and lawenforcement entities in identifying parties who may be involved in terrorism ormoney laundering.

 

**Check 21**

 

On October 28, 2003, President Bush signed into law the Check Clearingfor the 21st Century Act, also known as Check 21.  The new law, which became effective October28, 2004, gives “substitute checks,” such as a digital image of a check andcopies made from that image, the same legal standing as the original papercheck.  Some of the major provisionsinclude:

 

•                  allowingcheck truncation without making it mandatory;

•                  demandingthat every financial institution communicate to accountholders in writing adescription of its substitute check processing program and their rights underthe law;

•                  legalizingsubstitutions for and replacements of paper checks without agreement fromconsumers;

•                  retainingin place the previously mandated electronic collection and return of checksbetween financial institutions only when individual agreements are in place;

•                  requiringthat when accountholders request verification, financial institutions producethe original check (or a copy that accurately represents the original) anddemonstrate that the account debit was accurate and valid; and

•                  requiringrecrediting of funds to an individual’s account on the next business day aftera consumer proves that the financial institution has erred.

 

This new legislation will likely affect bank capital spending as manyfinancial institutions assess whether technological or operational changes arenecessary to stay competitive and take advantage of the new opportunitiespresented by Check 21.

 

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**Coastal Banking Company, Inc.**

 

We own 100% of the outstanding capital stock of the bank, and thereforewe are considered to be a bank holding company under the federal Bank HoldingCompany Act of 1956 and the South Carolina Banking and Branching EfficiencyAct.

 

*The Bank Holding Company Act.*  Under the Bank Holding Company Act, we aresubject to periodic examination by the Federal Reserve and are required to fileperiodic reports of our operations and any additional information that theFederal Reserve may require.  Ouractivities at the bank and holding company levels are limited to:

 

•                  bankingand managing or controlling banks;

•                  furnishingservices to or performing services for our subsidiaries; and

•                  engagingin other activities that the Federal Reserve determines to be so closelyrelated to banking and managing or controlling banks as to be a proper incidentthereto.

 

*Investments, Control, and Activities.*  With certain limited exceptions, the BankHolding Company Act requires every bank holding company to obtain the priorapproval of the Federal Reserve before:

 

•                  acquiringsubstantially all the assets of any bank;

•                  acquiringdirect or indirect ownership or control of any voting shares of any bank ifafter the acquisition it would own or control more than 5% of the voting sharesof such bank (unless it already owns or controls the majority of such shares); or

•                  mergingor consolidating with another bank holding company.

 

In addition, and subject to certain exceptions, the Bank HoldingCompany Act and the Change in Bank Control Act, together with regulationspromulgated thereunder, require Federal Reserve approval prior to any person orcompany acquiring “control” of a bank holding company.  Control is conclusively presumed to exist ifan individual or company acquires 25% or more of any class of voting securitiesof a bank holding company.  Control isrebuttably presumed to exist if a person acquires 10% or more, but less than25%, of any class of voting securities and either the company has registeredsecurities under Section 12 of the Securities Exchange Act of 1934 or no otherperson owns a greater percentage of that class of voting securities immediatelyafter the transaction.  Our common stockis registered under the Securities Exchange Act of 1934.  The regulations provide a procedure forrebutting control when ownership of any class of voting securities is below25%.

 

Under the Bank Holding Company Act, a bank holding company is generallyprohibited from engaging in, or acquiring direct or indirect control of morethan 5% of the voting shares of any company engaged in, nonbanking activitiesunless the Federal Reserve Board, by order or regulation, has found thoseactivities to be so closely related to banking or managing or controlling banksas to be a proper incident thereto.  Someof the activities that the Federal Reserve Board has determined by regulationto be proper incidents to the business of a bank holding company include:

 

•                  makingor servicing loans and certain types of leases;

•                  engagingin certain insurance and discount brokerage activities;

•                  performingcertain data processing services;

•                  actingin certain circumstances as a fiduciary or investment or financial adviser;

•                  owningsavings associations; and

•                  makinginvestments in certain corporations or projects designed primarily to promotecommunity welfare.

 

The Federal Reserve Board imposes certain capital requirements on thecompany under the Bank Holding Company Act, including a minimum leverage ratioand a minimum ratio of “qualifying” capital to risk-weighted assets.  These requirements are described below under “-Lowcountry National Bank - Capital Regulations.”  Subject to our capital requirements andcertain other restrictions, we are able to borrow money to make a capitalcontribution to the bank, and these loans may be repaid from dividends paidfrom the bank to the company.  Our abilityto pay dividends will be subject to regulatory restrictions as described belowin “- Lowcountry National Bank – Dividends.” We are also able to raise capital for contribution to the bank byissuing securities without having to receive regulatory approval, subject tocompliance with federal and state securities laws.

 

*Source of Strength; Cross-Guarantee.*  In accordance with Federal Reserve Boardpolicy, we are expected to act as a source of financial strength to the bankand to commit resources to support the bank in circumstances in which we

 

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might not otherwise do so.  Underthe Bank Holding Company Act, the Federal Reserve Board may require a bankholding company to terminate any activity or relinquish control of a nonbanksubsidiary, other than a nonbank subsidiary of a bank, upon the Federal ReserveBoard’s determination that such activity or control constitutes a serious riskto the financial soundness or stability of any depository institution subsidiaryof the bank holding company.  Further,federal bank regulatory authorities have additional discretion to require abank holding company to divest itself of any bank or nonbank subsidiaries ifthe agency determines that divestiture may aid the depository institution’sfinancial condition.

 

*The Gramm-Leach-Bliley Act.*  The Gramm-Leach-Bliley Act was signed intolaw on November 12, 1999.  Among otherthings, the Act repealed the restrictions on banks affiliating with securitiesfirms contained in sections 20 and 32 of the Glass-Steagall Act.  The Act also permits bank holding companiesthat become financial holding companies to engage in a statutorily providedlist of financial activities, including insurance and securities underwritingand agency activities, merchant banking, and insurance company portfolioinvestment activities.  The Act alsoauthorizes activities that are “complementary” to financial activities.  We have not elected to become a financialholding company.

 

The Act is intended, in part, to grant to community banks certainpowers as a matter of right that larger institutions have accumulated on an adhoc basis.  Nevertheless, the Act mayhave the result of increasing the amount of competition that we face fromlarger institutions and other types of companies.  In fact, it is not possible to predict thefull effect that the Act will have on us.

 

*South Carolina State Regulation.*As a South Carolina bank holding company under the South Carolina Banking andBranching Efficiency Act, we are subject to limitations on sale or merger andto regulation by the South Carolina Board of Financial Institutions.  We are not required to obtain the approval ofthe Board prior to acquiring the capital stock of a national bank, but we mustnotify them at least 15 days prior to doing so. We must receive the Board’s approval prior to engaging in theacquisition of a South Carolina state chartered bank or another South Carolinabank holding company.

 

**Lowcountry National Bank**

 

The bank operates as a national banking association incorporated underthe laws of the United States and subject to examination by the Office of theComptroller of the Currency.  Deposits inthe bank are insured by the Federal Deposit Insurance Corporation (“FDIC”) upto a maximum amount, which is generally $100,000 per depositor subject to theaggregation rule.

 

The Office of the Comptroller of the Currency and the FDIC regulate ormonitor virtually all areas of the bank’s operations, including

 

•                  securitydevices and procedures;

•                  adequacyof capitalization and loss reserves;

•                  loans;

•                  investments;

•                  borrowings;

•                  deposits;

•                  mergers;

•                  issuancesof securities;

•                  paymentof dividends;

•                  interestrates payable on deposits;

•                  interestrates or fees chargeable on loans;

•                  establishmentof branches;

•                  corporatereorganizations;

•                  maintenanceof books and records; and

•                  adequacyof staff training to carry on safe lending and deposit gathering practices.

 

The Office of the Comptroller of the Currency requires the bank tomaintain specified capital ratios and imposes limitations on the bank’saggregate investment in real estate, bank premises, and furniture andfixtures.  The Office of the Comptrollerof the Currency also requires the bank to prepare annual reports on the bank’sfinancial condition and to conduct an annual audit of its financial affairs incompliance with its minimum standards and procedures.

 

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Under the FDIC Improvement Act, all insured institutions must undergoregular on-site examinations by their appropriate banking agency.  The cost of examinations of insureddepository institutions and any affiliates may be assessed by the appropriateagency against each institution or affiliate as it deems necessary orappropriate.  Insured institutions arerequired to submit annual reports to the FDIC, their federal regulatory agency,and state supervisor when applicable. The FDIC Improvement Act directs the FDIC to develop a method forinsured depository institutions to provide supplemental disclosure of theestimated fair market value of assets and liabilities, to the extent feasibleand practicable, in any balance sheet, financial statement, report of conditionor any other report of any insured depository institution.  The FDIC Improvement Act also requires thefederal banking regulatory agencies to prescribe, by regulation, standards forall insured depository institutions and depository institution holdingcompanies relating, among other things, to the following:

 

•                  internalcontrols;

•                  informationsystems and audit systems;

•                  loandocumentation;

•                  creditunderwriting;

•                  interestrate risk exposure; and

•                  assetquality.

 

National banks and their holding companies which have been chartered orregistered or have undergone a change in control within the past two years orwhich have been deemed by the Office of the Comptroller of the Currency or theFederal Reserve Board to be troubled institutions must give the Office of theComptroller of the Currency or the Federal Reserve Board 30 days prior noticeof the appointment of any senior executive officer or director.  Within the 30 day period, the Office of theComptroller of the Currency or the Federal Reserve Board, as the case may be,may approve or disapprove any such appointment.

 

*Deposit Insurance -*TheFDIC has adopted a risk-based assessment system for determining an insureddepository institutions’ insurance assessment rate.  The system takes into account the risksattributable to different categories and concentrations of assets and liabilities.  An institution is placed into one of threecapital categories:  (1) wellcapitalized; (2) adequately capitalized; or (3) undercapitalized.  The FDIC also assigns an institution to oneof three supervisory subgroups, based on the FDIC’s determination of theinstitution’s financial condition and the risk posed to the deposit insurancefunds.  Assessments range from 0 to 27cents per $100 of deposits, depending on the institution’s capital group andsupervisory subgroup.  In addition, theFDIC imposes assessments to help pay off the $780 million in annual interestpayments on the $8 billion Financing Corporation bonds issued in the late 1980sas part of the government rescue of the thrift industry.  Our FDIC assessment rate is currently 1A or..000036 per million of insured deposits, but may change in the future.  The FDIC may increase or decrease theassessment rate schedule on a semiannual basis. An increase in the BIF assessment rate could have a material adverseeffect on our earnings, depending on the amount of the increase.

 

The FDIC may terminate its insurance of deposits if it finds that theinstitution has engaged in unsafe and unsound practices, is in an unsafe orunsound condition to continue operations, or has violated any applicable law,regulation, rule, order, or condition imposed by the FDIC.

 

*Transactions with Affiliates and Insiders -*Thebank is subject to the provisions of Section 23A of the Federal Reserve Act,which places limits on the amount of loans or extensions of credit to, or investmentsin, or certain other transactions with, affiliates and on the amount ofadvances to third parties collateralized by the securities or obligations ofaffiliates.  The aggregate of all coveredtransactions is limited in amount, as to any one affiliate, to 10% of the bank’scapital and surplus and, as to all affiliates combined, to 20% of the bank’scapital and surplus.  Furthermore, withinthe foregoing limitations as to amount, each covered transaction must meetspecified collateral requirements.  Complianceis also required with certain provisions designed to avoid the taking of lowquality assets.

 

The bank also is subject to the provisions of Section 23B of theFederal Reserve Act which, among other things, prohibits an institution fromengaging in certain transactions with certain affiliates unless thetransactions are on terms substantially the same, or at least as favorable tosuch institution or its subsidiaries, as those prevailing at the time forcomparable transactions with nonaffiliated companies.  The bank is subject to certain restrictionson extensions of credit to executive officers, directors, certain principalshareholders, and their related interests. Such extensions of credit (i) must be made on substantially the sameterms, including interest rates and collateral, as those prevailing at the timefor comparable transactions with third parties and (ii) must not involve morethan the normal risk of repayment or present other unfavorable features.

 

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The Federal Reserve Board has recently issued Regulation W, whichcodifies prior regulations under Sections 23A and 23B of the Federal ReserveAct and interpretative guidance with respect to affiliate transactions.  Regulation W incorporates the exemption fromthe affiliate transaction rules but expands the exemption to cover the purchaseof any type of loan or extension of credit from an affiliate.  In addition, under Regulation W:

 

•                  abank and its subsidiaries may not purchase a low-quality asset from anaffiliate;

•                  coveredtransactions and other specified transactions between a bank or itssubsidiaries and an affiliate must be on terms and conditions that areconsistent with safe and sound banking practices; and

•                  withsome exceptions, each loan or extension of credit by a bank to an affiliatemust be secured by collateral with a market value ranging from 100% to 130%,depending on the type of collateral, of the amount of the loan or extension ofcredit.

 

Regulation W generally excludes all non-bank and non-savingsassociation subsidiaries of banks from treatment as affiliates, except to theextent that the Federal Reserve Board decides to treat these subsidiaries asaffiliates.  Concurrently with the adoptionof Regulation W, the Federal Reserve Board has proposed a regulation whichwould further limit the amount of loans that could be purchased by a bank froman affiliate to not more than 100% of the bank’s capital and surplus.  This regulation has not yet been adopted.

 

*Dividends -*A nationalbank may not pay dividends from its capital. All dividends must be paid out of undivided profits then on hand, afterdeducting expenses, including reserves for losses and bad debts.  In addition, a national bank is prohibitedfrom declaring a dividend on its shares of common stock until its surplusequals its stated capital, unless there has been transferred to surplus no lessthan one-tenth of the bank’s net profits of the preceding two consecutivehalf-year periods (in the case of an annual dividend).  The approval of the Office of the Comptrollerof the Currency is required if the total of all dividends declared by anational bank in any calendar year exceeds the total of its net profits forthat year combined with its retained net profits for the preceding two years,less any required transfers to surplus.

 

*Branching -*Nationalbanks are required by the National Bank Act to adhere to branch office bankinglaws applicable to state banks in the states in which they are located.  Under current South Carolina law, the bankmay open branch offices throughout South Carolina with the prior approval ofthe Office of the Comptroller of the Currency. In addition, with prior regulatory approval, the bank is able to acquireexisting banking operations in South Carolina. Furthermore, federal legislation permits interstate branching, includingout-of-state acquisitions by bank holding companies, interstate branching bybanks if allowed by state law, and interstate merging by banks.  South Carolina law, with limited exceptions,currently permits branching across state lines through interstate mergers.

 

*Community Reinvestment Act -*TheCommunity Reinvestment Act requires that, in connection with examinations offinancial institutions within their respective jurisdictions, the FederalReserve, the FDIC, or the Office of the Comptroller of the Currency, shallevaluate the record of each financial institution in meeting the credit needsof its local community, including low and moderate income neighborhoods.  These factors are also considered inevaluating mergers, acquisitions, and applications to open a branch orfacility.  Failure to adequately meetthese criteria could impose additional requirements and limitations on ourbank.

 

*The Gramm-Leach-Bliley Act -*Underthe Gramm-Leach-Bliley Act, subject to certain conditions imposed by theirrespective banking regulators, national and state-chartered banks are permittedto form “financial subsidiaries” that may conduct financial or incidentalactivities, thereby permitting bank subsidiaries to engage in certainactivities that previously were impermissible. The Gramm-Leach-Bliley Act imposes several safeguards and restrictionson financial subsidiaries, including that the parent bank’s equity investmentin the financial subsidiary be deducted from the bank’s assets and tangibleequity for purposes of calculating the bank’s capital adequacy.  In addition, the Gramm-Leach-Bliley Actimposes new restrictions on transactions between a bank and its financialsubsidiaries similar to restrictions applicable to transactions between banksand nonbank affiliates.

 

The Gramm-Leach-Bliley Act also contains provisions regarding consumerprivacy.  These provisions requirefinancial institutions to disclose their policy for collecting and protectingconfidential information.  Customersgenerally may prevent financial institutions from sharing personal financialinformation with nonaffiliated third parties except for third parties thatmarket an institution’s own products and services.  Additionally, financial institutionsgenerally may not disclose consumer account numbers to any nonaffiliated thirdparty for use in telemarketing, direct mail marketing, or other marketing tothe consumer.

 

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*Other Regulations -*Interestand other charges collected or contracted for by the bank are subject to stateusury laws and federal laws concerning interest rates.  The bank’s loan operations are also subjectto federal laws applicable to credit transactions, such as:

 

•                  thefederal Truth-In-Lending Act, governing disclosures of credit terms to consumerborrowers;

•                  theHome Mortgage Disclosure Act of 1975, requiring financial institutions toprovide information to enable the public and public officials to determinewhether a financial institution is fulfilling its obligation to help meet thehousing needs of the community it serves;

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

•                  theFair Credit Reporting Act of 1978, governing the use and provision ofinformation to credit reporting agencies;

•                  theFair Debt Collection Act, governing the manner in which consumer debts may becollected by collection agencies; and

•                  therules and regulations of the various federal agencies charged with theresponsibility of implementing such federal laws.

 

The deposit operations of the bank also are subject to:

 

•                  theRight to Financial Privacy Act, which imposes a duty to maintain confidentialityof consumer financial records and prescribes procedures for complying withadministrative subpoenas of financial records; and

•                  theElectronic Funds Transfer Act and Regulation E issued by the Federal ReserveBoard to implement that Act, which governs automatic deposits to andwithdrawals from deposit accounts and customers’ rights and liabilities arisingfrom the use of automated teller machines and other electronic bankingservices.

 

*Capital Regulations -*Thefederal bank regulatory authorities have adopted risk-based capital guidelinesfor banks and bank holding companies that are designed to make regulatorycapital requirements more sensitive to differences in risk profiles among banksand bank holding companies and account for off-balance sheet items.  The guidelines are minimums, and the federalregulators have noted that banks and bank holding companies contemplatingsignificant expansion programs should not allow expansion to diminish theircapital ratios and should maintain ratios in excess of the minimums.  We have not received any notice indicatingthat either Coastal Banking Company, Inc. or Lowcountry National Bank issubject to higher capital requirements. The current guidelines require all bank holding companies andfederally-regulated banks to maintain a minimum risk-based total capital ratioequal to 8%, of which at least 4% must be Tier 1 capital.  Tier 1 capital includes common shareholders’equity, qualifying perpetual preferred stock, and minority interests in equityaccounts of consolidated subsidiaries, but excludes goodwill and most otherintangibles and excludes the allowance for loan and lease losses.  Tier 2 capital includes the excess of anypreferred stock not included in Tier 1 capital, mandatory convertiblesecurities, hybrid capital instruments, subordinated debt and intermediateterm-preferred stock, and general reserves for loan and lease losses up to1.25% of risk-weighted assets.

 

Under these guidelines, banks’ and bank holding companies’ assets aregiven risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance sheet items are given credit conversionfactors to convert them to asset equivalent amounts to which an appropriaterisk-weight applies.  These computationsresult in the total risk-weighted assets. Most loans are assigned to the 100% risk category, except for firstmortgage loans fully secured by residential property and, under certaincircumstances, residential construction loans, both of which carry a 50%rating.  Most investment securities areassigned to the 20% category, except for municipal or state revenue bonds,which have a 50% rating, and direct obligations of or obligations guaranteed bythe United States Treasury or United States Government agencies, which have a0% rating.

 

The federal bank regulatory authorities also have implemented aleverage ratio, which is equal to Tier 1 capital as a percentage of averagetotal assets less intangibles, to be used as a supplement to the risk-basedguidelines.  The principal objective ofthe leverage ratio is to place a constraint on the maximum degree to which abank holding company may leverage its equity capital base.  The minimum required leverage ratio fortop-rated institutions is 3%, but most institutions are required to maintain anadditional cushion of at least 100 to 200 basis points.

 

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The FDIC Improvement Act established a new capital-based regulatoryscheme designed to promote early intervention for troubled banks, whichrequires the FDIC to choose the least expensive resolution of bankfailures.  The new capital-basedregulatory framework contains five categories of compliance with regulatorycapital requirements, including “well capitalized,” “adequately capitalized,” “undercapitalized,”“significantly undercapitalized,” and “critically undercapitalized.”  To qualify as a “well capitalized”institution, a bank must have a leverage ratio of no less than 5%, a Tier 1risk-based ratio of no less than 6%, and a total risk-based capital ratio of noless than 10%, and the bank must not be under any order or directive from theappropriate regulatory agency to meet and maintain a specific capitallevel.  Currently, we qualify as “wellcapitalized.”

 

Under the FDIC Improvement Act regulations, the applicable agency cantreat an institution as if it were in the next lower category if the agencydetermines (after notice and an opportunity for hearing) that the institutionis in an unsafe or unsound condition or is engaging in an unsafe or unsound practice.  The degree of regulatory scrutiny of afinancial institution increases, and the permissible activities of theinstitution decrease, as it moves downward through the capital categories.  Institutions that fall into one of the threeundercapitalized categories may be required to do some or all of the following:

 

•                  submita capital restoration plan;

•                  raiseadditional capital;

•                  restricttheir growth, deposit interest rates, and other activities;

•                  improvetheir management;

•                  eliminatemanagement fees; or

•                  divestthemselves of all or a part of their operations.

 

These capital guidelines can affect us in several ways.  If we grow at a rapid pace, our capital maybe depleted too quickly, and a capital infusion from our holding company may benecessary which could impact our ability to pay dividends.  Our capital levels currently are adequate;however, rapid growth, poor loan portfolio performance, poor earningsperformance, or a combination of these factors could change our capitalposition in a relatively short period of time. If we fail to meet these capital requirements, our bank would berequired to develop and file a plan with the Office of the Comptroller of theCurrency describing the means and a schedule for achieving the minimum capitalrequirements.  In addition, our bankwould generally not receive regulatory approval of any application thatrequires the consideration of capital adequacy, such as a branch or mergerapplication, unless our bank could demonstrate a reasonable plan to meet the capitalrequirement within a reasonable period of time. A bank that is not “well capitalized” is also subject to certainlimitations relating to so-called “brokered” deposits.  Bank holding companies controlling financialinstitutions can be called upon to boost the institutions’ capital and topartially guarantee the institutions’ performance under their capitalrestoration plans.

 

*Enforcement Powers -*TheFinancial Institutions Reform Recovery and Enforcement Act expanded andincreased civil and criminal penalties available for use by the federalregulatory agencies against depository institutions and certain “institution-affiliatedparties.”  Institution-affiliated partiesprimarily include management, employees, and agents of a financial institution,as well as independent contractors and consultants such as attorneys andaccountants and others who participate in the conduct of the financialinstitution’s affairs.  These practicescan include the failure of an institution to timely file required reports orthe filing of false or misleading information or the submission of inaccuratereports.  Civil penalties may be as highas $1,000,000 a day for such violations. Criminal penalties for some financial institution crimes have beenincreased to twenty years.  In addition,regulators are provided with greater flexibility to commence enforcementactions against institutions and institution-affiliated parties.  Possible enforcement actions include thetermination of deposit insurance. Furthermore, banking agencies’ power to issue cease-and-desist orderswere expanded.  Such orders may, amongother things, require affirmative action to correct any harm resulting from aviolation or practice, including restitution, reimbursement, indemnificationsor guarantees against loss.  A financialinstitution may also be ordered to restrict its growth, dispose of certainassets, rescind agreements or contracts, or take other actions as determined bythe ordering agency to be appropriate.

 

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*Effect of Governmental Monetary Policies -*Ourearnings are affected by domestic economic conditions and the monetary andfiscal policies of the United States government and its agencies.  The Federal Reserve Bank’s monetary policieshave had, and are likely to continue to have, an important impact on theoperating results of commercial banks through its power to implement nationalmonetary policy in order, among other things, to curb inflation or combat arecession.  The monetary policies of theFederal Reserve Board have major effects upon the levels of bank loans,investments and deposits through its open market operations in United Statesgovernment securities and through its regulation of the discount rate onborrowings of member banks and the reserve requirements against member bankdeposits.  It is not possible to predictthe nature or impact of future changes in monetary and fiscal policies.

 

*Proposed Legislation and Regulatory Action.*  New regulations and statutes are regularlyproposed that contain wide-ranging proposals for altering the structures,regulations, and competitive relationships of the nation’s financialinstitutions.  We cannot predict whetheror in what form any proposed regulation or statute will be adopted or the extentto which our business may be affected by any new regulation or statute.

 

**Deposit Services**

 

We offer a full range of deposit services that are typically availablein most banks and savings and loan associations, including checking accounts,commercial accounts, savings accounts, and other time deposits of varioustypes, ranging from daily money market accounts to longer-term certificates ofdeposit.  The transaction accounts andtime certificates are tailored to our primary market area at rates competitiveto those offered in the Beaufort County area. In addition, we offer certain retirement account services, such asIRAs.  We solicit these accounts fromindividuals, businesses, associations, organizations, and governmentalauthorities.

 

**Other Banking Services**

 

The bank offers other bank services including drive up ATMs, safedeposit boxes, traveler’s checks, direct deposit, U.S. Savings Bonds, bankingby mail, and internet banking.  The bankis associated with the Plus and Star ATM networks, which may be used by itscustomers throughout Beaufort County and other regions.  We believe that by being associated with ashared network of ATMs, we are better able to serve our customers and attractcustomers who are accustomed to the convenience of using ATMs.  We do not expect the bank to exercise trustpowers during the first few years of operation.

 

**Employees**

 

As of March 15, 2005, our bank had 25full-time employees and 3 part-time employees, and our company had no employeesother than its officers, who are also employees of the Company.

 

**Item 2.****                                   Description ofProperty.**

 

The bank is located at 36 Sea Island Parkway inBeaufort, South Carolina.  We own our5,800 square foot main office building located on 2.33 acres of land.

 

The Bank owns a lot on Hwy 170, Bluffton, SouthCarolina in the Okatie Center, which was purchased in 2001 for a future branchsite.  The bank has since decided againstbuilding on this site and has now listed the lot for sale.

 

During 2002, we successfully established a loanproduction office to service the Bluffton area. Based on the success of the establishment of the loan production office,we decided to move forward with a full service branch to serve thismarket.  We decided that leasing a branchfacility was in the bank’s best interest as opposed to constructing our ownbuilding.  To that end, we entered into alease to open our first branch at Moss Creek Village, Bluffton, SouthCarolina.  The Moss Creek office becamefully operational during the second quarter of 2003.

 

**Item 3.****                                   Legal Proceedings.**

 

None.

 

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**Item 4.****                                   Submission ofMatters to a Vote of Security Holders.**

 

No matter was submitted to a vote of securityholders during the fourth quarter of the fiscal year covered by this report.

 

**PART II**

**Item 5.****                                   Market for CommonEquity and Related Stockholder Matters.**

 

In response to this Item, additionalinformation is contained on page 44 of the company’s annual report toshareholders for the year ended December 31, 2004 and is incorporated herein byreference.

 

**Item 6.****                                   Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

In response to this Item, the informationcontained on pages 5 through 18 of the company’s annual report to shareholdersfor the year ended December 31, 2004 is incorporated herein by reference.

 

**Item 7.****                                   Financial Statements**

 

In response to this Item, the informationcontained on pages 19 through 42 of the company’s annual report to shareholdersfor the year ended December 31, 2004 is incorporated herein by reference.

 

**Item 8.****                                   Changes in andDisagreements with Accountants on Accounting and Financial Disclosure**

 

None

 

**Item 8A.****                          Controls and Procedures**

 

As of the end of the period covered by this report,we carried out an evaluation, under the supervision and with the participationof our management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of our disclosure controls and procedures asdefined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that our current disclosure controls andprocedures are effective as of December 31, 2004.  There have been no significant changes in ourinternal controls over financial reporting during the fourth fiscal quarterended December 31, 2004 that have materially affected, or are reasonably likelyto materially affect, our internal controls over financial reporting.

 

The design of any system of controls and proceduresis based in part upon certain assumptions about the likelihood of futureevents.  There can be no assurance thatany design will succeed in achieving its stated goals under all potentialfuture conditions, regardless of how remote.

 

**Item 8B.****                         ****Other Information**

 

None.

 

**PART III**

**Item 9.****                                   Directors, ExecutiveOfficers, Promoters and Control Persons; Compliance with Section 16(a) of theExchange Act**

 

As required by Section 16(a) of the Securities Exchange Act of 1934,our directors and executive officers, and certain other individuals arerequired to report periodically their ownership of our common stock and anychanges in ownership to the SEC.  Basedon a review of Forms 3, 4, and 5 and any representations made to us, we believethat all such reports for these persons were filed in a timely fashion during2004 for transactions occurring in 2004 with the exception of Form 4’s filed byLila Meeks, a director, showing the disposition of stock as gifts during theperiod of 10/04/2004 to 12/29/2004.  Asubsequent Form 5 was filed on 1/13/2005 reflecting those transactions.

 

Set forth below is certain information about each of our directors andexecutive officers.  Each director isalso a director of the bank and has been a director of the company since itsformation in 1999, except for Mr. Pate who was appointed as chief financialofficer of our company and our bank in 2004.

 

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*Marjorie Trask Gray, DMD*, 35, Class I Directorand Secretary to the Board, graduated from the University of South Carolina in1992, and from the Medical University of South Carolina with the degree ofDoctor of Dental Medicine in 1997.  Dr.Gray is licensed to practice dentistry in the state of South Carolina.  She is a member of the Academy of GeneralDentistry, the Beaufort County Open Land Trust, the Historic BeaufortFoundation and St. Helena Episcopal Church. Dr. Gray is on the Board ofDirectors of the YMCA of Beaufort County.

 

*Dennis O. Green, CPA*, 64, Class I Director andVice Chairman of the Board, served as Chief Auditor for Citicorp, and itsprincipal banking subsidiary, Citibank N.A. in New York, New York, fromFebruary 1990 to July 1997, when he retired. He graduated in 1967 from Wayne State University with a degree inBusiness Administration/Finance and was licensed as a Certified PublicAccountant by the State of Michigan in 1969. Mr. Green is managing member andfounder of Celadon LLC, developer of “Celadon”, a New Traditional Neighborhooddevelopment on Lady’s Island, Beaufort, SC. He is a Director and Chair of theAudit Committee of Adesa, Inc.  He isDirector and President of The Olive Tree Foundation, Director of Gray Holdings,LLP, Director and Chairman of the Audit Committee of Venture Inc. of Beaufortand Director and President of the Boys and Girls Club of Beaufort.

 

*Mark B. Heles, CPC*, 55, Class II Director, isthe owner, President and Chief Executive Officer of Achieve Staffing &Training, Inc.  Achieve provides staffingservices for junior and senior management within the southeastern region in thearea of Banking and Finance.  Mr. Helesreceived his license as a Certified Personnel Consultant in 1990 from theNational Association of Personnel Consultants. He graduated from the University of South Carolina in 1976 with aBachelor of Science degree in Business Administration/Finance.  Mr. Heles is a former president of the HiltonHead Island Rotary Club and a past Director of the Greater Beaufort Chamber ofCommerce.  He currently is a member ofthe National Association of Personnel Services, The Hilton Head Island RotaryClub and the American Staffing Association.

 

*James W. Holden, Jr.*, 45, Class III Director,is a licensed veterinarian in South Carolina and Georgia, and has beenpracticing veterinary medicine in Beaufort since 1986.  He has been the owner and director of HollyHall Animal Hospital since 1988.  Dr.Holden is also a general partner and owner of James W. Holden & Co., LLC.,a real estate holding company.  Hereceived his DVM from the University of Georgia in 1983, and a degree in Pre-VeterinaryMedicine from Clemson University in 1979. He is a member of the Rotary Club of Beaufort where he has served asDirector, President, Vice President, and Secretary.

 

*William G. Horn*, 55, serves LowcountryNational Bank as Executive Vice President and Senior Credit Officer.  Mr. Horn brings 29 years of bankingexperience in management and credit administration.  Most recently, Mr. Horn was responsible forcredit and loan growth in the State of Florida for Nexity Bank.  Prior to his move to Florida, Mr. Horn wasPresident and Chief Executive Officer of Beach First National Bank in MyrtleBeach, South Carolina.  Mr. Horn is agraduate of Georgia Southern University, the Georgia School of Banking and theStonier Graduate School of Banking.

 

*Ladson F. Howell*, 61, Class I Director, servesas Chairman of the Board of Directors of Coastal Banking Company and LowcountryNational Bank.  He is licensed topractice law in South Carolina and retired in January 2000 as a practicingattorney with Howell, Gibson & Hughes, PA, a law firm located in Beaufort,South Carolina, since 1968.  He receivedhis law degree from the University of South Carolina Law School in 1968 and adegree in Journalism from the University of South Carolina in 1965.  Mr. Howell was a former President of theBeaufort County Bar Association.  Hecurrently is a member of the South Carolina State Bar Association and the Boardof Trustees of Carteret Street United Methodist Church.

 

*James C. Key*, 65, Class III Director, is themanaging partner of Shenandoah Group, LLP, a firm providing risk management,controls, and governance solutions in Beaufort, South Carolina since 1997.  He is a Certified Internal Auditor.  Mr. Key served as Director, Internal AuditNorth America and Asia Pacific at IBM Corporation in Armonk, New York until heretired in 1997.  He graduated fromSyracuse University with a BA in Liberal Studies.  Mr. Key serves on the Board of Governors ofthe Institute of Internal Auditors, Coastal Georgia Chapter and the SeminarCommittee of the Institute of Internal Auditors.  He is a member of Historic BeaufortFoundation, Beaufort Arts Council, on the Board of Directors at the YMCA ofBeaufort County and is President of the Unitarian Universal Fellowship ofBeaufort.

 

*Randolph C. Kohn*, 57, Class I Director, hasserved as President and Chief Executive Officer for Coastal Banking Company andLowcountry National Bank since their inception. He previously served as Senior Vice President and Senior Credit Officerfor Clemson Bank & Trust, a community bank located in Clemson, SouthCarolina.  He has more than 32 years ofbanking experience in both Georgia and South Carolina.  He graduated from the University of Georgiain 1970 with a degree in Business Management & Finance.  Mr. Kohn serves on the Board of Directors ofthe Arts Council

 

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of Beaufort County.  He alsoserves on the Board of Directors for the Boys and Girls Club of Beaufort, is amember of the Administrative Board of Carteret Street United Methodist Churchand a member of the Beaufort Rotary Club.

 

*Ron Lewis*, 64, Class III Director, has beenowner and operator of McDonald’s franchises in Beaufort, South Carolina since1990.  He graduated from the StateUniversity of New York, New York in 1961 with a Bachelor of Science degree inBusiness/Economics.  He is a member ofthe Board of Directors of the Marine Institute, the Beaufort Chamber ofCommerce, the Family Resources, Inc., Military Affairs Committee, The AdvisoryBoard of the Boys and Girls Clubs of Beaufort, Business Partner with BeaufortCounty School District, and member of the Beaufort County Arts Council.

 

*Lila N. Meeks*, 64, Class II Director, is theVice-Chancellor for Advancement at the University of South Carolina,Beaufort.  She graduated from AuburnUniversity in 1962, and received a Masters degree in English from Auburn in1966.  Ms. Meeks is a member of theBeaufort County Open Land Trust, the Arts Council, the Beaufort CountyHistorical Society, The Historic Beaufort Foundation, and St. Helena’sEpiscopal Church.  She is also theUniversity’s representative to the AAUW and Main Street Beaufort.

 

*James L. Pate*, 53, has served as Senior VicePresident and Chief Financial Officer for Coastal Banking Company, Inc. andLowcountry National Bank since June 2004. He previously served as managing officer for Jeter Homes, a residentialhomebuilder in Beaufort, South Carolina from 2000 to 2004.  Previously, he was Chief Financial Officer ofFirstBancorporation, Inc., which had two bank subsidiaries, FirstBank, N.A.,Beaufort, South Carolina and FirstBank, N.A., Columbia, South Carolina from1995 through 1999.  He has more than 25years of banking experience in South Carolina. He graduated from Presbyterian College with degree in BusinessAdministration, the University of South Carolina with an MBA and the BankAdministration Institute’s School of Financial Control with Honors.  He serves as treasurer of the Boys and GirlsClubs of the Lowcountry, is a past president of the Boys and Girls Club ofBeaufort and is a member of the Sea Island Rotary Club.

 

*Robert B. Pinkerton*, 64, Class II Director,has been President and Chief Executive Officer of Athena Corporation, amanufacturer and fabricator of custom products for the construction industrysince 1990.  Prior to that, he wasPresident and Chief Executive Officer of Blackstone Corporation (now part ofValeo), a multinational original equipment manufacturer of automotive enginecooling systems.  He is also a principalin Beaufort Land Company, LLC and Village Renaissance, Inc., both developers inBeaufort, South Carolina.  He holds a lawdegree, two engineering degrees and is a graduate of the South Carolina BankersAssociation Directors College. He serves as chairman of the Beaufort RedevelopmentCommission, Treasurer of St Mark’s Episcopal Chapel, and is a former AssistantDistrict Governor of Rotary.

 

*John M. Trask, III*, 41, Class II Director, hasbeen an owner of Lowcountry Real Estate, a local real estate company, since1996.  He formerly owned and managedPikes Peak of Memphis, a wholesale florist company, from 1991 until 1996.  Mr. Trask is active in the Beaufort businesscommunity and he has additional ownership interests in several local businesses.  He graduated from Vanderbilt University witha Bachelor of Arts degree in 1987.  Mr.Trask is a licensed real estate broker in South Carolina.

 

*Matt Trumps*, 35, Class III Director, has beenthe co-owner of Tideland Realty, Inc. since 1994.  Mr. Trumps received a Bachelor of Arts degreein Political Science from the College of Charleston in 1991 and is a lifeMember of the College of Charleston Alumni Association.  He is a member of St. Peter’s Catholic Churchand a board member of the St. Peter’s Catholic School.

 

*Family Relationships:*  DirectorsJohn M. Trask and Marjorie Trask Gray are cousins.

 

Audit Committee

 

Our board of directors has appointed a number of committees, including an audit, personnel, asset/ liability and compensation committee.  The audit committee is composed of James W. Holden, James C. Key, Robert B. Pinkerton, Marjorie Trask Gray, Ladson F. Howell, Lila N. Meeks, and Dennis O. Green as chair.  Each of these members are considered “independent” under Rule 4200(a)(15) of the National Association of Securities Dealers’ listing standards.  The board also has determined that Messrs. Key and Green are audit committee financial experts as defined by the rules of the Securities and Exchange Commission.  The audit committee met six times in 2004.

 

The audit committee functions are set forth in its charter, which was adopted September 2000 and filed with the Securities and Exchange Commission on April 19, 2002.  The audit committee has the responsibility of reviewing

 

17

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financial statements, evaluating internal accounting controls, reviewing reports of regulatory authorities, and determining that all audits and examinations required by law are performed.  The committee recommends to the board the appointment of the independent auditors for the next fiscal year, reviews and approves the auditor’s audit plans, and reviews with the independent auditors the results of the audit and management’s responses.  The audit committee is responsible for overseeing the entire audit function and appraising the effectiveness of internal and external audit efforts.  The audit committee reports it findings to the board of directors.

 

**Code of Ethics**

 

We expect all of our employees to conductthemselves honestly and ethically, particularly in handling actual and apparentconflicts of interest and providing full, accurate, and timely disclosure tothe public.  We have adopted a formalcode of ethics that applies to our senior executive officers and staff which isapproved by our board of directors. The Code of Ethics is available without charge upon request bycontacting our Secretary in writing at Coastal Banking Company, Inc., 36Sea Island Parkway, Beaufort, South Carolina 29907.

 

**Item 10.****                            Executive Compensation**

 

**Summary of Cash and Certain Other Compensation**

 

The following table shows the cash compensation we paid to our chiefexecutive officer and president and each of the other executive officers whosetotal annual compensation, including salary and bonus, for services renderedduring the fiscal year ended December 31, 2004 exceeded $100,000.

 

**Summary Compensation Table**

 
| ** **                      | ** ** | **Annual  Compensation (1)** | ** ** | **Long  Term  Compensation  Securities  Underlying  Options** | ** ** | ** ** | ** ** |
|---------------------------------|------------|------------------------------|------------|---------------------------------------------------------------|------------|------------|------------|
| **Name and Principal Position** | ** ** | ** **                   | ** ** | ** **                                                    | ** ** | ** ** | ** ** | **Other  Annual  Compensation** | ** ** | ** ** | **All  Other  Compensation** | ** ** |
| ** **                      |
| ** **                      |
| **Year**                        | ** ** | **Salary**                   | ** ** | **Bonus**                                                     |
|                            |       |                         |       |                                                          |       |       |       |   |   |   |   |   |   |
| Randolph C. Kohn                |       | 2004                         |       | $                                                             | 135,862    |       | $          | 68,561 |   | — |   | — |   | $ | 6,848 | (2) |
| Chief Executive Officer         |       | 2003                         |       | $                                                             | 125,860    |       | $          | 35,000 |   | — |   | — |   | $ | 6,725 |   |
| and President                   |       | 2002                         |       | $                                                             | 115,000    |       | $          | 10,000 |   | — |   | — |   | $ | 3,386 |   |
|                            |       |                         |       |                                                          |       |       |       |   |   |   |   |   |   |
| William Gary Horn               |       | 2004                         |       | $                                                             | 107,037    |       | $          | 25,000 |   | — |   | — |   | $ | 3,811 | (3) |
| Executive Vice President        |       | 2003                         |       | $                                                             | 100,000    |       | $          | 20,000 |   | — |   | — |   | $ | 3,107 |   |
| Senior Credit Officer           |       | 2002                         |       | $                                                             | 90,000     |       | $          | 10,000 |   | — |   | 10,500 |   | $ | 2,682 |   |
|                                 |            |                              |            |                                                               |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

----

(1)                      Executive officers of the company also received indirect compensation in the form of certain perquisites and other personal benefits.  The amount of such benefits received in the fiscal year by each named executive officer did not exceed the lesser of either $50,000 or 10% of the executive’s annual salary and bonus.

(2)                      Represents executive's 401(k) match and 50% of the term life insurance premium paid by the company for the benefit of the named executive officer.  The company maintains a term life insurance policy on the named executive officer with 50% of the benefits payable to a designated beneficiary.

(3)                      Represents executive's 401(k) match.

 

**OptionGrants in Last Fiscal Year**

 

No options were granted to our named executive officers in 2004.

 

18

----

 

**Aggregated Option Exercises and Year-End Option Values**

 
| ** **        | ** ** | **Number  of Unexercised Securities  Underlying Options at Fiscal year End (#)** | ** ** | **Value of  Unexercised In-the-Money  Options at Fiscal Year End ($ )(1)** | ** ** |
|-------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **Name**          | ** ** | **Exercisable**                                                                  | ** ** | **Unexercisable**                                                               | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Randolph C. Kohn  |       | 65,535                                                                           |       | —                                                                          |       | $ | 555,736 |   | $ | — |   |
| William Gary Horn |       | 6,300                                                                            |       | 4,200                                                                           |       | $ | 50,400 |   | $ | 33,600 |   |

 

----

(1)                                  The values shown equal the difference betweenthe exercise price of unexercised in-the-money options and the closing marketprice ($18.00) of the underlying common stock at December 31, 2004.  If the closing market price is less than theexercise price, we assume that the value is zero.  Options are in-the-money if the fair marketvalue of the common stock exceeds the exercise price of the option.

 

**Employment Agreements**

 

In 1999, we entered into an employment agreement with Randy Kohn for a five-year term, pursuant to which he serves as president, chief executive officer and director of our bank. Mr. Kohn is currently paid a salary of $160,000, which includes certain perquisites, plus his yearly medical insurance premium. He is also entitled to receive an annual increase in his salary equal to the previous year’s salary times the increase in the Consumer Price Index during the previous year. The board of directors may increase Mr. Kohn’s salary above this level, but not below it.  He is eligible to receive an annual bonus of up to 5% of the net pre-tax income of the bank, if the bank meets performance goals set by the board.  Additionally, Mr. Kohn participates in our retirement, welfare, and other benefit programs and is entitled to a life insurance policy and an accident liability policy and reimbursement for automobile expenses, club dues, and travel and business expenses.

 

Mr. Kohn’s employment agreement also provides that following termination of his employment and for a period of 12 months thereafter, he may not (a) compete with the company, the bank, or any of its affiliates by, directly or indirectly, forming, serving as an organizer, director or officer of, or consultant to, or acquiring or maintaining more than 1% passive investment in, a depository financial institution or holding company thereof if such depository institution or holding company has one or more offices or branches within a radius of thirty miles from the main office of the company or any branch office of the company, (b) solicit major customers of the bank for the purpose of providing financial services, or (c) solicit employees of the bank for employment. If Mr. Kohn terminates his employment for good cause as that term is defined in the employment agreement or if he is terminated following a change in control of Coastal Banking Company as defined in the agreement, he will be entitled to severance compensation of his then current monthly salary for a period of 12 months, plus accrued bonus, and all outstanding options and incentives shall vest immediately.

 

**Director Compensation**

 

Directors were paid $3,500 each in 2004 for board and committee fees.

 

Director Deferred Fee Program. We maintain adirector deferred compensation program to provide directors with an opportunityto defer board fees in an interest-bearing account.  Interest is credited on the account balanceat an annual rate, compounded quarterly, equal to 75% of the company’s returnon equity for the previous quarter, not to exceed 12%.  Benefits are payable in a lump sum within 60days following retirement or termination of service following death, disability,or a change in control.  All directorswith the exception of two, participate in this program.

 

**Executive Deferred Compensation Program**

 

We maintain an executive deferredcompensation program to provide executive officers with an opportunity to defercompensation in an interest-bearing account. Interest is credited on the account balance at an annual rate,compounded quarterly, equal to 75% of the company’s return on equity for theprevious quarter, not to exceed 12%. Benefits are payable in 120 equal monthly installments commencing on thefirst day of the month following the executive’s normal requirement date.  Upon early retirement or the termination ofemployment following death, disability, or a change of control, benefits arepayable in a lump sum within 60 days of such termination.  All of our named executive officersparticipate in this program.

 

19

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**Employee Stock Bonus Plan**

 

In November 2002, our board of directors approved the Coastal BankingCompany, Inc. 2002 Stock Bonus Plan. Under this plan, the board of directors authorized Coastal BankingCompany to purchase 1,365 shares of the its common stock in the public marketfor subsequent disposition as bonuses to certain non-executive and non-directoremployees.  Recipients of stock bonusesunder this plan are responsible for any individual tax consequences resultingfrom their stock grants.  Thecompensation committee was tasked with determining the eligible employees andthe amount of shares awarded to each recipient. As of March 21, 2005, we had granted 1,312 shares to employees underthis plan.

 

**Item 11.****                            Security Ownership ofCertain Beneficial Owners and Management**

 

The following table sets forth equitycompensation plan information at December 31, 2004.  All per share amounts and number of shares outstandinghave been adjusted to reflect all stock dividends.

 

**EquityCompensation Plan Information**

** **
| **Plan Category**                                                                     | ** ** | **Number of securities  to be issued  upon exercise of  outstanding options,  warrants and rights (a)** | ** ** | **Weighted-average  exercise price of**

**outstanding options,  warrants and rights (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans (c)  (excluding securities  reflected in column(a))** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                  |       |                                                                                                    |       |                                                                                       |       |                                                                                                                                                    |       |
| Equity  compensation plans approved by security holders(1)                            |       | 117,221                                                                                                 |       | $                                                                                          | 10.32      |                                                                                                                                                    | 21,633     |   |
|                                                                                  |       |                                                                                                    |       |                                                                                       |       |                                                                                                                                                    |       |
| Equity  compensation plans not approved by security holders and Organizer warrants(2) |       | 190,050                                                                                                 |       | $                                                                                          | 9.52       |                                                                                                                                                    | —     |   |
|                                                                                  |       |                                                                                                    |       |                                                                                       |       |                                                                                                                                                    |       |
| Total                                                                                 |       | 307,271                                                                                                 |       | —                                                                                     |       | 21,633                                                                                                                                                  |       |

 

----

(1)                                  The number of shares of common stock availableunder the 2000 Coastal Banking Company Stock Incentive Plan is currently138,854, and it will automatically increase each time we issue additionalshares so that it continues to equal 15% of our total outstanding shares.

(2)                                  In connection with our initial public offeringin 1999, we issued 212,000 (adjusted for stock dividends) warrants to ourorganizing directors at an exercise price of $9.52 per share with a term of 10years, and we issued an option to one of our consultants for 10,500 shares at$9.52 per share.  During 2003, 17,850 ofthese warrants expired related to one former director.  See our description of “Stock Warrants”below.

 

#### **Stock Warrants**

 

Each of our organizers has received, for noadditional consideration, a warrant to purchase one share of common stock for$9.52 per share for each share purchased during our initial publicoffering.  The warrants are representedby separate warrant agreements.  Onethird of the warrants vest on each of the first three anniversaries of the dateour bank opened for business, and they are exercisable in whole or in partduring the ten year period following that date. The warrants may not be assigned, transferred, pledged, or hypothecatedin any way.  The shares issued pursuantto the exercise of such warrants are transferable, subject to compliance withapplicable securities laws.  If the OCCor the FDIC issues a capital directive or other order requiring the bank toobtain additional capital, the warrants will be forfeited, if not immediatelyexercised.

 

20

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**Security Ownership ofCertain Beneficial Owners and Management**

** **

Thefollowing table shows how much of our common stock is owned by the directors,certain named executive officers, and owners of more than 5% of the outstandingcommon stock, as of March 15, 2005. These shares have been adjusted for all stock dividends.  Except as noted below, the mailing addressfor each beneficial owner is care of Coastal Banking Company, Inc., 36 SeaIsland Parkway, Beaufort, South Carolina, 29907.

 
| **Name**                                                      | ** ** | **Number of  Shares Owned (****1)** | ** ** | **Right to  Acquire (****2)** | ** ** | **Percentage of  Beneficial  Ownership (****3)** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------|------------|--------------------------------------------------|------------|
| Marjorie Trask Gray                                           |       | 15,750                              |       | 15,750                        |       | 3.07                                             | %          |
| Dennis O. Green                                               |       | 33,075                              |       | 22,575                        |       | 5.39                                             | %          |
| Mark B. Heles                                                 |       | 32,025                              |       | 15,750                        |       | 4.66                                             | %          |
| James W. Holden, Jr.                                          |       | 21,498                              |       | 12,075                        |       | 3.28                                             | %          |
| William Gary Horn                                             |       | 3,055                               |       | 6,300                         |       |                                             | *          |
| Ladson F. Howell                                              |       | 10,500                              |       | 10,500                        |       | 2.06                                             | %          |
| James C. Key                                                  |       | 11,967                              |       | 10,500                        |       | 2.20                                             | %          |
| Randolph C. Kohn                                              |       | 17,010                              |       | 65,535                        |       | 7.67                                             | %          |
| Ron Lewis                                                     |       | 9,550                               |       | 13,650                        |       | 2.27                                             | %          |
| Lila N. Meeks                                                 |       | 16,433                              |       | 10,500                        |       | 2.64                                             | %          |
| Robert B. Pinkerton                                           |       | 22,312                              |       | 21,000                        |       | 4.20                                             | %          |
| John M. Trask, III                                            |       | 34,573                              |       | 26,250                        |       | 5.87                                             | %          |
| Matt A. Trumps                                                |       | 16,240                              |       | 15,750                        |       | 3.12                                             | %          |
|                                                          |       |                                |       |                          |       |                                             |       |
| Wellington Management Company (4)                             |       | 76,400                              |       | 0                             |       | 7.56                                             | %          |
|                                                          |       |                                |       |                          |       |                                             |       |
| All directors and executive officers as a  group (14 persons) |       | 243,988                             |       | 256,135                       |       | 39.40                                            | %          |

 

----

*Indicatesless than 1% ownership.

 

(1)                                  Includes shares for which the named person hassole voting and investment power, has shared voting and investment power, orholds in an IRA or other retirement plan program, unless otherwise indicated inthese footnotes.

 

(2)                                  Includes shares that may be acquired withinthe next 60 days of March 15, 2005 by exercising vested stock options orwarrants but does not include any unvested stock options or warrants.

 

(3)                                  Foreach individual, this percentage is determined by assuming the named personexercises all options and warrants which he or she has the right to acquirewithin 60 days, but that no other persons exercise any options orwarrants.  For the directors andexecutive officers as a group, this percentage is determined by assuming thateach director and executive officer exercises all options and warrants which heor she has the right to acquire within 60 days, but that no other personsexercise any options.  The calculationsare based on 1,010,395 shares of commonstock outstanding on March 15, 2005.

 

(4)                                  Theaddress for Wellington Capital Management is 75 State Street, Boston, MA  02109.

 

**Item 12.****                            Certain Relationships andRelated Transactions**

 

We have banking and othertransactions in the ordinary course of business with our directors and officersand the bank and their affiliates.  It isour policy that these transactions be on substantially the same terms(including price, or interest rates and collateral) as those prevailing at thetime for comparable transactions with unrelated parties.  We do not expect these transactions toinvolve more than the normal risk of collectibility nor present otherunfavorable features to the company or the bank.  Loans to individual directors and officersmust also comply with the bank’s lending policies and statutory lending limits,and directors with a personal interest in any loan application are excludedfrom the consideration of the loan application. The company intends for all of its transactions with its affiliates tobe on terms no less favorable to the company than could be obtained from anunaffiliated third party and to be approved by a majority of disinteresteddirectors.

 

21

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**Item 13.****                            Exhibits**

 
| 3.1    |   | Amended and Restated  Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the  Registration Statement on Form SB-2, File No. 333-86371).                                                                                                                              |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                     |
| 3.2.   |   | Bylaws (incorporated by reference to Exhibit 3.3 of the Registration  Statement on Form SB-2, File No. 333-86371).                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                     |
| 4.1.   |   | See Exhibits 3.1, 3.2, and 3.3 for provisions in the company’s  Articles of Incorporation and Bylaws defining the rights of holders’ of the  common stock (incorporated by reference to Exhibits 3.1 and 3.2 of the  Registration Statement on Form SB-2, File No. 333-86371). |
|   |   |                                                                                                                                                                                                                                                                                     |
| 4.2.   |   | Form of certificate of common stock (incorporated by reference to  Exhibit 4.2 of the Registration Statement on Form SB-2, File No. 333-86371).                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                     |
| 10.1   |   | Employment Agreement dated August 12, 1999 between the company and  Randolph Kohn (incorporated by reference to Exhibit 10.1 of the Registration  Statement on Form SB-2, File No. 333-86371).*                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                     |
| 10.2   |   | Form of Stock Warrant Agreement (incorporated by reference to Exhibit  10.8 of the Registration Statement on Form SB-2, File No. 333-86371).*                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                     |
| 10.3   |   | Coastal Banking Company, Inc. 2000 Stock Incentive Plan and Form of  Stock Option Agreement (incorporated by reference to Exhibit 10.7 of the Form  10-KSB for the period ended December 31, 2002, File No. 333-86371).*                                                                 |
|   |   |                                                                                                                                                                                                                                                                                     |
| 10.4   |   | Lease Agreement between Lowcountry National Bank and Bright O’Hare  Moss Creek Partnership, dated January 14, 2003 (incorporated by reference to  Exhibit 10.7 of the Form 10-KSB for the period ended December 31, 2002, File  No. 333-86371).                                     |
|   |   |                                                                                                                                                                                                                                                                                     |
| 10.5   |   | Form of Lowcountry National Bank Director Deferred Fee Agreement.*                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                     |
| 10.6   |   | Form of Lowcountry National Bank Executive Deferred Compensation Fee  Agreement.*                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                     |
| 13.1   |   | Company’s 2004 Annual Report.                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                     |
| 21     |   | Subsidiaries of the Company.                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                     |
| 23     |   | Consent of Certified Public Accountants.                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                     |
| 24     |   | Power of Attorney (contained as part of the  signature pages herewith).                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                     |
| 31.1   |   | Rule 13a-14(a) Certification of the Chief Executive Officer.                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                     |
| 31.2   |   | Rule 13a-14(a) Certification of the Chief Financial Officer.                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                     |
| 32     |   | Section 1350 Certifications.                                                                                                                                                                                                                                                             |

 

----

*              Management contract or compensatory plan orarrangement required to be filed as an Exhibit to this Annual Report on Form10-KSB.

 

22

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**Item 14.****                            Principal Accountant Feesand Services**

 

The following table shows the fees that the Company paid or accrued forthe audit and other services provided by Elliott Davis LLC for the fiscal yearsended December 31, 2004 and 2003:

 
| ** **         | ** ** | **Year Ended  December 31, 2004** | ** ** | **Year Ended  December 31, 2003** | ** ** |
|--------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| Audit Fees         |       | $                                 | 34,520     |                              | $          | 26,800 |   |
| Audit-Related Fees |       | $                                 | —     |                              | $          | — |   |
| Tax Fees           |       | $                                 | 3,800      |                              | $          | 3,800 |   |
| All Other Fees     |       | $                                 | —     |                              | $          | — |   |
| Total              |       | $                                 | 38,320     |                              | $          | 30,600 |   |

 

*Audit Fees. *This category includes the aggregate feesbilled for professional services rendered by Elliott Davis for the audit of ourannual consolidated financial statements and the limited reviews of ourquarterly condensed consolidated financial statements for the years endedDecember 31, 2004 and 2003.

 

*Audit-Related Fees*.  This category includes the aggregate feesbilled for non-audit services, exclusive of the fees disclosed relating toaudit fees, rendered by Elliott Davis during the fiscal years ended December31, 2004 and 2003.  These servicesprincipally included the assistance and issuance of consents for variousfilings with the SEC.

 

*Tax Fees.*  This category includes the aggregate feesbilled for tax services rendered by Elliott Davis during fiscal years endedDecember 31, 2004 and 2003.  Theseservices consisted primarily of tax compliance and tax consultationsservices.  In addition, for fiscal yearsended December 31, 2004 and 2003, these services include preparation of local,state and federal tax returns for the Company and its subsidiary.

 

*All Other Fees.*  This category includes the aggregate feesbilled for all other services, exclusive of the fees disclosed above, renderedby Elliott Davis during the fiscal year ended December 31, 2004 and 2003.  These other services in fiscal 2004 and 2003consisted primarily of assistance and meetings with management and the auditcommittee on planning issues.

 

*Oversight of Accountants;Approval of Accounting Fees*

 

Under the provisions of its charter, the auditcommittee recommends to the board the appointment of the independent auditorsfor the next fiscal year, reviews and approves the auditor’s audit plans, andreviews with the independent auditors the results of the audit and management’sresponses.  The audit committee hasadopted pre-approval policies and procedures for audit and non-auditservices.  The pre-approval processrequires all services to be performed by our independent auditor to be approvedin advance, regardless of amount.  Theseservices may include audit services, audit related services, tax services andother services.

 

23

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**SIGNATURES**

 

In accordance with Section 13 or 15(d) of theSecurities Exchange Act of 1934 (the “Exchange Act”), the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
|   |                 |   | COASTAL  BANKING COMPANY, INC.        |
|--------|----------------------|--------|---------------------------------------|
|   |                 |   |                                  |
|   |                 |   |                                  |
| Date:  |  March 28, 2005 |   | By:                                   | /s/ Randolph C. Kohn |   |
|   |                 |   | President and Chief Executive Officer |
|        |                      |        |                                       |  |  |

 

KNOW ALL MEN BY THESE PRESENTS, that eachperson whose signature appears below constitutes and appoints Randolph C. Kohn,his true and lawful attorney-in-fact and agent, with full power of substitutionand resubstitution, for him and in his name, place and stead, in any and allcapacities, to sign any and all amendments to this Annual Report on Form10-KSB, and to file the same, with all exhibits thereto, and other documents inconnection therewith, with the Securities and Exchange Commission, grantingunto attorney-in-fact and agent full power and authority to do and perform eachand every act and thing requisite or necessary to be done in and about thepremises, as fully to all intents and purposes as he might or could do in person,hereby ratifying and confirming all that attorney-in-fact and agent, or hissubstitute or substitutes, may lawfully do or cause to be done by virtuehereof.

 

In accordance with the Exchange Act, thisreport has been signed below by the following persons on behalf of theregistrant in the capacities and on the dates indicated.

 
| **Signature**              | ** ** | **Title**               | ** ** | **Date**        |
|----------------------------|------------|-------------------------|------------|-----------------|
|                       |       |                    |       |            |
| /s/ Marjorie Trask Gray    |       |                    |       |            |
| Marjorie Trask Gray, DMD   |       | Director                |       | March 28, 2005  |
|                       |       |                    |       |            |
| /s/ Dennis O. Green        |       |                    |       |            |
| Dennis  O. Green, CPA      |       | Director,  Vice-        |       | March  28, 2005 |
|                       |       | Chairman of the Board   |       |            |
| /s/ Mark B. Heles          |       |                    |       |            |
| Mark  B. Heles             |       | Director                |       | March  28, 2005 |
|                       |       |                    |       |            |
| /s/ James W. Holden        |       |                    |       |            |
| James  W. Holden, Jr., DVM |       | Director                |       | March  28, 2005 |
|                       |       |                    |       |            |
| /s/ Ladson F. Howell       |       |                    |       |            |
| Ladson F. Howell           |       | Director                |       | March 28, 2005  |
|                       |       | Chairman of the Board   |       |            |
| /s/ James C. Key           |       |                    |       |            |
| James  C. Key              |       | Director                |       | March  28, 2005 |
|                       |       |                    |       |            |
| /s/ Randolph C. Kohn       |       |                    |       |            |
| Randolph C. Kohn           |       | Director, President and |       | March 28, 2005  |
|                       |       | Chief Executive Officer |       |            |
| /s/ Ron Lewis              |       |                    |       |            |
| Ron  Lewis                 |       | Director                |       | March  28, 2005 |
|                       |       |                    |       |            |
| /s/ James L. Pate, III     |       |                    |       |            |
| James L. Pate, III         |       | Senior Vice President   |       | March 28, 2005  |
|                       |       | and Chief Financial     |       |            |
|                       |       | Officer                 |       |            |
| /s/ Lila N. Meeks          |       |                    |       |            |
| Lila  N. Meeks             |       | Director                |       | March  28, 2005 |

 

24

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| /s/ Robert B. Pinkerton |   |     |   |            |
|-------------------------|--------|----------|--------|-----------------|
| Robert  B. Pinkerton    |   | Director |   | March  28, 2005 |
|                    |   |     |   |            |
| /s/ John M. Trask, III  |   |     |   |            |
| John  M. Trask, III     |   | Director |   | March  28, 2005 |
|                    |   |     |   |            |
| /s/ Matt A. Trumps      |   |     |   |            |
| Matt A. Trumps          |   | Director |   | March 28, 2005  |

 

25

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**Exhibit List**

 
| 3.1    |   | Amended and Restated  Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the  Registration Statement on Form SB-2, File No. 333-86371).                                                                                                                              |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                     |
| 3.2.   |   | Bylaws (incorporated by reference to Exhibit 3.3 of the Registration  Statement on Form SB-2, File No. 333-86371).                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                     |
| 4.1.   |   | See Exhibits 3.1, 3.2, and 3.3 for provisions in the company’s  Articles of Incorporation and Bylaws defining the rights of holders’ of the  common stock (incorporated by reference to Exhibits 3.1 and 3.2 of the  Registration Statement on Form SB-2, File No. 333-86371). |
|   |   |                                                                                                                                                                                                                                                                                     |
| 4.2.   |   | Form of certificate of common stock (incorporated by reference to  Exhibit 4.2 of the Registration Statement on Form SB-2, File No. 333-86371).                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                     |
| 10.1   |   | Employment Agreement dated August 12, 1999 between the company and  Randolph Kohn (incorporated by reference to Exhibit 10.1 of the Registration  Statement on Form SB-2, File No. 333-86371).*                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                     |
| 10.2   |   | Form of Stock Warrant Agreement (incorporated by reference to Exhibit  10.8 of the Registration Statement on Form SB-2, File No. 333-86371).*                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                     |
| 10.3   |   | Coastal Banking Company, Inc. 2000 Stock Incentive Plan and Form of  Stock Option Agreement (incorporated by reference to Exhibit 10.7 of the Form  10-KSB for the period ended December 31, 2002, File No. 333-86371).*                                                                 |
|   |   |                                                                                                                                                                                                                                                                                     |
| 10.4   |   | Lease Agreement between Lowcountry National Bank and Bright O’Hare  Moss Creek Partnership, dated January 14, 2003 (incorporated by reference to  Exhibit 10.7 of the Form 10-KSB for the period ended December 31, 2002, File  No. 333-86371).                                     |
|   |   |                                                                                                                                                                                                                                                                                     |
| 10.5   |   | Form of Lowcountry National Bank Director Deferred Fee Agreement.*                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                     |
| 10.6   |   | Form of Lowcountry National Bank Executive Deferred Compensation Fee  Agreement.*                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                     |
| 13.1   |   | Company’s 2004 Annual Report.                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                     |
| 21     |   | Subsidiaries of the Company.                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                     |
| 23     |   | Consent of Certified Public Accountants.                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                     |
| 24     |   | Power of Attorney (contained as part of the  signature pages herewith).                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                     |
| 31.1   |   | Rule 13a-14(a) Certification of the Chief Executive Officer.                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                     |
| 31.2   |   | Rule 13a-14(a) Certification of the Chief Financial Officer.                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                     |
| 32     |   | Section 1350 Certifications.                                                                                                                                                                                                                                                             |

 

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