SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                            _________________________

                                    FORM 10-K
       +-+
       |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       +-+ SECURITIES EXCHANGE ACT OF 1934

       For the Fiscal Year Ended September 30, 2002

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

                     Commission File Number: 0-19684

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


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


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


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

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


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

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_].

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

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Act. YES [X]  NO [_].

     The aggregate market value of the voting and non-voting  common equity held
by non-affiliates  of the registrant,  based upon the closing sales price of the
registrant's common stock as quoted on the NASDAQ System under the symbol "CFCP"
as of the last business day of the registrant's  most recently  completed second
fiscal quarter,  was $99,554,220  (10,630,456) shares at $9.365 per share, which
is the average of the  closing  ask and  closing  bid price on such date.  It is
assumed for purposes of this calculation that none of the registrant's officers,
directors and 5% stockholders are affiliates.

     The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing sales price of the registrant's common stock as
quoted on the NASDAQ  System under the symbol  "CFCP" on December 17, 2002,  was
$147,072,359  (10,630,456)  shares at $13.835 per share, which is the average of
the closing ask and closing bid price on December  17,  2002.  It is assumed for
purposes of this calculation that none of the registrant's  officers,  directors
and 5% stockholders are affiliates.

     As of  December  17,  2002,  there were issued and  outstanding  10,630,456
shares of the registrant's Common Stock.

<PAGE>



                       DOCUMENTS INCORPORATED BY REFERENCE

     1.   Portions  of the Annual  Report to  Stockholders  for the Fiscal  Year
          Ended September 30, 2002 (Parts I and II)

     2.   Portions  of the  Proxy  Statement  for the  2003  Annual  Meeting  of
          Stockholders. (Part III)

                                       2
<PAGE>


                                     PART I

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

General

     Coastal Financial  Corporation  ("Coastal  Financial" or the "Corporation")
was  incorporated  in the State of  Delaware  in June 1990,  for the  purpose of
becoming a savings and loan holding company for Coastal  Federal Bank,  formerly
named  Coastal  Federal  Savings  Bank,  ("Coastal  Federal" or the "Bank").  On
January 28, 1991, the stockholders of the Bank approved a plan to reorganize the
Bank  into  the  holding  company  form of  ownership.  The  reorganization  was
completed  on November 6, 1991,  on which date the Bank became the wholly  owned
subsidiary  of  the  Corporation,  and  the  stockholders  of  the  Bank  became
stockholders of the Corporation. Prior to completion of the reorganization,  the
Corporation  had no material  assets or  liabilities  and engaged in no business
activities.  On April 1, 1993, Coastal Federal's  investment in Coastal Investor
Services,   Inc.,  formerly  named  Coastal  Investment   Services,   Inc.,  was
transferred  to Coastal  Financial  and became a first  tier  subsidiary  of the
Corporation.  The financial  results  contained  herein relate  primarily to the
Corporation's principal subsidiary, Coastal Federal.

     Coastal  Federal  was  organized  in  1953 as a  mutual  savings  and  loan
association and, since that time, its deposits have been federally  insured.  In
March 1989, Coastal Federal converted from a federally  chartered mutual savings
and loan association to a federally chartered mutual savings bank. On October 4,
1990,  Coastal Federal  converted to the stock form of ownership  ("Conversion")
through the sale and  issuance of 492,541  shares of common  stock at a price of
$10.00  per share,  which  resulted  in gross  proceeds  to  Coastal  Federal of
$4,925,410.

     Coastal Federal conducts its business from its main office in Myrtle Beach,
South Carolina,  thirteen  branch offices located in South Carolina,  one branch
office located in Sunset Beach, North Carolina,  one branch office in Southport,
North Carolina, and two branch offices located in Wilmington, North Carolina. At
September 30, 2002 Coastal  Financial had total assets of $950.8 million,  total
deposits  of $637.1  million  and  stockholders'  equity of $66.4  million.  The
deposits of the Bank are insured by the Federal  Deposit  Insurance  Corporation
("FDIC") under the Savings  Association  Insurance Fund ("SAIF").  The corporate
offices of the Bank are located at 2619 Oak Street, Myrtle Beach, South Carolina
and the telephone number is (843) 205-2000.

     Thirteen of Coastal Federal's  eighteen offices are in Horry County,  South
Carolina.  The economy of the Horry County area depends primarily on tourism. To
the extent Horry County area

                                       3
<PAGE>

businesses rely heavily on tourism for business,  decreased tourism would have a
significant adverse effect on Coastal Federal's primary deposit base and lending
area. Moreover,  Coastal Federal would likely experience a higher degree of loan
delinquencies should the local economy be materially and adversely affected.

     Coastal  Federal's  principal  business  currently  consists of  attracting
deposits from the general public and using these funds to originate conventional
one-to-four family first mortgage loans, consumer, commercial business loans and
commercial  real estate loans.  Commercial real estate loans were 35.5% of total
loans at September 30, 2002.

     As part of its lending strategy,  subject to market conditions,  management
intends to continue  emphasizing  the  origination  of consumer  and  commercial
business loans in addition to first mortgage  loans. At September 30, 2002, 3.2%
and  7.4%  respectively,  of  the  Bank's  total  loan  portfolio  consisted  of
commercial business and consumer loans.

                                       4

<PAGE>


Rate/Volume Analysis

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

<TABLE>
<CAPTION>

                                                                         Year Ended September 30,
                                    ----------------------------------------------------------------------------------------------
                                                2000 Compared to 1999                         2001 Compared to 2000
                                                 Increase (Decrease)                           Increase (Decrease)
                                                       Due to                                        Due to
                                        Rate     Volume      Rate/       Net        Rate       Volume       Rate/        Net
                                        ----     ------      -----       ---        ----       ------      -----         ---
                                                            Volume                                         Volume
                                     --------   --------   --------    --------   --------    --------    --------    --------
                                                                      (Dollars in thousands)
<S>                                  <C>        <C>        <C>         <C>        <C>         <C>         <C>         <C>
Interest-Earning Assets:
 Loans ...........................   $    857   $  4,477   $    130    $  5,464   $    286    $  1,597    $     10    $  1,893
 Mortgage-backed
 Securities/Investments ..........      1,991        906        159       3,056       (691)      1,024         (50)        283
                                     --------   --------   --------    --------   --------    --------    --------    --------
Total net change in
 income on interest-
 earning assets ..................      2,848      5,383        289       8,520       (405)      2,621         (40)      2,176
                                     --------   --------   --------    --------   --------    --------    --------    --------
Interest-Bearing
 Liabilities:
 Deposits ........................        427        680         35       1,142        135       3,435          40       3,610
 FHLB advances ...................      1,336        889        154       2,379       (380)        662         (23)        259
 Repurchase
   Agreements ....................        576      2,215        333       3,124       (766)     (3,837)        420      (4,183)
                                     --------   --------   --------    --------   --------    --------    --------    --------

Total net change in
 expense on interest-
 bearing liabilities .............      2,339      3,784        522       6,645     (1,011)        260         437        (314)
                                     --------   --------   --------    --------   --------    --------    --------    --------
Net change in net
 Interest income .................   $    509   $  1,599   $   (233)   $  1,875   $    606    $  2,361    $   (477)   $  2,490
                                     ========   ========   ========    ========   ========    ========    ========    ========
</TABLE>

<TABLE>
<CAPTION>
                                          Year Ended September 30,
                                  ---------------------------------------------
                                              2002 Compared to 2001
                                               Increase (Decrease)
                                                      Due to
                                     Rate       Volume       Rate/      Net
                                     ----       ------       -----      ---
                                                            Volume
                                   --------    --------    --------   --------
                                              (Dollars in thousands)
<S>                                <C>         <C>         <C>         <C>
Interest-Earning Assets:
 Loans ........................... $ (6,372)   $    852    $   (118)   $ (5,638)
 Mortgage-backed
 Securities/Investments ..........   (1,943)      1,386        (187)       (744)
                                   --------    --------    --------    --------
Total net change in
 income on interest-
 earning assets ..................   (8,315)      2,238        (305)     (6,382)
                                   --------    --------    --------    --------
Interest-Bearing
 Liabilities:
 Deposits ........................   (7,799)      3,629      (1,460)     (5,630)
 FHLB advances ...................   (1,486)     (2,268)        303      (3,451)
 Repurchase
   Agreements ....................   (1,811)     (1,645)      1,060      (2,396)
                                   --------    --------    --------    --------

Total net change in
 expense on interest-
 bearing liabilities .............  (11,096)       (284)        (97)    (11,477)
                                   --------    --------    --------    --------
Net change in net
 Interest income ................. $  2,781    $  2,522    $   (208)   $  5,095
                                   ========    ========    ========    ========
</TABLE>

                                       5

<PAGE>


Average Balance Sheet

     The  following  table  sets  forth  certain  information  relating  to  the
Corporation's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived  by  dividing  income or  expense  by the  average  balance of assets or
liabilities,  respectively,  for the periods  presented.  Average  balances  are
derived from  month-end  balances.  Management  does not believe that the use of
month-end  balances  instead of daily  average  balances has caused any material
difference  in the  information  presented.  Non-accrual  loans are  included in
average balance calculations.

<TABLE>
<CAPTION>
                                                                      Year Ended September 30,
                                   -----------------------------------------------------------------------------------------------
                                               2000                             2001                           2002
                                   -----------------------------  ------------------------------  --------------------------------
                                    Average              Yield/    Average                Yield/   Average                Yield/
                                    Balance  Interest    Rate      Balance    Interest    Rate     Balance   Interest     Rate
                                    -------  --------    ----      -------    --------    ----     -------   --------     ----
                                                                        (Dollars in thousands)
<S>                                <C>       <C>         <C>      <C>         <C>         <C>     <C>        <C>           <C>
ASSETS
 Loans .........................   $503,306  $ 44,005    8.74%    $521,575    $ 45,899    8.80%   $531,257   $ 40,261      7.58%

  Mortgage-backed
  Securities/Investments(1).....    192,375    14,074    7.32      206,367      14,356    6.95     226,295     13,612      6.02
                                   --------  --------    ----     --------    --------    ----    --------   --------      ----
Total interest-earning
  assets .......................   $695,681  $ 58,079    8.34%    $727,942    $ 60,255    8.26%   $757,552   $ 53,873      7.11%
                                   ========  ========    ====     ========    ========    ====    ========   ========      ====
LIABILITIES
 Transaction accounts ..........    215,255     6,283    2.92      250,784       7,404    2.95     309,624      4,524      1.46
 Passbook accounts .............     40,891       909    2.22       34,071         741    2.17      36,870        459      1.24
 Certificate accounts ..........    149,982     8,577    5.72      194,575      11,235    5.77     222,723      8,767      3.94
 FHLB advances .................    177,834    10,874    6.11      188,666      11,133    5.90     150,239      7,682      5.11
 Securities sold under
    repurchase agreements ......    110,563     6,993    6.32       49,891       2,810    5.63      20,676        414      2.00
                                   --------  --------    ----     --------    --------    ----    --------   --------      ----
Total interest-bearing
 liabilities ...................   $694,525  $ 33,636    4.84%    $717,987    $ 33,323    4.64%   $740,132   $ 21,846      2.95%
                                   ========  ========    ====     ========    ========    ====    ========   ========      ====


Net interest income/
  interest rate spread .........             $ 24,443    3.50%                $ 26,932    3.62%              $ 32,027      4.16%
Net yield on interest earning
  assets .......................                         3.57%                            3.70%                            4.23%

Ratio of interest earning assets
 to interest-bearing
 liabilities ...................                         1.02x                            1.01x                            1.02x

</TABLE>


----------
(1) Includes short-term interest-bearing deposits and Federal funds sold.

                                       6

<PAGE>


Lending Activities

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

     The Bank's loan portfolio totaled approximately $555.5 million at September
30, 2002,  representing  approximately  58.4% of its total assets. On that date,
approximately  45.9% of Coastal  Federal's  total loan  portfolio was secured by
mortgages on one-to-four family residential properties.

     In an  effort  to  ensure  that  the  yields  on  its  loan  portfolio  and
investments are  interest-rate  sensitive,  the Bank has implemented a number of
measures, including: (i) emphasis on origination of adjustable rate mortgages on
residential and commercial  properties;  (ii) origination of construction  loans
secured by residential  properties,  generally with terms for a one-year period;
and (iii)  origination of commercial and consumer loans having either adjustable
rates or relatively  short  maturities.  At September 30, 2002,  adjustable rate
loans  constituted  approximately  $407.7 million (or 73.4%) of the Bank's total
loan portfolio.  Therefore,  at such date, fixed rate loans comprised only 26.6%
of the total loan portfolio. These lending practices were adopted to shorten the
term of the  Bank's  assets  and make  the loan  portfolio  more  responsive  to
interest rate volatility.



                                       7
<PAGE>


Loan Portfolio Analysis

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


<TABLE>
<CAPTION>
                                                                          At September 30,
                                   ------------------------------------------------------------------------------------------------
                                         1998               1999                2000                  2001               2002
                                   ----------------  ------------------ -------------------- ------------------- ------------------
                                    Amount  Percent    Amount   Percent   Amount   Percent     Amount   Percent   Amount   Percent
                                    ------  -------    ------   -------   ------   -------     ------   -------   ------   -------
                                                                        (Dollars in thousands)
<S>                               <C>         <C>    <C>         <C>    <C>         <C>      <C>         <C>     <C>         <C>
Mortgage loans:
 Construction ..................  $  31,261   7.09%  $  46,766   9.48%  $  54,905   10.13%   $  60,765   11.56%  $ 45,544    7.99%
 Single family to 4 family units    254,161  57.63     265,069  53.73     283,851   52.39      268,670   51.10    261,296   45.88
 Income property (Commercial) ..     95,420  21.63     114,931  23.29     133,569   24.65      137,282   26.11    202,117   35.49
Commercial business loans ......     14,848   3.37      22,818   4.62      23,357    4.31       18,886    3.59     18,377    3.23
Consumer loans:
 Mobile home ...................        990   0.22       1,166   0.24       1,374    0.25        2,056   0.39       3,446    0.61
 Automobiles ...................      5,106   1.16       6,809   1.38       7,789    1.44        6,599   1.26       7,117    1.25
 Equity lines of credit ........     18,655   4.23      21,081   4.27      23,009    4.25       22,379   4.26      24,273    4.26
 Other .........................     20,567   4.67      14,738   2.99      13,915    2.58        9,161   1.73       7,378    1.29
                                  --------- ------     ------- ------   ---------  ------    --------- ------    --------   ------
Total loans and loans
    held for sale ..............  $ 441,008 100.00%  $ 493,378 100.00%  $ 541,769  100.00%   $ 525,798 100.00%   $569,548   100.00%
                                            ======             ======              ======              ======               ======
Less:
 Loans in process ..............    (11,292)           (15,315)           (13,329)             (13,983)            (6,365)
 Deferred loan (fees) costs ....        702                354                519                  372                245
 Allowance for loan losses .....     (5,668)            (6,430)            (7,064)              (7,159)            (7,883)
                                  ---------          ---------          ---------            ---------           --------

Total loans and loans held
       for sale, net ...........  $ 424,750          $ 471,987          $ 521,895            $ 505,028           $555,545
                                  =========          =========          =========            =========            =======
</TABLE>


                                       8
<PAGE>


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

     The Bank offers adjustable rate mortgage loans ("ARMs"), the interest rates
of  which  generally  adjust  based  upon  either  the  prime  rate or  treasury
securities  indices.  The interest  rates on ARMs  generally may not adjust more
than 2% per year and 6% over the life of the loan. Based upon market conditions,
the Bank may  originate  ARMs at below the  fully  phased-in  interest  rate but
generally  qualifies  borrowers for one-year and three-year ARMS at 2% above the
initial rate when the loan to value ratio exceeds 70%.  Monthly  payments  could
increase significantly at the first repricing period. Although Coastal Federal's
ARMs are  beneficial  in helping  Coastal  Federal  improve  the  interest  rate
sensitivity  of its assets,  such loans may pose potential  additional  risks to
Coastal Federal.  A precipitous  increase in interest rates could be expected to
result in an increase  in  delinquencies  or  defaults on such loans.  Whereas a
significant decrease in rates could cause repayments to increase significantly.

     Coastal Federal also offers one-to-four family residential loans with fixed
rates of interest.  These loans generally can be sold in the secondary market or
are portfolio loans where the Bank offers such loans at rates  approximately  1%
above  conforming  loan rates.  Loans sold to  correspondents  amounted to $14.8
million and $1.6 million, respectively, in fiscal 2001 and 2002. Coastal Federal
sold approximately $13.7 million and $12.3 million,  respectively,  of mortgages
in 2001 and 2002 to FHLMC. In addition,  Coastal Federal  securitized loans into
FHLMC mortgage-backed  securities of $47.2 million and $84.0 million in 2001 and
2002, respectively.  The securitized  mortgage-backed  securities were generally
sold in the secondary market within a few days of securitization.

     At September 30, 2002,  approximately $261.3 million or 45.9% of the Bank's
loan portfolio consisted of one-to-four family residential loans.

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

                                       9
<PAGE>


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

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

     At September  30, 2002,  approximately  $45.5 million or 8.0% of the Bank's
gross loan portfolio  consisted of construction loans on both residential ($15.1
million) and commercial  properties  ($30.4  million).  Undisbursed  proceeds on
these loans amounted to $6.4 million at September 30, 2002.

                                       10
<PAGE>


     Commercial Real Estate Loans.  The Bank may invest,  by OTS regulation,  in
non-residential  real estate  loans up to 400% of its capital as computed  under
GAAP plus  general loan loss  reserves.  At  September  30,  2002,  this limited
Coastal Federal's aggregate  non-residential  real estate loans to approximately
$273.4  million.  At such date, the Bank had  non-residential  real estate loans
outstanding of $202.1 million  compared to $137.3 million at September 30, 2001.
During  fiscal 2000  through  2002,  the Bank  opened 7 offices.  The Bank hired
commercial  lending  officers to lead many of these  offices and intends to have
commercial  officers leading a majority of its banking  offices.  As a result of
this focus,  the Bank has  approximately  doubled  the number of its  commercial
lending  officers over the last two years. The Bank expects to continue to focus
significant  origination  efforts  in  commercial  real  estate  and  commercial
lending.  It is  expected  that the Bank's  commercial  real  estate  loans will
continue to comprise the most  significant  portion of the Bank's loan growth in
future years.

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

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

                                       11
<PAGE>


     Consumer  Loans.  The Bank is permitted by OTS  regulations to invest up to
35% of its assets in consumer loans. The Bank currently offers a wide variety of
consumer  loans on a secured and  unsecured  basis  including  home  improvement
loans,  loans secured by savings accounts and automobile,  truck and boat loans.
The Bank also offers a revolving line of credit secured by  owner-occupied  real
estate. Total consumer loans, including equity lines of credit generally secured
by one-to-four  family  residences,  amounted to $42.2  million,  or 7.4% of the
total loan portfolio, at September 30, 2002.

     Coastal  Federal offers consumer loans in order to provide a wider range of
financial  services to its  customers.  These loans also have a shorter term and
normally higher interest rates than residential real estate loans.

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

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


                                       12
<PAGE>

     Coastal  Federal has been making  commercial  business  loans since 1983 on
both a secured and unsecured  basis with terms that  generally do not exceed one
year.  The majority of these loans have interest  rates that adjust with changes
in the prime rate as published in The Wall Street  Journal.  The Bank's non-real
estate  commercial  loans  primarily  consist of  short-term  loans for  working
capital  purposes,  seasonal  loans and lines of  credit.  The Bank  customarily
requires a personal  guaranty  of payment  by the  principals  of any  borrowing
entity and  reviews  the  financial  statements  and  income tax  returns of the
guarantors.  At September 30, 2002,  the Bank had $18.4 million  outstanding  in
commercial  business loans,  which  represented  approximately  3.2% of its loan
portfolio.

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


                                       13
<PAGE>



Loan Maturity

     The following  table sets forth certain  information  at September 30, 2002
regarding the dollar amount of loans  maturing in the Company's  loan  portfolio
based on their contractual terms to maturity  including  scheduled  payments and
potential prepayments.  Prepayment estimates used are based on the OTS NPV Model
prepayment functions. Specific prepayment speeds applied to loans are a function
of their  underlying  coupons,  lifetime rate caps and maturities.  Demand loans
(without a stated  maturity),  loans having no stated schedule of repayments and
no stated maturity and overdrafts are reported as due in one year or less.

<TABLE>
<CAPTION>

                                                       More than
                                                       One Year
                                          One Year     Through     More than
                                          or Less     Five Years  Five Years   Totals
                                          -------     ----------  ----------   ------
                                                         (In thousands)
<S>                                      <C>           <C>         <C>        <C>
First mortgage loans ................    $ 161,588     $124,901    $13,986    $300,475
Other residential and
   non-residential...................      185,808        9,169      7,140     202,117
Equity lines of credit ..............       24,219           54         --      24,273
Consumer loans ......................        8,549        9,392         --      17,941
Commercial loans ....................       11,833        6,544         --      18,377
                                           -------      -------    -------     -------
       Total loans ..................    $ 391,997     $150,060    $21,126    $563,183
                                         =========     ========    =======
Less:
   Deferred loan (fees) costs .......                                              245
   Allowance for loan losses ........                                           (7,883)
                                                                                ------
       Total loans, net .............                                         $555,545
                                                                              ========
</TABLE>


     The following  table sets forth the dollar amount of all loans  expected to
be repaid after one year at September 30, 2002 which have fixed  interest  rates
and those which have floating or adjustable interest rates.


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

First mortgage loans........        $ 77,534        $61,353        $138,887
Other residential and
    non-residential ........          16,309             --          16,309
Equity lines of credit .....              --             54              54
Consumer loans .............           7,640          1,752           9,392
Commercial loans ...........           6,544             --           6,544
                                     -------        -------         -------
       Total loans .........        $108,027        $63,159        $171,186
                                    ========        =======        ========

                                       14

<PAGE>


     Loan Solicitation and Processing.  The Bank actively solicits mortgage loan
applications from existing customers,  walk-ins,  referrals and from real estate
brokers.  Commercial real estate loan  applications  also are obtained by direct
solicitation by loan officers.

     Detailed loan applications are obtained to determine the borrower's ability
to repay,  and the more  significant  items on these  applications  are verified
through  the use of  credit  reports,  financial  statements  and  confirmations
through  verification forms. After analysis of the loan application and property
or collateral  involved,  including an appraisal of the property by  independent
appraisers  approved by the Bank's Board of Directors and reviewed by the Bank's
underwriter,  a lending decision is made by the Bank. With respect to commercial
loans, the Bank also reviews the capital  adequacy of the business,  the ability
of the  borrower to repay the loan and honor its other  obligations  and general
economic and industry conditions.  All loan applications over $1 million require
the  approval  by a member or  members,  depending  on loan size,  of the Bank's
Internal Loan Committee,  Director Gerald and Executive Vice Presidents  Rexroad
and  Stalvey.  All loan  applications  greater  than $2.5  million  require  the
approval of the Bank's Loan  Committee  that  consists  of  Directors  Clemmons,
Gerald,  Thompson and Executive Vice Presidents  Rexroad and Stalvey.  All first
mortgage loan  applications in excess of 80% of the lesser of appraised value or
purchase  price of the  property,  unless the  borrowers  have private  mortgage
insurance,  generally  must be approved by a member of the Bank's  Internal Loan
Committee.

     The Bank's general policy is to obtain a title  insurance  policy  insuring
that  the  Bank  has a valid  lien on the  mortgaged  real  estate  and that the
property  is free of  encumbrances.  Borrowers  must  also  obtain  paid  hazard
insurance  policies  prior to closing and, when the property is in a flood plain
as  designated by the Federal  Emergency  Management  Agency,  obtain paid flood
insurance  policies.  It is the  policy of  Coastal  Federal  to  require  flood
insurance for the full  insurable  value of the  improvements  for any such loan
located in a designated  flood hazard area.  Borrowers on loans which exceed 80%
of the value of the security  property are also  required to advance  funds on a
monthly basis, with each payment of principal and interest, to a mortgage escrow
account  from which the Bank makes  disbursements  for items such as real estate
taxes,  hazard insurance  premiums and private mortgage insurance  premiums.  In
cases of flood insurance, it is the Bank's policy to generally require escrow on
these premiums regardless of the loan-to-value ratio.

                                       15

<PAGE>


     Residential  Mortgage Loan  Originations,  Purchases and Sales. The Bank is
qualified to service loans for FHLMC and FNMA. Depending upon interest rates and
economic  conditions,  the Bank has sold  loans in order to  provide  additional
funds for lending,  to generate servicing fee income, and to decrease the amount
of its  long-term,  fixed rate loans in order to  minimize  the gap  between the
maturities of its interest-earning assets and interest-bearing  liabilities. The
Bank  generally  continues  to  collect  payments  on the  loans,  to  supervise
foreclosure  proceedings,  if necessary, and to otherwise service the loans. The
Bank  retains a portion of the  interest  paid by the  borrower  on the loans as
consideration for its servicing activities.  At September 30, 2002, the Bank was
servicing loans sold to others with a principal balance of approximately  $192.1
million.  Sales of whole loans and participation  interests by the Bank are made
without  right of recourse to the Bank by the buyer of the loans in the event of
default by the borrower.  At September 30, 2002,  the Bank's  consolidated  loan
portfolio  included purchased loans of approximately  $12.6 million,  which have
been primarily  secured by single family  residences and which have been written
as adjustable rate mortgage loan instruments.  These loans are generally secured
by  properties  located in the  Southeast  and were  purchased  according to the
Bank's non-conforming mortgage loan underwriting standards.

                                       16

<PAGE>



Loans Originated, Purchased and Sold

The following  table shows total loans  originated,  purchased,  sold and repaid
during the periods indicated.

<TABLE>
<CAPTION>

                                                                                         Year Ended September 30,
                                                                             ------------------------------------------------
                                                                                 2000             2001              2002
                                                                                 ----             ----              ----
                                                                                             (In thousands)
<S>                                                                           <C>               <C>               <C>
Loans receivable, net, at the beginning
    of the period ....................................................        $ 471,987         $ 521,895         $ 505,028
                                                                              ---------         ---------         ---------

Loans originated:
   Construction ......................................................           68,799            66,769           100,717
     Residential .....................................................          120,961           106,043           192,095
     Nonresidential & commercial business ............................           39,899            83,463            67,951
   Land ..............................................................            6,103            23,665            43,819
   Consumer ..........................................................           11,434            16,134            13,626
                                                                              ---------         ---------         ---------
         Total loans originated ......................................          247,196           296,074           418,208
                                                                              ---------         ---------         ---------

Loans purchased, primarily single
family residential mortgages .........................................            4,027                20               233
                                                                              ---------         ---------         ---------

Loans sold ...........................................................          (33,695)          (28,541)          (13,907)
                                                                              ---------         ---------         ---------

Loan principal repayment and other ...................................         (139,900)         (233,653)         (268,120)
                                                                              ---------         ---------         ---------

Sale of loans, related to the sale of the Florence office ............          (10,897)               --                --

Securitization of mortgage loans .....................................          (14,894)          (47,157)          (83,982)

Other ................................................................           (1,929)           (3,610)           (1,915)
                                                                              ---------         ---------         ---------

Loans receivable, net, at end of period ..............................        $ 521,895         $ 505,028         $ 555,545
                                                                              =========         =========         =========
</TABLE>

                                       17

<PAGE>


     Loan  Commitments.  The Bank,  upon the  submission of a loan  application,
generally  provides  a  45-day  written  commitment  as  to  the  interest  rate
applicable  to such loan.  If the loan has not been closed  within 45 days,  the
rate may be adjusted to reflect current market  conditions at the Bank's option.
Loans  which  require  closing  time in  excess  of 45  days  from  the  date of
application are issued a written  commitment,  with a term ranging from three to
six months. For fixed rate loans, the Bank either charges a higher interest rate
on the loan or may  charge up to one point to lock in the rate for 180 days.  At
September 30, 2002, the Company had residential loan origination  commitments of
approximately  $28.8 million,  home equity loans and consumer lines of credit of
$37.2 million,  commercial  lines of credit of $1.3 million,  standby letters of
credit of $4.0 million and unused  business  and  personal  credit card lines of
$11.4 million.

     Loan  Origination  and  Other  Fees.   Coastal  Federal  may  receive  loan
origination fees and discount "points." Loan fees and points are a percentage of
the principal  amount of the mortgage loan which are charged to the borrower for
funding the loan. In certain circumstances, Coastal Federal allows the purchaser
to reduce  the rate of  interest  by the  payment  of  points at the  customers'
options.  Fees on long-term commercial real estate and residential  construction
loans vary with loan type.

     Delinquencies. Coastal Federal's collection procedures provide for a series
of contacts with delinquent borrowers. If the delinquency continues, more formal
efforts are made to contact  the  delinquent  borrower.  If a  residential  real
estate  loan  continues  in a  delinquent  status  for 90 days or more,  Coastal
Federal generally initiates foreclosure  proceedings.  Coastal Federal generally
initiates  foreclosure  proceedings on a commercial real estate loan if the loan
continues  in a  delinquent  status  for 60 days or  more.  In  certain  limited
instances,  however,  Coastal  Federal  may  modify  the loan or grant a limited
moratorium on loan  payments to enable the borrower to reorganize  his financial
affairs.

     Problem  Assets and Asset  Classification.  Loans are reviewed on a regular
basis and a reserve for  uncollectible  interest is  established  on loans where
collection of interest is questionable, generally when such loans become 90 days
delinquent.   Loan  balances  that  relate  to  interest  amounts  reserved  are
considered  to be on a  nonaccrual  basis.  Typically,  payments  received  on a
nonaccrual  loan are  applied  to the  outstanding  principal  and  interest  as
determined at the time of collection of the loan.

                                       18

<PAGE>


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

<TABLE>
<CAPTION>

                                                                              At September 30, 2002
                                                         -------------------------------------------------------------
                                                            1998        1999          2000        2001         2002
                                                            ----        ----          ----        ----         ----
                                                                                   (Dollars in thousands)
<S>                                                       <C>          <C>          <C>          <C>          <C>
Loans accounted for on a
  nonaccrual basis:
    Real estate -
      Residential ..................................      $  222       $1,097       $2,080       $1,554       $  785
      Commercial ...................................          --          267        2,478        1,185           18
    Commercial business ............................       1,962           --           --          322        2,423
    Consumer .......................................          73           67          224          193          288
                                                          ------       ------       ------       ------       ------
           Total ...................................       2,257        1,431        4,782        3,254        3,514
                                                          ------       ------       ------       ------       ------

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

Restructured loans .................................          --          418          419        1,693          970
Real estate owned ..................................          35           96          867        2,363        1,046
Other nonperforming assets .........................          --           --           --           --           --
                                                          ------       ------       ------       ------       ------
Total nonperforming assets .........................      $2,292       $1,945       $6,068       $7,310       $5,530
                                                          ======       ======       ======       ======       ======
Total nonaccrual loans to
  net loans ........................................        0.54%        0.30%        0.92%        0.64%        0.63%

Total nonaccrual loans to
  total assets .....................................        0.35%        0.20%        0.62%        0.43%        0.37%

Total nonperforming assets
  to total assets ..................................        0.36%        0.27%        0.79%        0.96%        0.58%

Total nonperforming assets,excluding restructured...
loans which are generally performing under the
restructured terms, to total
assets .............................................        0.36%        0.21%        0.73%        0.74%        0.48%

</TABLE>


                                       19
<PAGE>

     In fiscal years 2000, 2001 and 2002,  interest income which would have been
recorded was approximately $220,000,  $377,000 and $301,000,  respectively,  had
nonaccruing  loans been current in  accordance  with their  original  terms.  At
September 30, 2001, impaired loans totaled $3.4 million. There were $3.2 million
in impaired  loans at September  30, 2002.  Included in the  allowance  for loan
losses at September 30, 2001 was $281,000  related to impaired loans compared to
$194,000 at September  30, 2002.  The average  recorded  investment  in impaired
loans for the year ended  September  30, 2001 was $3.6 million  compared to $3.1
million for the year ended  September 30, 2002.  Interest  income  recognized on
impaired  loans in fiscal  2001 was  $120,000.  Interest  income  recognized  on
impaired loans in fiscal 2002 was $36,000.

     The allowance for  uncollectible  interest which is netted against  accrued
interest  receivable  totaled  $323,000 and  $349,000 at September  30, 2001 and
2002, respectively.

     The OTS has adopted various changes in its  regulations  regarding  problem
assets.  OTS  regulations  require  that each  insured  institution  review  and
classify  its  assets  on a regular  basis.  In  addition,  in  connection  with
examinations of insured  institutions,  OTS examiners have authority to identify
problem assets and, if  appropriate,  require them to be  classified.  There are
four classifications for problem assets: special mention, substandard,  doubtful
and loss.  Substandard  assets must have one or more defined  weaknesses and are
characterized  by the distinct  possibility  that the insured  institution  will
sustain some loss if the  deficiencies  are not corrected.  Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses  make  collection  or  liquidation  in full on the basis of currently
existing  facts,  conditions  and  values  questionable,  and  there  is a  high
possibility of loss. An asset classified loss is considered uncollectible and of
such  little  value  that  continuance  as an  asset of the  institution  is not
warranted.  The regulations also have a special mention  category,  described as
assets  which do not  currently  expose an insured  institution  to a sufficient
degree of risk to warrant  classification but do possess credit  deficiencies or
potential weaknesses deserving  management's close attention.  Assets classified
as  substandard  or  doubtful  require  the  institution  to  establish  general
allowances for loan losses.  If an asset or portion thereof is classified  loss,
the insured  institution  must either  establish  specific  allowances  for loan
losses in the  amount of 100% of the  portion  of the asset  classified  loss or
charge off such amount.  A portion of general  loss  allowances  established  to
cover possible losses related to assets  classified  substandard or doubtful may
be included in determining an institution's  regulatory capital,  while specific
valuation  allowances  for loan losses  generally  do not qualify as  regulatory
capital.

                                       20
<PAGE>


     Coastal  Federal  had  three  individually  classified  assets in excess of
$950,000 as of September 30, 2002. At that date,  classified  assets amounted to
$22.2 million ($11.5 million substandard;  $179,000 doubtful;  and $10.5 million
special  mention).  Substandard  assets consist  primarily of twenty three loans
with aggregate balances of approximately $8.1 million at September 30, 2002. The
largest  amount to any one borrower was $1.1  million.  Special  mention  assets
consist primarily of twenty loans with aggregate  balances of approximately $9.0
million at September 30, 2002.

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

     The evaluation of the allowance is segregated into general  allocations and
specific allocations.  For general allocations, the portfolio is segregated into
risk-similar  segments  for which  historical  loss  ratios are  calculated  and
adjusted for identified trends or changes in current portfolio  characteristics.
Historical  loss  ratios are  calculated  by  product  type for  consumer  loans
(installment and revolving),  mortgage loans, and commercial loans. To allow for
modeling  error,  a range of  probable  loss  ratios  is then  derived  for each
segment. The resulting percentages are then applied to the dollar amounts of the
loans in each segment to arrive at each segment's range of probable loss levels.

     Certain  nonperforming loans are individually assessed for impairment under
SFAS 114 and assigned specific allocations.  Other identified high-risk loans or
credit  relationships  based on  internal  risk  ratings  are also  individually
assessed and assigned specific allocations.

     The general  allocation  also  includes a  component  for  probable  losses
inherent in the portfolio,  based on management's  analysis,  that are not fully
captured  elsewhere  in the  allowance.  This  component  serves to address  the
inherent  estimation and imprecision  risk in the methodology as well as address
management's  evaluation of various factors or conditions not otherwise directly
measured in the evaluation of the general and specific allocations. Such factors
or conditions may include  evaluation of current  general  economic and business
conditions; geographic, collateral, or other concentrations; system, procedural,
policy,  or underwriting  changes;  experience of lending staff;  entry into new
markets or new  product  offerings;  and  results  from  internal  and  external
portfolio examinations.

                                       21
<PAGE>


     The  allocation  of the  allowance to the  respective  loan  segments is an
approximation  and  not  necessarily  indicative  of  future  losses  or  future
allocations. The entire allowance is available to absorb losses occurring in the
overall loan portfolio.

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

     The  allowance  is also  subject to  examination  and  adequacy  testing by
regulatory agencies,  which may consider such factors as the methodology used to
determine  adequacy  and the  size  of the  allowance  relative  to that of peer
institutions,  and other adequacy tests. In addition,  such regulatory  agencies
could require us to adjust our allowance based on information  available to them
at the time of their examination.

     The  Company  established  provisions  for loan  losses  for the year ended
September  30,  2000,  2001 and 2002,  of $978,000,  $955,000 and $1.2  million,
respectively. For the years ended September 30, 2000, 2001 and 2002, the Company
had net  charge-offs  of $319,000,  $860,000  and  $511,000,  respectively.  Net
charge-offs as a percentage of average  outstanding  loans were .06%,  .17%, and
..10% for fiscal years ended 2000,  2001,  and 2002. At September  30, 2002,  the
Company had an allowance for loan losses of $7.9 million, which was 1.42% of net
loans.

See "Management's  Discussion and Analysis - Non-Performing  Assets" in the 2002
Annual Report to Stockholders attached hereto and incorporated by reference.


                                       22
<PAGE>


     Loan Loss Allowance Analysis

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

<TABLE>
<CAPTION>

                                                      Year Ended September 30,
                                    ------------------------------------------------------------
                                     1998         1999          2000          2001        2002
                                     ----         ----          ----          ----        ----
                                                       (Dollars in thousands)
<S>                                 <C>          <C>          <C>            <C>          <C>
Allowance at beginning of
  period .....................      $4,902       $5,668       $ 6,430        $7,064       $7,159
Allowance recorded on
  acquired loans .............         109          112            50            --           --
Sale of Florence office loans           --           --           (75)           --           --
Provision for loan losses ....         865          750           978           955        1,235
                                    ------       ------       -------        ------       ------
Recoveries:
   Residential real estate ...           7          184            12             3            4
   Commercial real estate ....           1           13            --            --           --
   Real estate construction ..          --           --            --            --           --
   Consumer ..................          56           55            65            57           62
                                    ------       ------       -------        ------       ------
      Total recoveries .......          64          252            77            60           66
                                    ------       ------       -------        ------       ------

Charge-offs:
   Residential real estate ...          28           15            28           167           --
   Commercial real estate ....          17            8            --           226           90
   Real estate construction ..          --           --            --            --           --
   Consumer ..................         227          329           368           527          487
                                    ------       ------       -------        ------       ------
      Total charge-offs ......         272          352           396           920          577
                                    ------       ------       -------        ------       ------
      Net charge-offs ........         208          100           319           860          511
                                    ------       ------       -------        ------       ------
Allowance at end of period ...      $5,668       $6,430       $ 7,064        $7,159       $7,883
                                    ======       ======       =======        ======       ======

Ratio of allowance to net
  loans outstanding at the
  end of the period ..........        1.33%        1.36%         1.35%         1.42%        1.42%

Ratio of net charge-offs
  to average loans outstanding
  during the period ..........        0.05%        0.02%         0.06%         0.17%        0.10%

</TABLE>


                                       23
<PAGE>


Loan Loss Allowance by Category

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

<TABLE>
<CAPTION>
                                                             September 30,
                         -------------------------------------------------------------------------------------------
                                    1998                         1999                           2000
                         --------------------------- ------------------------------ --------------------------------
                                 As a %    Loan Type          As a %      Loan Type            As a %      Loan Type
                                 of out-   As a %             of out-     As a %               of out-     As a %
                                 standing  of out-            standing    of out-              standing    of out-
                                 loans in  standing           loans in    standing             loans in    standing
                         Amount  category  loans     Amount   category    loans     Amount     category    loans
                         ------  --------  -----     ------   --------    -----     ------     --------    -----
                                                            (Dollars in thousands)
<S>                      <C>      <C>      <C>       <C>       <C>        <C>        <C>         <C>        <C>
Real Estate - mortgage
   Residential .......   $1,375   0.47%    67.60%    $1,747    0.56%      66.01%     $2,081      0.60%      66.53%
   Commercial ........    3,685   3.30     28.52      4,191    3.04       29.18       4,719      3.01       30.07
   Consumer ..........      608   2.82      6.08        492    2.17        4.81         264      1.49        3.40
                          -----           ------     ------              ------      ------                ------
   Total Allowance for
     loan losses         $5,668   1.33%   100.00%    $6,430    1.36%     100.00%     $7,064      1.35%     100.00%
                         ======           ======     ======              ======      ======                ======


</TABLE>


<TABLE>
<CAPTION>
                                                    September 30,
                         ----------------------------------------------------------------
                                       2001                          2002
                           ----------------------------- --------------------------------
                                     As a %    Loan Type            As a %      Loan Type
                                     of out-   As a %               of out-     As a %
                                     standing  of out-              standing    of out-
                                     loans in  standing             loans in    standing
                           Amount    category  loans      Amount    category    loans
                           ------    --------  -----      ------    --------    -----
                                            (Dollars in thousands)
<S>                        <C>         <C>      <C>       <C>         <C>        <C>
Real Estate - mortgage
   Residential .......     $2,148      0.65%    65.55%    $2,272      0.72%      57.08%
   Commercial ........      4,893      3.13     30.92      5,273      2.39       39.69
   Consumer ..........        118      0.66      3.53        338      1.88        3.23
                           ------              ------     ------                ------
   Total Allowance for
     loan losses           $7,159      1.42%   100.00%    $7,883      1.42%     100.00%
                           ======              ======     ======                ======

</TABLE>


                                       24
<PAGE>


Investment Activities

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

     Coastal Federal is required under federal regulations to maintain a minimum
amount of liquid assets and is also  permitted to make certain other  securities
investments.  See "Regulation" herein and "Management's  Discussion and Analysis
of  Financial  Condition  and  Results of  Operations  -  Liquidity  and Capital
Resources"  in the Annual  Report.  The  balance of the  Bank's  investments  in
short-term securities in excess of regulatory requirements reflects management's
response to the  significantly  increasing  percentage  of  deposits  with short
maturities.

     Investment  decisions  are  made  by the  Investment  Officer  who  reports
quarterly  to  the  Asset/Liability  Committee  ("ALCO  Committee").   The  ALCO
Committee meets  quarterly and consists of Directors  Creel,  Bishop,  Thompson,
Clemmons and Gerald,  and Executive Vice Presidents  Graham,  Rexroad,  Douglas,
Sherry and Stalvey and Vice  President  Loehr.  The ALCO  Committee  acts within
policies  established  by the Board of  Directors.  At September  30, 2002,  the
Bank's investment  portfolio had a market value of approximately $333.8 million.
The  investment  securities  portfolio  consisted  primarily of  mortgage-backed
securities.  For further information concerning the Bank's securities portfolio,
see Notes 2 and 3 of the Notes to  Consolidated  Financial  Statements  attached
hereto and incorporated by reference.

     At September 30, 2002,  Coastal Federal did not own any  securities,  other
than those disclosed in the following table, that had an aggregate book value in
excess of 10% of its retained earnings at that date.


                                       25
<PAGE>


Securities Analysis

     The following  table sets forth  Coastal  Federal's  investment  securities
portfolio at amortized cost at the dates indicated.

<TABLE>
<CAPTION>
                                                        September 30,
                          -------------------------------------------------------------------------
                                   2000                     2001                     2002
                          -----------------------  -----------------------   ----------------------
                          Amortized    Percent of  Amortized    Percent of   Amortized   Percent of
                          Cost(1)      Portfolio   Cost(1)      Portfolio    Cost(1)     Portfolio
                          -------      ---------   -------      ---------    -------     ---------
                                                   (Dollars in thousands)
<S>                       <C>           <C>        <C>           <C>          <C>            <C>
U.S. Government agency
Securities:
   FHLMC .............    $2,858        32.99%     $1,893        100.00%           --            --
   FHLB ..............     3,077        35.52%         --            --        $1,998        100.00%
   FNMA ..............     1,235        14.26%         --            --            --            --
   Federal Farm Credit
   Bond ..............        --           --          --            --            --            --
   Federal Agric Mtg .
   Association .......     1,499        17.23%         --            --            --            --
                           -----        -----       -----         -----         -----         -----

         Total .......    $8,669       100.00%     $1,893        100.00%       $1,998        100.00%
                          ======       ======      ======        ======        ======        ======

</TABLE>

(1)  The market value of the Bank's investment  securities portfolio amounted to
     $8.5 million, $2.0 million and $2.0 million at September 30, 2000, 2001 and
     2002, respectively.

     The following  table sets forth the final  maturities and weighted  average
     yields of the securities at amortized cost at September 30, 2002.

<TABLE>
<CAPTION>

                                   One Year         More than One         More than Five           More than
                                   or Less          to Five Years          to Ten Years            Ten Years
                               --------------      ---------------       -----------------      ----------------
                               Amount   Yield      Amount    Yield       Amount      Yield      Amount     Yield
                               ------   -----      ------    -----       ------      -----      ------     -----
                                                            (Dollars in thousands)
<S>                           <C>         <C>     <C>          <C>       <C>         <C>      <C>           <C>
U.S. Government agency
securities:
   FHLMC .................    $   --      --%     $    --      --%           --         --    $   --         --%
   FHLB ..................        --      --           --      --        $1,998       6.35%       --         --
   FNMA ..................        --      --           --      --            --         --        --         --
   Federal Farm
   Credit Bond ...........        --      --           --      --            --         --        --         --
   Federal Agric Mtg......
   Association ...........        --      --           --      --            --         --        --         --
                              ------    ----      -------    ----        ------       ----    ------       ----
         Total ...........    $   --      --%     $    --      --%       $1,998       6.35%   $   --         --%
                              ======    ====      =======    ====        ======       ====    ======       ====
</TABLE>

                                       26
<PAGE>



     The following table sets forth Coastal Federal's mortgage-backed securities
portfolio, at amortized cost, at the dates indicated.

<TABLE>
<CAPTION>

                                                                           September 30,
                                     ----------------------------------------------------------------------------------------
                                                2000                          2001                            2002
                                     -------------------------    ---------------------------   -----------------------------
                                     Amortized      Percent of    Amortized       Percent of    Amortized         Percent of
                                     Cost(1)        Portfolio     Cost(1)         Portfolio     Cost(1)           Portfolio
                                     ----------     ----------    ----------      -----------   -----------       -----------
                                                                      (Dollars in thousands)
<S>                                   <C>            <C>          <C>                <C>         <C>               <C>
Mortgage-backed Securities:.....
      FHLMC ....................      $ 19,191       10.02%       $ 12,223           6.61%       $ 57,628          17.87%
      FNMA .....................       122,665       64.03         123,271          66.64         206,448          64.01
      GNMA .....................        18,698        9.76          20,630          11.15          22,139           6.86
      CMO ......................        31,023       16.19          28,856          15.60          36,320          11.26
                                       -------      ------         -------         ------         -------         ------
           Total ...............      $191,577      100.00%       $184,980         100.00%       $322,535         100.00%
                                      ========      ======        ========         ======        ========         ======

</TABLE>


(1)  The  market  value  of  the  Bank's  mortgage-backed  securities  portfolio
     amounted to $189.2 million,  $190.6 million and $331.8 million at September
     30, 2000, 2001 and 2002, respectively.



     The following  table sets forth the maturities and weighted  average yields
of the securities, at amortized cost, at September 30, 2002.


<TABLE>
<CAPTION>
                                       One Year       More than One         More than Five          More than
                                        or Less       to Five Years          to Ten Years           Ten Years
                                    ---------------   --------------      -----------------    ------------------
                                    Amount   Yield    Amount   Yield      Amount      Yield     Amount      Yield
                                    ------   -----    ------   -----      ------      -----     ------      -----
                                                             (Dollars in thousands)
Mortgage-backed
Securities
<S>                                 <C>       <C>      <C>       <C>      <C>         <C>      <C>          <C>
      FHLMC ..................      $ --      --%      $ --      --%      $   --        --%    $ 57,628     6.13%
      FNMA ...................        --      --         --      --        3,311      4.17      203,137     6.43
      GNMA ...................        --      --         --      --           --        --       22,139     6.76
      CMO ....................        --      --         --      --        2,157      7.00       34,163     6.38
                                    ----    ----       ----    ----        -----      ----      -------     ----
           Total .............      $ --      --%      $ --      --%      $5,468      5.29%    $317,067     6.39%
                                    ====    ====       ====    ====        =====      ====     ========     ====
</TABLE>


                                       27
<PAGE>



Service Corporation Activities

     Coastal Federal has one wholly-owned service corporation:  Coastal Mortgage
Bankers and Realty Co., Inc. "Coastal Mortgage  Bankers," which was incorporated
in 1970 under the laws of South Carolina. Coastal Mortgage Bankers is not active
in any real estate operations.


<TABLE>
<CAPTION>

<S>                       <C>                           <C>                    <C>                    <C>

                                                        -------------------
                                                          COASTAL FEDERAL
                                                        -------------------
                                                                 |              ------------------
                                                                 |              COASTAL FEDERAL(1)
                                                                 |                    HOLDING
                                                                 | -------------    CORPORATION
                                                                 |              ------------------
                                                                 |                       |
                                                                 |                       |
                                                                 |              ------------------
                                                                 |                 COASTAL REAL
                                                                 |               ESTATE INVESTMENT
                                                                 |                  CORPORATION
                                                        -------------------    -------------------
                                                          COASTAL MORTGAGE
                                                              BANKERS*
                                                        -------------------
                                                                 |
                                                                 |
     -----------------------------------------------------------------------------------------------------------------
      |                                 |                       |                      |                       |
      |                                 |                       |                      |                       |
----------------------    --------------------------    -------------------    -----------------      ----------------------
   North Beach                   Shady Forest               Sherwood                 Ridge               501 Development
                                  Development              Development            Development
Investments, Inc.*               Corporation*              Corporation*           Corporation*             Corporation*
----------------------    --------------------------    -------------------    -----------------      ----------------------
</TABLE>


*    Inactive

(1)  First tier operating  subsidiary of Coastal Federal Bank  consolidated with
     Coastal Federal Bank for regulatory reporting.


                                       28
<PAGE>


     On February 20, 1998, Coastal Real Estate Investment  Corporation ("CREIC")
was incorporated in North Carolina. CREIC is a wholly owned operating subsidiary
of Coastal Federal Holding Corporation  ("CFHC") and is a real estate investment
trust  ("REIT").  CREIC engages in the  investment and management of real estate
related  assets,  primarily  mortgage  loans.  On September  1, 1998,  CREIC was
capitalized  with  approximately  $131.8  million of mortgage loans from Coastal
Federal.  On December 10, 1998,  CREIC became a wholly owned  subsidiary of CFHC
through an exchange of stock transaction.

     On June 25, 1998,  Coastal Federal Holding  Corporation was incorporated in
the state of Delaware. CFHC is a wholly owned subsidiary of Coastal Federal Bank
and is a  passive  investment  company.  All of  CFHC's  consolidated  operating
activities  are  consolidated  into Coastal  Federal  Bank.  CFHC engages in the
management  of its  investment  in  CREIC  and  the  management  of the  related
dividends received on that investment.

Deposit Activities and Other Sources of Funds

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

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


                                       29
<PAGE>


Deposit Flow

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

<TABLE>
<CAPTION>
                                                                             At September 30,
                                   -------------------------------------------------------------------------------------------------
                                                2000                              2001                            2002
                                   -------------------------------------------------------------------------------------------------
                                              Percent     Increase               Percent    Increase             Percent   Increase
                                    Amount    of Total   (Decrease)   Amount     of Total  (Decrease)   Amount   of Total (Decrease)
                                    ------    --------   ----------   ------     --------  ----------   ------   -------------------
                                                                           (Dollars in thousands)
<S>                               <C>         <C>       <C>         <C>          <C>       <C>        <C>        <C>     <C>
Transaction accounts:
     NOW checking ..............  $  48,945    12.05%   $  (1,829)  $  55,926     10.54%   $   6,981  $  67,381   10.58%   $11,455
     Commercial checking .......     35,214     8.67       (2,042)     49,098      9.26       13,884     63,003    9.89     13,905
                                  ---------   -------   ----------  ---------    ------    ---------  ---------  ------    -------

Total transaction accounts .....     84,159    20.72       (3,871)    105,024     19.80       20,865    130,384   20.47     25,360
                                  ---------   -------   ----------  ---------    ------    ---------  ---------  ------    -------

Money market demand accounts ...    120,133    29.57      (18,055)    193,631     36.51       73,498    212,924   33.42     19,293
Savings accounts ...............     36,205     8.91       (3,007)     33,317      6.28       (2,888)    39,092    6.13      5,775

Fixed-rate certificates
   (original maturity):
     3 months ..................      3,695     0.91         (745)      3,689      0.70           (6)     4,968    0.78      1,279
     6 months ..................     62,377    15.36       39,010      47,126      8.89      (15,251)    90,177   14.15     43,051
     9 months ..................      3,211     0.79       (2,009)     30,180      5.69       26,969     17,613    2.76    (12,567)
     12 months .................     32,650     8.04       (5,303)     44,866      8.46       12,216     57,206    8.98     12,340
     18 months .................     24,520     6.04        8,504      31,638      5.97        7,118     30,994    4.87       (644)
     24 months .................     18,073     4.45       (1,031)     25,120      4.74        7,047     27,939    4.39      2,819
     30 months .................      8,620     2.12       (5,057)      2,751      0.52       (5,869)     3,041    0.48        290
     36 months .................      3,275     0.81       (1,347)      2,294      0.43         (981)    11,580    1.82      9,286
     48 months .................      4,821     1.19          (49)      6,586      1.24        1,765      7,936    1.25      1,350
     96 months .................         33     0.01            2          18      0.00          (15)        19    0.00          1
                                  ---------   -------   ----------  ---------    ------    ---------  ---------  ------    -------
                                    161,275    39.70       31,975     194,268     36.64       32,993    251,473   39.48     57,205
                                  ---------   -------   ----------  ---------    ------    ---------  ---------  ------    -------

Variable rate certificates:
   (original maturity)
     12 months .................         --     0.00           --          --      0.00           --        163    0.02        163
     18 months .................      2,287     0.56         (429)      2,146      0.40         (141)     1,471    0.23       (675)
     30 months .................      2,158     0.53          (69)      1,978      0.37         (180)     1,574    0.25       (404)
                                  ---------   -------   ----------  ---------    ------    ---------  ---------  ------    -------
Total variable .................      4,445     1.09         (498)      4,124      0.77         (321)     3,208    0.50       (916)
                                  ---------   -------   ----------  ---------    ------    ---------  ---------  ------    -------

Total certificates .............    165,720    40.80       31,477     198,392     37.41       32,672    254,681   39.98     56,289
                                  ---------   -------   ----------  ---------    ------    ---------  ---------  ------    -------

Total deposits .................  $ 406,217   100.00%   $   6,544   $ 530,364    100.00%   $ 124,147  $ 637,081  100.00% $ 106,717
                                  =========   ======    =========   =========    ======    =========  =========  ======  =========
</TABLE>

                                       30
<PAGE>


Time Deposits by Maturity and Rate

     The following  table sets forth the amount and  maturities of time deposits
at September 30, 2002.

<TABLE>
<CAPTION>
                                                           Amount Due
                               -----------------------------------------------------------------------------
                               Less Than        1-2           2-3           3-4           After
           Rate                One Year        Years         Years         Years         4 Years       Total
           ----                --------        -----         -----         -----         -------       -----
                                                        (In thousands)

<S>                            <C>           <C>           <C>           <C>                <C>      <C>
0.00 - 5.99% ............      $188,707      $ 25,769      $ 18,519      $  5,444           $--      $238,439
6.00 - 8.00% ............        12,663         1,278         1,792             6            19        15,758
8.01 - 10.00%............            --           437            47            --            --           484
                               --------      --------      --------      --------      --------      --------

      Total .............      $201,370      $ 27,484      $ 20,358      $  5,450      $     19      $254,681
                               ========      ========      ========      ========      ========      ========
</TABLE>


     The following  table sets forth the amount and  maturities of time deposits
with balances of $100,000 or more at September 30, 2002.

<TABLE>
<CAPTION>

                                                          Amount Due
-----------------------------------------------------------------------------------------------------------------
         Within                 Over 3                      Over 6                  Over 12             Total
        3 Months            through 6 months           through 12 months            Months
-----------------------------------------------------------------------------------------------------------------
                                                        (In thousands)
        <S>                    <C>                         <C>                      <C>               <C>
        $37,605                $ 23,891                    $11,208                  $14,326           $ 87,030
        =======                ========                    =======                  =======           ========
</TABLE>


     In the unlikely  event Coastal  Federal is liquidated,  depositors  will be
entitled to full payment of their  deposit  accounts  prior to any payment being
made to the Corporation as the sole stockholder of Coastal Federal.

     Borrowings.  Demand and time  deposits are the primary  source of funds for
Coastal Federal's lending and investment activities and for its general business
purposes. The Bank has in the past, however,  relied upon advances from the FHLB
of  Atlanta  to  supplement  its supply of  lendable  funds and to meet  deposit
withdrawal  requirements.  The FHLB of  Atlanta  has served as one of the Bank's
primary  borrowing  sources.  Advances  from the FHLB of Atlanta  are  typically
secured by the Bank's  first  mortgage  loans.  At September  30, 2002,  Coastal
Federal had  advances  totaling  $189.7  million from the FHLB of Atlanta due on
various  dates  through  2012 with a weighted  average  interest  rate of 4.61%.
Certain of these advances are subject to call  provisions.  Call  provisions are
more likely to be exercised by the FHLB when rates rise.


                                       31
<PAGE>


     The FHLB of Atlanta  functions as a central  reserve bank providing  credit
for financial institutions and certain other member financial institutions. As a
member,  Coastal Federal is required to own capital stock in the FHLB of Atlanta
and is  authorized  to apply for  advances  on the  security  of such  stock and
certain of its mortgage loans,  certain  commercial real estate loans, and other
assets  (principally  securities which are obligations of, or guaranteed by, the
United States) provided certain standards related to creditworthiness  have been
met.  Advances  are made  pursuant to several  different  programs.  Each credit
program has its own  interest  rate and range of  maturities.  Depending  on the
program,  limitations  on the  amount of  advances  are based  either on a fixed
percentage  of an  institution's  net worth or on the FHLB's  assessment  of the
institution's creditworthiness. The FHLB of Atlanta determines specific lines of
credit for each member institution.

     In addition to the borrowing  described above, the Bank, from time to time,
has borrowed  funds under  reverse  repurchase  agreements  pursuant to which it
sells securities (generally secured by government securities and mortgage-backed
securities)  under an agreement to buy them back at a specified price at a later
date. These agreements to repurchase are deemed to be borrowings  collateralized
by the  securities  sold. At September  30, 2002,  the Bank had $30.0 million in
broker repurchase agreements. The Bank has also offered repurchase agreements to
its  customers  that are  borrowings  collateralized  by  underlying  government
securities.  At September  30, 2002,  the Bank had $4.1 million  outstanding  in
customer repurchase agreements.



                                       32
<PAGE>


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

<TABLE>
<CAPTION>

                                                                 At September 30,
                                                     -----------------------------------------
                                                       2000           2001          2002
                                                     -----------------------------------------
                                                              (Dollars in thousands)
<S>                                                  <C>            <C>            <C>
Outstanding balance:
   Securities sold under agreements............
      to repurchase:
      Customer ................................      $  3,825       $  3,703       $  4,070
      Broker ..................................        72,033         15,000         30,000
   Short-term FHLB advances (1) ...............       116,476         46,400        110,350

Weighted average rate paid on:
   Securities sold under agreements
      to repurchase:
      Customer ................................          5.75%          3.36%          1.37%
      Broker ..................................          6.59           2.97           1.84
   Short-term FHLB advances (1) ...............          6.68           5.13           4.52

Maximum amount of borrowings outstanding
   At any month end:
   Securities sold under agreements
      to repurchase:
      Customer ................................      $  4,196       $  3,726       $  5,625
      Broker ..................................       122,700         67,099         30,000
   Short-term FHLB advances (1) ...............       154,546        138,946        110,350

Approximate average short-term borrowings
   outstanding with respect to:
   Securities sold under agreements
      to repurchase:
      Customer ................................      $  2,826       $  2,361       $  3,600
      Broker ..................................       107,737         45,461         15,007
   Short-term FHLB advances (1) ...............       127,458         50,884         59,243

Weighted average rate paid on:
   Securities sold under agreements
      to repurchase:
      Customer ................................          4.10%          3.73%          1.58%
      Broker ..................................          6.38           5.65           2.39
   Short-term FHLB advances (1) ...............          6.68           5.90           4.52

</TABLE>

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

                                       33
<PAGE>



Competition

     As of June 30, 2002, Coastal Federal held the largest share of deposits,  a
15.4% share, in Horry County,  S.C.  according to the Federal Deposit  Insurance
Corporation.  Coastal Federal also held an 11.3% share in Brunswick County, N.C.
and a 1.6% share in  Wilmington,  N.C. The Bank faces strong  competition in the
attraction  of  deposits  (its  primary  source of  lendable  funds)  and in the
origination  of loans.  Its most direct  competition  for deposits and loans has
historically  come from other  financial  institutions  located  in its  primary
market  area.  The  Bank  estimates  that  there  are over 89  offices  of other
financial  institutions in Horry County,  29 offices in Brunswick  County and 57
offices in Wilmington.  Particularly in times of high interest  rates,  the Bank
has  faced  additional   significant   competition  for  investors'  funds  from
short-term   money  market   securities  and  other   corporate  and  government
securities.  The  Bank's  competition  for loans  comes  principally  from other
financial institutions, mortgage banking companies and mortgage brokers.


Personnel

     As of September 30, 2002,  the Company had 265 full-time  Associates and 25
part-time  Associates.  The  Associates  are  not  represented  by a  collective
bargaining  unit.  The Bank  believes its  relationship  with its  Associates is
excellent.


                           REGULATION AND SUPERVISION

General

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



                                       34
<PAGE>

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

Holding Company Regulation

     The Company is a  nondiversified  unitary  savings and loan holding company
within the meaning of federal law.  Under prior law, a unitary  savings and loan
holding  company,  such as the Company,  was not generally  restricted as to the
types of  business  activities  in which it may engage,  provided  that the Bank
continued to be a qualified  thrift  lender.  See "Federal  Savings  Institution
Regulation  - QTL Test." The  Gramm-Leach-Bliley  Act of 1999  provides  that no
company may acquire control of a savings association after May 4, 1999 unless it
engages  only  in the  financial  activities  permitted  for  financial  holding
companies  under the law or for multiple  savings and loan holding  companies as
described below.  Further,  the  Gramm-Leach-Bliley  Act specifies that existing
savings  and loan  holding  companies  may only engage in such  activities.  The
Gramm-Leach-Bliley  Act, however,  grandfathered the unrestricted  authority for
activities with respect to unitary savings and loan holding  companies  existing
prior to May 4, 1999, so long as the Bank continues to comply with the QTL Test.
The  Company  does  qualify  for the  grandfathering.  Upon any  non-supervisory
acquisition by the Company of another  savings  institution or savings bank that
meets the qualified thrift lender test and is deemed to be a savings


                                       35
<PAGE>

institution  by the Office of Thrift  Supervision,  the Company  would  become a
multiple  savings and loan holding company (if the acquired  institution is held
as  a  separate  subsidiary)  and  would  generally  be  limited  to  activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, subject to the prior approval of the Office of Thrift  Supervision,
and certain activities authorized by Office of Thrift Supervision regulation.

     A  savings  and loan  holding  company  is  prohibited  from,  directly  or
indirectly,  acquiring  more  than 5% of the  voting  stock of  another  savings
institution or savings and loan holding company,  without prior written approval
of the Office of Thrift Supervision and from acquiring or retaining control of a
depository  institution  that is not  insured by the Federal  Deposit  Insurance
Corporation.  In evaluating applications by holding companies to acquire savings
institutions,  the Office of Thrift  Supervision  considers  the  financial  and
managerial  resources  and  future  prospects  of the  Company  and  institution
involved,  the effect of the  acquisition  on the risk to the deposit  insurance
funds, the convenience and needs of the community and competitive factors.

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

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


                                       36
<PAGE>


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


Federal Savings Institution Regulation

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

     Capital Requirements.  The Office of Thrift Supervision capital regulations
require savings  institutions to meet three minimum  capital  standards:  a 1.5%
tangible capital ratio, a 4% leverage ratio (3% for  institutions  receiving the
highest  rating on the CAMELS  examination  rating  system) and an 8% risk-based
capital ratio. In addition,  the prompt  corrective  action standards  discussed
below also establish,  in effect, a minimum 2% tangible capital  standard,  a 4%
leverage ratio (3% for  institutions  receiving the highest rating on the CAMELS
system),  and, together with the risk-based capital standard itself, a 4% Tier 1
risk-based capital standard.  The Office of Thrift Supervision  regulations also
require  that,  in  meeting  the  tangible,   leverage  and  risk-based  capital
standards,  institutions  must  generally  deduct  investments  in and  loans to
subsidiaries  engaged in activities as principal that are not  permissible for a
national bank.

     The  risk-based  capital  standard  for savings  institutions  requires the
maintenance of Tier 1 (core) and total capital



                                       37
<PAGE>

(which is defined as core capital and  supplementary  capital) to  risk-weighted
assets  of at  least 4% and 8%,  respectively.  In  determining  the  amount  of
risk-weighted  assets, all assets,  including certain  off-balance sheet assets,
are multiplied by a risk-weight factor of 0% to 100%,  assigned by the Office of
Thrift  Supervision  capital  regulation based on the risks believed inherent in
the type of asset.  Core (Tier 1)  capital  is  defined as common  stockholders'
equity (including retained earnings),  certain noncumulative perpetual preferred
stock  and  related  surplus,  and  minority  interests  in equity  accounts  of
consolidated subsidiaries less intangibles other than certain mortgage servicing
rights and credit card  relationships.  The components of supplementary  capital
currently include  cumulative  preferred stock,  long-term  perpetual  preferred
stock,  mandatory  convertible  securities,  subordinated  debt and intermediate
preferred stock, the allowance for loan and lease losses limited to a maximum of
1.25%  of   risk-weighted   assets  and  up  to  45%  of  unrealized   gains  on
available-for-sale  equity  securities  with  readily  determinable  fair market
values.  Overall, the amount of supplementary  capital included as part of total
capital cannot exceed 100% of core capital.

     The capital  regulations also incorporated an interest rate risk component.
Savings  institutions  with "above  normal"  interest  rate risk  exposure  were
subject to a deduction  from total  capital for  purposes of  calculating  their
risk-based  capital  requirements.  The  Office of Thrift  Supervision  deferred
implementation  of the  interest  rate risk  capital  charge  and  repealed  the
interest rate risk component in May 2002,  concluding that it was unnecessary in
light of other tools  available to measure and control  interest  rate risk.  At
September 30, 2002, the Bank met each of its capital  requirements.  See Note 13
of the Notes to Consolidated Financial Statements for further information.

     Prompt Corrective  Regulatory  Action.  The Office of Thrift Supervision is
required  to  take  certain   supervisory   actions   against   undercapitalized
institutions,  the severity of which  depends upon the  institution's  degree of
undercapitalization.  Generally, a savings institution that has a ratio of total
capital  to risk  weighted  assets  of less  than  8%,  a ratio of Tier 1 (core)
capital to  risk-weighted  assets of less than 4% or a ratio of core  capital to
total  assets  of less  than 4% (3% or less for  institutions  with the  highest
examination   rating)  is  considered  to  be   "undercapitalized."   A  savings
institution  that has a total  risk-based  capital  ratio less than 6%, a Tier 1

                                       38
<PAGE>

capital  ratio  of less  than 3% or a  leverage  ratio  that is less  than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible  capital to assets ratio equal to or less than 2% is deemed to be
"critically  undercapitalized."  Subject  to a narrow  exception,  the Office of
Thrift  Supervision  is  required to appoint a receiver  or  conservator  for an
institution that is "critically  undercapitalized." The regulation also provides
that a  capital  restoration  plan  must be filed  with  the  Office  of  Thrift
Supervision  within 45 days of the date a savings  institution  receives  notice
that it is "undercapitalized,"  "significantly  undercapitalized" or "critically
undercapitalized."  Compliance  with the plan must be  guaranteed  by any parent
holding company.  In addition,  numerous  mandatory  supervisory  actions become
immediately applicable to an undercapitalized  institution,  including,  but not
limited to,  increased  monitoring by  regulators  and  restrictions  on growth,
capital distributions and expansion. The Office of Thrift Supervision could also
take any one of a number of  discretionary  supervisory  actions,  including the
issuance of a capital directive and the replacement of senior executive officers
and directors.

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

     The Bank's average  assessment rate for the fiscal year 2002 was 1.75 basis
points and the premium  paid for this period was  $93,000.  The Federal  Deposit
Insurance  Corporation  has  authority  to  increase  insurance  assessments.  A
significant  increase in Savings  Association  Insurance Fund insurance premiums
would  likely have an adverse  effect on the  operating  expenses and results of
operations of the Bank.  Management  cannot  predict what  insurance  assessment
rates will be in the future.

     In  addition to the  assessment  for deposit  insurance,  institutions  are
required  to make  payments on bonds  issued in the late 1980s by the  Financing

                                       39
<PAGE>

Corporation  ("FICO") to recapitalize the predecessor to the Savings Association
Insurance  Fund.  During  fiscal 2002,  FICO  payments  for Savings  Association
Insurance Fund members approximated 1.79 basis points of assessable deposits.

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

     Loans to One Borrower.  Federal law provides that savings  institutions are
generally subject to the limits on loans to one borrower  applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related  group of  borrowers  in excess  of 15% of its  unimpaired  capital  and
surplus.  An additional  amount may be lent, equal to 10% of unimpaired  capital
and surplus, if secured by specified readily-marketable collateral. At September
30, 2002, the Bank's limit on loans to one borrower was $10.3  million,  and the
Bank's largest aggregate  outstanding  balance of loans to one borrower was $7.5
million.

     QTL Test. The HOLA requires savings institutions to meet a qualified thrift
lender test. Under the test, a savings association is required to either qualify
as a "domestic building and loan association" under the Internal Revenue Code or
maintain  at  least  65% of its  "portfolio  assets"  (total  assets  less:  (i)
specified liquid assets up to 20% of total assets;  (ii) intangibles,  including
goodwill;  and (iii) the value of property used to conduct  business) in certain
"qualified  thrift  investments"  (primarily  residential  mortgages and related
investments,  including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.

     A savings  institution  that  fails the  qualified  thrift  lender  test is
subject to certain  operating  restrictions  and may be required to convert to a
bank  charter.  As of  September  30,  2002,  the Bank  maintained  88.7% of its
portfolio  assets  in  qualified  thrift  investments  and,  therefore,  met the
qualified  thrift  lender test.  Recent  legislation  has expanded the extent to
which  education  loans,  credit  card  loans  and small  business  loans may be
considered "qualified thrift investments."

                                       40
<PAGE>


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

     Assessments.  Savings  institutions  are required to pay assessments to the
Office  of Thrift  Supervision  to fund the  agency's  operations.  The  general
assessments,  paid  on a  semi-annual  basis,  are  computed  upon  the  savings
institution's total assets, including consolidated subsidiaries,  as reported in
the Bank's latest quarterly thrift financial report. The assessments paid by the
Bank for the fiscal year ended September 30, 2002 totaled $157,000.

     Transactions  with  Related  Parties.  The  Bank's  authority  to engage in
transactions  with  "affiliates"  (e.g.,  any company that  controls or is under
common control with an  institution,  including the Company and its  non-savings
institution  subsidiaries)  is limited by federal law. The  aggregate  amount of
covered  transactions  with any  individual  affiliate  is limited to 10% of the
capital and surplus of the savings institution.  The


                                       41
<PAGE>

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

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

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


                                       42
<PAGE>

circumstances.  Federal  law also  establishes  criminal  penalties  for certain
violations.

     Standards  for Safety and  Soundness.  The federal  banking  agencies  have
adopted Interagency  Guidelines  prescribing Standards for Safety and Soundness.
The  guidelines  set forth the safety and soundness  standards  that the federal
banking  agencies  use to identify  and address  problems at insured  depository
institutions   before  capital  becomes  impaired.   If  the  Office  of  Thrift
Supervision  determines  that a savings  institution  fails to meet any standard
prescribed by the guidelines,  the Office of Thrift  Supervision may require the
institution  to  submit  an  acceptable  plan to  achieve  compliance  with  the
standard.


Federal Home Loan Bank System

     The Bank is a member of the Federal Home Loan Bank System,  which  consists
of 12 regional  Federal Home Loan Banks.  The Federal Home Loan Bank  provides a
central credit facility primarily for member institutions. The Bank, as a member
of the Federal Home Loan Bank, is required to acquire and hold shares of capital
stock in that  Federal Home Loan Bank in an amount at least equal to 1.0% of the
aggregate principal amount of its unpaid residential  mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances  (borrowings)
from  the  Federal  Home  Loan  Bank,  whichever  is  greater.  The  Bank was in
compliance  with this  requirement  with an investment in Federal Home Loan Bank
stock at September 30, 2002 of $10.6 million.

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

                                       43
<PAGE>


Federal Reserve System

     The Federal  Reserve Board  regulations  require  savings  institutions  to
maintain  non-interest  earning  reserves  against  their  transaction  accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows: a
3% reserve  ratio is assessed on net  transaction  accounts up to and  including
$42.1  million;  a 10% reserve ratio is applied above $42.1  million.  The first
$6.0 million of otherwise  reservable  balances  (subject to  adjustments by the
Federal Reserve Board) are exempted from the reserve  requirements.  The amounts
are adjusted annually. The Bank complies with the foregoing requirements.

                                    TAXATION

Federal Taxation

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

     Tax Bad Debt Reserves.  For  discussion  related to the Bank's Tax Bad Debt
Reserves, please refer to Note 11 of the Company's Annual Report to Stockholders
for the fiscal year ended September 30, 2002.

     Distributions.   To  the   extent   that   the  Bank   makes   "nondividend
distributions"  to the  Corporation  that are  considered as made:  (i) from the
reserve for losses on qualifying  real property loans, to the extent the reserve
for such  losses  exceeds  the amount  that would  have been  allowed  under the
experience  method;  or (ii) from the  supplemental  reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will be
included  in  the  Bank's  taxable  income.  Nondividend  distributions  include
distributions  in excess of the Bank's  current  and  accumulated  earnings  and
profits,  distributions in redemption of stock, and  distributions in partial or
complete  liquidation.  However,  dividends  paid out of the  Bank's  current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be  considered  to result in a  distribution  from the  Bank's bad debt

                                       44
<PAGE>

reserve.  Thus,  any  dividends to the  Corporation  that would  reduce  amounts
appropriated  to the Bank's bad debt reserve and deducted for federal income tax
purposes  would create a tax  liability  for the Bank.  The amount of additional
taxable income  attributable  to an Excess  Distribution is an amount that, when
reduced by the tax  attributable  to the  income,  is equal to the amount of the
distribution.  Thus,  if,  the Bank  makes a  "nondividend  distribution,"  then
approximately  one and one-half  times the amount so used would be includable in
gross income for federal  income tax purposes,  assuming a 35% corporate  income
tax rate (exclusive of state and local taxes).  See  "Regulation"  for limits on
the payment of dividends by the Bank.  The Bank does not intend to pay dividends
that would result in a recapture of any portion of its tax bad debt reserve.

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

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

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

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


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


                                       45
<PAGE>

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

     The  following  table sets  forth the  location  of the  offices of Coastal
Financial's subsidiaries,  as well as certain additional information relating to
these offices, as of September 30, 2002.

<TABLE>
<CAPTION>

                                                           Total Investment
                                                           Including Land,      Net Book         Approximate
                                                 Year      Building, Furni-     Value as         Square           Owned/
Location                                         Opened    ture and Fixtures    Of 9/30/02       Footage          Leased
--------                                         ------    -----------------    ----------       -------          ------
                                                                         (Dollars in thousands)
<S>                                               <C>         <C>                 <C>               <C>             <C>
Main Office
2619 Oak St.
Myrtle Beach, SC (1)                              1980        $  11,601           $5,103            25,000          Owned

Dunes Office
7500 North Kings Hwy
Myrtle Beach, SC                                  1971              842              323             2,000          Owned

North Myrtle Beach Office
521 Main Street
North Myrtle Beach, SC                            1973            1,248              646             4,100          Owned

Surfside Office
112 Highway 17 South
  & Glenns Bay Road                               1975            1,501              684             3,300          Owned
Surfside Beach, SC

Conway Office
310 Wright Boulevard                              1976            1,051              407             2,882          Owned
Conway, SC

Socastee Office
4801 Socastee Boulevard                           1981            1,008              306             2,275          Owned
Myrtle Beach, SC

Murrells Inlet Office
3348 Highway 17 South & Inlet Crossing            1986            1,142              643             3,450          Owned
Murrells Inlet, SC

</TABLE>


                                       46
<PAGE>


<TABLE>
<CAPTION>

                                                           Total Investment
                                                           Including Land,      Net Book         Approximate
                                                 Year      Building, Furni-     Value as         Square           Owned/
Location                                         Opened    ture and Fixtures    Of 9/30/02       Footage          Leased
--------                                         ------    -----------------    ----------       -------          ------
                                                                         (Dollars in thousands)

<C>                                               <C>               <C>              <C>             <C>            <C>
Waccamaw Medical Pk Office
112 Waccamaw Medical Pk Drive                     1986              613              262             1,450          Owned
Conway, SC

Sunset Beach Office
1625 Seaside Road S.W.                            1998            1,106              861             3,000          Owned
Sunset Beach, NC

Coastal Federal University Center
504 27th Avenue North                             1997            1,600              668             7,500          Owned
Myrtle Beach, SC

Conway Annex Property
1515 4th Avenue                                   1999            1,950              728            10,000          Owned
Conway, SC

Little River Office
1602 Highway 17                                   1999            1,211            1,011             2,300          Owned
Little River, SC

Bi-Lo 38th Avenue
1245 38th Avenue North                                                                                 600          Leased
Myrtle Beach, SC                                  2000              331              233

Wilmington Office
5710 Oleander Drive, Suite 209                    1999              165               97             1,400          Leased
Wilmington, NC

Carolina Forest Office
3894 Renee Drive                                  2000            1,247            1,072             3,500          Owned
Myrtle Beach, SC

Southport Office
4956-1 Long Beach Road SE                         2001              216              151             1,600          Leased
Southport, NC

Central Business District Office
109 Market Street                                                                                    1,800          Leased
Wilmington, NC                                    2001              177              146

Bi-Lo Socastee Office
5020 Dick Pond Road                               2001              282              222               486          Leased
Myrtle Beach, SC

Loris Office
4262 Main Street                                  2002               58               58             1,040          Leased
Loris, SC

Pawleys Island Office
Coastal Federal Town Center                       2002               89               73             3,150          Owned
11403 Ocean Highway
Pawleys Island, SC

Coastal Mortgage Bankers
   and Realty Co., Inc.
2619 Oak Street                                   1970                2                0               N/A          N/A
Myrtle Beach, SC

                                       47
<PAGE>

Coastal Investor Services, Inc
2619 Oak Street
Myrtle Beach, SC                                  1987              127               16               N/A          N/A

</TABLE>



(1)  The original  main office was located at 816 North Kings Highway and opened
     in January 1954. The main office was moved to its new location in 1980.

     The net book value of the Company's  investment in office,  properties  and
equipment  totaled $13.7 million at September 30, 2002.  See Note 6 of the Notes
to the Consolidated  Financial Statements.  Coastal Federal uses the services of
an independent data processing  service to process customer records and monetary
transactions,  post deposit and general  ledger  entries and record  activity in
installment lending, loan servicing and loan originations.


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

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

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

           Not Applicable.

                                     PART II

Item 5.  Market  for the  Registrant's  Common  Equity and  Related  Stockholder
         -----------------------------------------------------------------------
         Matters
         -------

     The  information  contained  under the  section  captioned  "Market for the
Corporation's Common Stock and Related Stockholder Matters" in the Corporation's
Annual  Report to  Stockholders  for the Fiscal  Year Ended  September  30, 2002
("Annual Report") is incorporated herein by reference.

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

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


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

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


                                       48
<PAGE>


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

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


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

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

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

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

                                    PART III

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

     The  information  contained  under the  sections  captioned  "Proposal I --
Election  of  Directors"  and  "Section  16(a)  Beneficial  Ownership  Reporting
Compliance"  in the  Company's  definitive  proxy  statement for the Bank's 2003
Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by
reference.

     Certain executive  officers of the Bank also serve as executive officers of
the Corporation.  The day-to-day  management duties of the executive officers of
the  Corporation  and the Bank relate  primarily to their duties as to the Bank.
The executive  officers of the Company and the Bank are elected  annually by the
respective  Boards of Directors and hold office until their successors have been
elected and qualified or until they are removed from office.


                                       49
<PAGE>

<TABLE>
<CAPTION>


Executive Officers of the Registrant
------------------------------------
<S>                                       <C>
Name, Age and Position                    Business Experience
----------------------                    -------------------

Michael C. Gerald, 53                     Mr.  Gerald has been  associated  with
President, Chief Executive                Coastal  Federal since 1974 and serves
Officer and a Director                    as  Director,   President   and  Chief
                                          Executive  Officer of the  Corporation
                                          and Bank.  Mr.  Gerald  also serves as
                                          Director  and   President  of  Coastal
                                          Mortgage  Bankers  &  Realty  Company,
                                          Inc., and as Director and President of
                                          Coastal    Real   Estate    Investment
                                          Corporation.  He  currently  serves on
                                          the  Board  of   Visitors  of  Coastal
                                          Carolina  University's  Wall School of
                                          Business,  the Board of  Directors  of
                                          the Waccamaw Community Foundation, the
                                          Board  of  Directors  of  the  Coastal
                                          Education  Foundation,  the Session of
                                          the  First   Presbyterian   Church  of
                                          Myrtle  Beach,  the Board of Directors
                                          of   the   South   Carolina    Bankers
                                          Association, the Board of Directors of
                                          SC BancPAC  and the Board of  Advisors
                                          of  the   USC   Business   Partnership
                                          Foundation.

Jimmy R. Graham, 54,                      Mr.  Graham  serves as Executive  Vice
Executive Vice President and              President   and   Chief    Information
Chief Information Officer                 Officer of Coastal Federal. Mr. Graham
                                          serves as Executive  Vice President of
                                          Coastal Financial Corporation.  He has
                                          been  associated  with the bank  since
                                          1977.

</TABLE>
                                       50
<PAGE>

<TABLE>
<CAPTION>

<S>                                       <C>


Jerry L. Rexroad, CPA, 42,                Mr.  Rexroad  joined  the  Company  in
Executive Vice President and              April  1995  and  is  Executive   Vice
Chief Financial Officer                   President and Chief Financial  Officer
                                          of   Coastal   Federal   and   Coastal
                                          Financial  Corporation.   Mr.  Rexroad
                                          also  serves  as the  Chief  Financial
                                          Officer  and a  Director  for  Coastal
                                          Mortgage  Bankers  &  Realty  Company,
                                          Inc., Coastal Investments Corporation,
                                          and Coastal Federal Mortgage,  Coastal
                                          Real Estate Investment Corporation and
                                          President of Coastal Federal  Holdings
                                          Corporation.  He  currently  serves on
                                          the   Junior   Achievement   Board  of
                                          Directors  of  Horry  County.  He is a
                                          Past   Chairman   of  the   Board   of
                                          Directors  for Junior  Achievement  of
                                          Horry County as well as Past  Chairman
                                          of the Board of  Directors  for Junior
                                          Achievement of Greenville. Mr. Rexroad
                                          is   a    Director    of    PowerHouse
                                          Ministries,  Inc.  and Chairman of the
                                          Board  of  Deacons  at  Grand   Strand
                                          Baptist  Church.  He  is  a  certified
                                          public accountant,  and is a member of
                                          the AICPA and SCACPA. Prior to joining
                                          the Company, Mr. Rexroad was a partner
                                          with KPMG LLP where he was  partner in
                                          charge of the  Financial  Institutions
                                          practice in South Carolina.


Phillip G. Stalvey, 46,                   Mr.    Stalvey   is   Executive   Vice
Executive Vice President                  President  and Sales Group  Leader for
and Banking Group Leader                  the  Bank.   He  also   serves  as  an
                                          Executive   Vice   President   of  the
                                          Corporation   and  is  a  director  of
                                          Coastal  Federal  Mortgage and Coastal
                                          Investor  Services,  Inc.  He has been
                                          associated  with  Coastal  Federal for
                                          the past 20 years.  In  addition,  Mr.
                                          Stalvey  is a member  of the  Florence
                                          Stake Presidency with his Church and a
                                          member of the  Myrtle  Beach Air Force
                                          Base Redevelopment Authority.



Steven J. Sherry, 51                      Mr. Sherry is Executive Vice President
Executive Vice President and              and  Director  of  Marketing  for  the
Director of Marketing                     Bank. He also serves as Executive Vice
                                          President and Chief Marketing  Officer
                                          for Coastal Financial Corporation. Mr.
                                          Sherry   is  a  member   of  the  Bank
                                          Marketing   Association  and  the  ABA
                                          Marketing  Network.  He is active with
                                          Horry County  United Way and serves on
                                          the Executive Board of the Franklin G.
                                          Burroughs-Simeon B. Chapin Art Museum.
                                          Mr. Sherry holds numerous  achievement
                                          awards for marketing and advertising.
</TABLE>

                                       51
<PAGE>

<TABLE>
<CAPTION>

<S>                                       <C>
Susan J. Cooke, 52                        Ms. Cooke is Senior Vice President and
Vice President and                        Corporate    Secretary   for   Coastal
Corporate Secretary                       Federal  and  for  Coastal   Financial
                                          Corporation,  Corporate  Secretary for
                                          Coastal   Mortgage  Bankers  &  Realty
                                          Company,  Inc.,  and Coastal  Investor
                                          Services,  Inc.  Ms.  Cooke  has  been
                                          employed  with  Coastal   Federal  for
                                          fifteen years.  She is a member of the
                                          American    Society    of    Corporate
                                          Secretaries,  Inc.  and  the  National
                                          Association for Female Executives.




Robert D. Douglas, 43                     Mr. Douglas joined the  corporation in
Executive Vice President                  June 1994 and serves as Executive Vice
Human Resources/Coastal                   President  of  the  Bank  and  Coastal
Federal University Group                  Financial  Corporation.  He  currently
                                          serves  on  the   Myrtle   Beach  Area
                                          Chamber   of   Commerce   Governmental
                                          Affairs   Committee.   He   previously
                                          served  as   Chairman   of  the  Human
                                          Resources Committee.  He has served on
                                          various  advisory  committees  for the
                                          Horry    County   Drug   and   Alcohol
                                          Commission,  and  the  South  Carolina
                                          Employment    Security     Commission,
                                          Coastal  Carolina and Horry Georgetown
                                          Technical College.


</TABLE>
                                       52
<PAGE>


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

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

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

          (a)  Security Ownership of Certain Beneficial Owners

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

          (b)  Security Ownership of Management

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

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

          (d)  Equity Compensation Plan Information as of September 30, 2002:

<TABLE>
<CAPTION>
------------------------------ -------------------------------- ------------------------------- --------------------------------
                                 Number of securities to be                                      Number of securities remaining
                                   issued upon exercise of        Weighted-average price of       available for future issuance
                                outstanding options, warrants   outstanding options, warrants       under equity compensation
             Plan Category              and rights                       and rights                plans (excluding securities
                  (a)                      (b)                             (c)                      reflected in column (a))
                                                                                                               (d)
------------------------------ -------------------------------- ------------------------------- --------------------------------
<S>                            <C>                              <C>                             <C>
Equity compensation plans
approved by security holders              1,234,207                         $8.18                           454,559
------------------------------ -------------------------------- ------------------------------- --------------------------------
Equity compensation plans not
approved by security holders                 N/A                             N/A                              N/A
------------------------------ -------------------------------- ------------------------------- --------------------------------
Total                                     1,234,207                         $8.18                           454,559
------------------------------ -------------------------------- ------------------------------- --------------------------------
</TABLE>


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

     The information  required by this item is incorporated  herein by reference
to the  section  captioned  "Proposal  I - Election  of  Directors"  and "Voting
Securities and Principal Holders Thereof" in the Proxy Statement.

                                       53
<PAGE>


Item 14. Evaluation of Disclosure Controls and Procedures and Changes in
-------------------------------------------------------------------------
         Internal Controls
         -----------------

          (a)  Evaluation of Disclosure Controls and Procedures

               The  Corporation  maintains  controls and procedures  designed to
               ensure that  information  required to be disclosed in the reports
               that the  Corporation  files or submits under the  Securities and
               Exchange  Act of  1934 is  recorded,  processed,  summarized  and
               reported within the time periods specified in the rules and forms
               of the  Securities  and  Exchange  Commission.  Based  upon their
               evaluation of those controls and procedures  performed  within 90
               days of the  filing  date of this  report,  the  chief  executive
               officer  and  the  chief  financial  officer  of the  Corporation
               concluded  that  the   Corporation's   disclosure   controls  and
               procedures were adequate.

          (b)  Changes in Internal Controls

          The Corporation made no significant  changes in its internal  controls
          or other  factors  that  could  significantly  affect  these  controls
          subsequent  to the date of the  evaluation  of those  controls  by the
          chief executive officer and chief financial officer.

                                     PART IV

Item 15.  Exhibits, Financial Statement Schedules, and Reports on
------------------------------------------------------------------
                     Form 8-K
                     --------

          1.   Independent Auditors' Report(1)

          2.   All Financial Statements(1)

               (a)  Consolidated   Statements  of  Financial   Condition  as  of
                    September 30, 2001 and 2002.

               (b)  Consolidated  Statements of  Operations  for the Years Ended
                    September 30, 2000, 2001, 2002.

               (c)  Consolidated   Statements   of   Stockholders'   Equity  and
                    Comprehensive Income for the Years Ended September 30, 2000,
                    2001, 2002.

               (d)  Consolidated  Statements  of Cash Flows for the Years  Ended
                    September 30, 2000, 2001, 2002.

               (e)  Notes to Consolidated Financial Statements.

                                       54
<PAGE>



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

          4.   Exhibits


               3  (a)   Certificate of Incorporation of Coastal Financial
                        Corporation(2)

               3  (b)   Certificate of Amendment to Certificate of Incorporation
                        of Coastal Financial Corporation(7)

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

              10  (a)   Employment Agreement with Michael C. Gerald(2)

                  (b)   Employment Agreement with Jerry L. Rexroad(2)

                  (c)   Employment Agreement with Phillip G. Stalvey(4)

                  (d)   Employment Agreement with Jimmy R. Graham(2)

                  (e)   Employment Agreement with Steven J. Sherry(5)

                  (f)   1990 Stock Option Plan(2)

                  (g)   Directors Performance Plan(3)

                  (h)   2000 Stock Option Plan(6)

                  (i)   Loan Agreement with Bankers Bank(8)

              13        Annual Report to Stockholders for the Fiscal Year Ended
                        September 30, 2002

              21        Subsidiaries of the Registrant

              23        Consent of Independent Auditors



                                       55
<PAGE>


____________________

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

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

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

(4)  Incorporated  by reference to 1997 Form 10-K filed with the  Securities and
     Exchange Commission on January 2, 1998.

(5)  Incorporated  by reference to 1998 Form 10-K filed with the  Securities and
     Exchange Commission on December 29, 1998.

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

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

(8)  Incorporated by reference to the December 31, 1997 Form 10-Q filed with the
     Securities and Exchange Commission on February 13, 1998.



                                       56
<PAGE>


                                   SIGNATURES


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


                                          COASTAL  FINANCIAL CORPORATION

             Date:  December 21, 2002     By:  /s/ Michael C. Gerald
                                               --------------------------------
                                               Michael C. Gerald
                                               President/Chief Executive
                                                Officer
                                               (Duly Authorized Representative)


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


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

Date:        December 21, 2002                   December 21, 2002

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

Date:        December 21, 2002             Date: December 21, 2002


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

Date:        December 21, 2002             Date: December 21, 2002

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

Date:        December 21, 2002             Date: December 21, 2002

                                       57
<PAGE>



                                  CERTIFICATION

I, Michael C. Gerald, certify that:

     1.   I have reviewed  this annual report on Form 10-K of Coastal  Financial
          Corporation;

     2.   Based on my knowledge,  this annual report does not contain any untrue
          statement  of a  material  fact  or  omit to  state  a  material  fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this annual report;

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this  annual  report,  fairly  present in all
          material respects the financial  condition,  results of operations and
          cash flows of the registrant as of, and for, the periods  presented in
          this annual report;

     4.   The registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and have:

          a)   designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               annual report is being prepared;

          b)   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this annual report (the "Evaluation Date"); and

          c)   presented  in  this  annual  report  our  conclusions  about  the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit  committee  of  registrant's  board  of  directors  (or  persons
          performing the equivalent functions):

          a)   all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and

          b)   any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and

     6.   The  registrant's  other  certifying  officers and I have indicated in
          this annual report whether there were significant  changes in internal
          controls or in other factors that could significantly  affect internal
          controls  subsequent  to the  date  of  our  most  recent  evaluation,
          including   any   corrective   actions  with  regard  to   significant
          deficiencies and material weaknesses.



      Date: December 24, 2002                  /s/ Michael C. Gerald
           -----------------------             ---------------------------------
                                               Michael C. Gerald
                                               President/Chief Executive Officer



                                       58

<PAGE>


                                  CERTIFICATION


I, Jerry L. Rexroad, certify that:

     1.   I have reviewed  this annual report on Form 10-K of Coastal  Financial
          Corporation;

     2.   Based on my knowledge,  this annual report does not contain any untrue
          statement  of a  material  fact  or  omit to  state  a  material  fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this annual report;

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this  annual  report,  fairly  present in all
          material respects the financial  condition,  results of operations and
          cash flows of the registrant as of, and for, the periods  presented in
          this annual report;

     4.   The registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and have:

          a.   designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               annual report is being prepared;

          b.   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this annual report (the "Evaluation Date"); and

          c.   presented  in  this  annual  report  our  conclusions  about  the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit  committee  of  registrant's  board  of  directors  (or  persons
          performing the equivalent functions):

          a.   all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and

          b.   any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and

     6.   The  registrant's  other  certifying  officers and I have indicated in
          this annual report whether there were significant  changes in internal
          controls or in other factors that could significantly  affect internal
          controls  subsequent  to the  date  of  our  most  recent  evaluation,
          including   any   corrective   actions  with  regard  to   significant
          deficiencies and material weaknesses.



      Date: December 24, 2002                 /s/  Jerry L. Rexroad
           --------------------               ---------------------
                                              Jerry L. Rexroad
                                              Executive Vice
                                              President/Chief Financial Officer


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