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, 1999

                                       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                              (I.R.S. Employer I.D.)
----------------------------                              ----------------------
of incorporation 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) 448-5151

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 [  ]  NO [ X ] .

         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 ]

         As of December 21, 1999,  there were issued and  outstanding  6,754,421
shares of the registrant's Common Stock.

         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  21,
1999, was $84,430,263 (6,754,421 shares at $12.50 per share, which is the ending
bid price on December 21, 1999.). It is assumed for purposes of this calculation
that  none of the  registrant's  officers,  directors  and 5%  stockholders  are
affiliates.
<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

         1.  Portions of the Annual Report to  Stockholders  for the Fiscal Year
Ended September 30, 1999 (Parts I and II)

         2.  Portions  of the Proxy  Statement  for the 2000  Annual  Meeting of
Stockholders. (Part III)
<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
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.

         On  November  2,  1995,  Coastal  Financial  purchased  Granger-O'Harra
Mortgage,   Inc.("Granger-O'Harra")   and  merged  Granger-O'Harra  into  a  new
subsidiary,  Coastal  Federal  Mortgage,  Inc.  Coastal Federal  Mortgage,  Inc.
engaged in the  origination  of conforming  mortgage loans which are sold in the
secondary market,  generally on a servicing released basis.  During fiscal 1999,
Coastal Federal  Mortgage's  operations  were  discontinued.  Consequently,  the
Bank's mortgage banking function was expanded.

         On May 7, 1996, the  Corporation  formed Coastal  Technology  Services,
Inc. ("CTS").  CTS primarily develops  specialized  banking software for sale to
financial services companies. CTS's activities for fiscal 1999 was immaterial to
the  consolidated  financial  condition  and  results of  operations  of Coastal
Financial.

         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").  All of CREIC's operating activities are consolidated
into  Coastal  Federal  Savings  Bank.  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  ("CFHC") was
incorporated  in the state of  Delaware.  CFHC is a wholly owned  subsidiary  of
Coastal  Federal  Savings  Bank  ("CFSB")  and is a passive  investment  company
("PIC").  All of CFHC's  operating  activities  are  consolidated  into  Coastal
Federal  Savings Bank. CFHC engages in the management of its investment in CREIC
and the management of the related dividends received on that investment.

         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.
<PAGE>
         Coastal  Federal  conducts its business  from its main office in Myrtle
Beach, South Carolina, nine branch offices located in South Carolina, one branch
office located in Sunset Beach, North Carolina,  and a lending office located in
Wilmington,  North Carolina.  At September 30, 1999, Coastal Financial had total
assets of $713.0  million,  total deposits of $399.7  million and  stockholders'
equity of $41.2  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) 448-5151.

         Nine of Coastal  Federal's  eleven  offices are in Horry County,  South
Carolina.  The economy of the Horry County area depends primarily on tourism. To
the extent Horry County area  businesses  rely heavily on tourism for  business,
decreased  tourism would have a significant  adverse effect on Coastal Federal's
primary  deposit base and lending area.  Moreover,  Coastal Federal would likely
experience a higher  degree of loan  delinquencies  should the local  economy be
materially and adversely affected.

         Coastal Federal's  principal  business currently consists of attracting
deposits from the general public and using these funds to originate conventional
one-to-four family first mortgage loans, consumer, commercial business loans and
commercial  real estate loans.  Commercial  real estate loans as a percentage of
total loans have  increased  from 14.3% of total loans at September  30, 1995 to
23.3% of total loans at September 30, 1999.

         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,
1999, 4.6% and 8.9%, respectively,  of the Bank's total loan portfolio consisted
of commercial business and consumer loans.
<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,
                             -------------------------------------------------------------------------------------------------
                                         1997 Compared to 1996                                1998 Compared to 1997
                                           Increase (Decrease)                                  Increase (Decrease)
                                                  Due to                                              Due to
                             ----------------------------------------------      ---------------------------------------------
                                                        Rate/                                             Rate/
                                Rate       Volume       Volume         Net           Rate      Volume     Volume          Net
                             -------      -------      -------      -------      -------      -------     -------      -------
                                                                (Dollars in thousands)
<S>                          <C>          <C>          <C>          <C>          <C>          <C>         <C>          <C>
Interest-Earning Assets:
 Loans .................     $   502      $ 1,545      $    24      $ 2,071      $   195      $ 2,240     $    13      $ 2,448
 Mortgage-backed
  Securities/Investments        (193)       1,567         (100)       1,274         (436)       4,711        (992)       3,283
                             -------      -------      -------      -------      -------      -------     -------      -------

Total net change in
 income on interest-
 earning assets ........         309        3,112          (76)       3,345         (241)       6,951        (979)       5,731
                             -------      -------      -------      -------      -------      -------     -------      -------

Interest-Bearing
 Liabilities:
 Deposits ..............         200        1,742           19        1,961         (165)       1,089         (13)         911
 FHLB advances .........        (361)      (1,425)          73       (1,713)        (298)       1,501         (83)       1,120
 Repurchase
  agreements ...........          50          576          181          807          (47)       2,422        (100)       2,275
                             -------      -------      -------      -------      -------      -------     -------      -------
Total net change in
 expense on interest-
 bearing liabilities ...        (111)         893          273        1,055         (510)       5,012        (196)       4,306
                             -------      -------      -------      -------      -------      -------     -------      -------

Net change in net
 interest income .......     $   420      $ 2,219      $  (349)     $ 2,290      $   269      $ 1,939     $  (783)     $ 1,425
                             =======      =======      =======      =======      =======      =======     =======      =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                          1999 Compared to 1998
                                           Increase (Decrease)
                                                   Due to
                              ---------------------------------------------
                                                       Rate/
                                Rate      Volume       Volume        Net
                             -------      -------     -------      -------
<S>                          <C>          <C>         <C>          <C>
Interest-Earning Assets:
 Loans .................     $  (830)     $ 3,150     $   (93)     $ 2,227
 Mortgage-backed
  Securities/Investments         201        3,156          81        3,438
                             -------      -------     -------      -------

Total net change in
 income on interest-
 earning assets ........        (629)       6,306         (12)       5,665
                             -------      -------     -------      -------

Interest-Bearing
 Liabilities:
 Deposits ..............      (1,188)       1,148         108           68
 FHLB advances .........        (392)       2,564        (165)       2,007
 Repurchase
  agreements ...........         (49)         519          (5)         465
                             -------      -------     -------      -------
Total net change in
 expense on interest-
 bearing liabilities ...      (1,629)       4,231         (62)       2,540
                             -------      -------     -------      -------

Net change in net
 interest income .......     $ 1,000      $ 2,075     $    50      $ 3,125
                             =======      =======     =======      =======
</TABLE>
                                       4

<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,
                                ----------------------------------------------------------------------------------------------------
                                               1997                               1998                            1999
                                ------------------------------    ------------------------------    --------------------------------
                                 Average                Yield/     Average                Yield/     Average                  Yield/
                                 Balance     Interest    Rate      Balance     Interest    Rate      Balance    Interest       Rate
ASSETS
<S>                             <C>         <C>         <C>       <C>         <C>          <C>      <C>         <C>            <C>
 Loans .....................     $389,196   $ 33,769    8.70%     $414,938    $ 36,314     8.75%    $450,940    $ 38,541       8.55%
 Mortgage-backed
  Securities/Investments (1)      60,745       4,296    7.07       125,509       7,580     6.04      177,758      11,018       6.20

Total interest-earning
 assets ....................    $449,941    $ 38,065    8.46%     $540,447    $ 43,894     8.11%    $628,698    $ 49,559       7.88%
                                ========    ========    ====      ========    ========     ====     ========    ========       ====

LIABILITIES
 Transaction accounts ......     153,796       4,894    3.18       179,398       5,756     3.21      210,072       6,368       3.03
 Passbook accounts .........      41,143       1,015    2.47        36,102         924     2.56       33,310         962       2.89
 Certificate accounts ......     135,335       7,741    5.72       144,569       7,879     5.45      144,698       7,297       5.04
 FHLB advances .............      90,154       5,366    5.95       115,389       6,488     5.62      161,005       8,495       5.28
 Securities sold
  under repurchase
  agreements ...............      19,387       1,130    5.82        60,998       3,404     5.58       70,299       3,869       5.50
                                 --------    --------    ----      --------    --------     ----     --------    --------       ----

Total interest-bearing
 liabilities ...............    $439,815    $ 20,146    4.57%     $536,456    $ 24,451     4.60%    $619,384    $ 26,991       4.33%
                                ========    ========    ====      ========    ========     ====     ========    ========       ====

Net interest income/
 interest rate spread.................       $17,919    3.89%                  $19,443     3.51%                 $22,568       3.55%

Net yield on interest earning
 assets...............................                  4.03%                              3.64%                               3.67%

Ratio of interest earning assets
 to interest-bearing
 liabilities..........................                  1.03x                              1.03x                               1.03x
</TABLE>
-------------------------
 (1)     Includes short-term interest-bearing deposits and Federal funds sold.

                                       5
<PAGE>
Interest Rate Sensitivity of Net Portfolio Value

         The table below measures interest rate risk by estimating the change in
market value of the Bank's assets, liabilities,  and off-balance sheet contracts
in response to an  instantaneous  change in the general level of interest rates.
The  procedure  for  measuring  interest  rate risk was  developed by the OTS to
replace the "gap" analysis (the difference between  interest-earning  assets and
interest-bearing  liabilities  that  mature or reprice  within a  specific  time
period) used  previously by the OTS. The model first  estimates the level of the
Bank's market value of portfolio equity ("MVPE")  (market value of assets,  less
market value of  liabilities,  plus or minus the market value of any off-balance
sheet items) under the current rate environment.  In general,  market values are
estimated  by  discounting  the  estimated  cash  flows  of each  instrument  by
appropriate  discount rates.  The model then  recalculates the Bank's MVPE under
different  interest  rate  scenarios.  The  change in MVPE  under the  different
interest rate  scenarios  provides a measure of the Bank's  exposure to interest
rate risk. Due to OTS reporting requirements, classifications may vary from GAAP
reporting. Further, this report does not include assets owned by the Company not
included in the Bank. The data presented below is as of September 30, 1999. This
information  is an estimate and may not be indicative of actual market values or
the actual  changes in market  values  should  rates change  significantly  at a
future date.
<PAGE>
<TABLE>
<CAPTION>
                               -300          -200           -100                            +100            +200        +300
                               Basis         Basis          Basis           No              Basis           Basis        Basis
                               Points        Points         Points          Change          Points          Points       Points
                               ------        ------         ------          ------          ------          ------       ------
                                                                       (In thousands)
<S>                           <C>           <C>           <C>              <C>            <C>             <C>            <C>
ASSETS
Mortgage loans and
 securities...........        $632,916      $625,103      $616,782         $606,078       $592,608        $577,232       $560,958
Non-mortgage loans....          36,529        36,198        35,873           35,556         35,246          34,942         34,645
Cash, deposits and
 securities...........          56,384        55,193        54,006           52,827         51,651          50,480         49,314
Repossessed assets....              97            97            97               97             97              97             97
Premises and equipment          11,114        11,114        11,114           11,114         11,114          11,114         11,114
Other assets..........          17,128        20,124        23,963           29,067         34,006          38,653         43,063
                                ------        ------        ------           ------         ------          ------         ------
TOTAL.................         754,168       747,829       741,835          734,739        724,722         712,518        699,191
                               =======       =======       =======          =======        =======         =======        =======

LIABILITIES
Deposits..............        $401,004      $400,223      $399,451         $398,691       $397,944        $397,208       $396,483
Borrowings............         269,786       265,764       261,905          258,201        254,645         251,230        247,947
Other liabilities.....           8,023         8,023         8,023            8,023          8,023           8,023          8,023
                              --------      --------      --------         --------       --------        --------       --------
TOTAL.................         678,813       674,010       669,379          664,915        660,612         656,461        652,453
                               =======       =======       =======          =======        =======         =======        =======

OFF BALANCE SHEET
 POSITIONS............         $ 1,058          $492          $219             $304           $501            $823         $1,186

MARKET VALUE OF
 PORTFOLIO EQUITY.....         $76,413       $74,311       $72,675          $70,128        $64,611         $56,880        $47,924
</TABLE>
<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  $472.0  million at
September 30, 1999,  representing  approximately  66.0% of its total assets.  On
that date,  approximately  62.9% 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, 1999,  adjustable rate
loans  constituted  approximately  $329.5 million (or 69.8%) of the Bank's total
loan portfolio.  Therefore,  at such date, fixed rate loans comprised only 30.2%
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.

                                       6
<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,
                                  --------------------------------------------------------------------------------------------------
                                        1995                 1996                1997                1998                 1999
                                  -----------------  ------------------   -----------------   -----------------    -----------------
                                  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 ...............    $ 27,905     7.34% $ 34,566       8.65% $ 34,216      7.93% $ 31,261      7.09% $ 46,766      9.48%
 On existing property .......     228,881    60.23   231,373      57.89   240,268     55.69   254,161     57.63   265,069     53.73
 Income property (commercial)      54,401    14.31    73,295      18.34    97,680     22.64    95,420     21.63   114,931     23.29
Commercial business loans ...      19,610     5.16    14,831       3.71    10,939      2.54    14,848      3.37    22,818      4.62
Consumer loans:
  Mobile home ...............       1,204      .32     1,103        .28     1,291       .30       990       .22     1,166       .24
  Automobiles ...............       5,941     1.56     7,261       1.82     6,055      1.40     5,106      1.16     6,809      1.38
  Equity lines of credit ....      13,210     3.48    12,441       3.11    15,294      3.54    18,655      4.23    21,081      4.27
  Other .....................      28,887     7.60    24,776       6.20    25,714      5.96    20,567      4.67    14,738      2.99
                                 --------     ----  --------       ----  --------      ----  --------      ----  --------      ----

 Total loans and loans
       held for sale.........    $380,039   100.00% $399,646     100.00% $431,457    100.00% $441,008    100.00% $493,378    100.00%
                                            ======               ======              ======              ======              ======

 Less:
  Loans in process............    (17,178)           (18,589)             (15,084)            (11,292)            (15,315)
  Deferred loan(fees)costs....        (71)               286                  458                 702                 354
   Allowance for loan losses..     (3,578)            (4,172)              (4,902)             (5,668)             (6,430)
                                  -------            -------              -------             -------             -------



 Total loans and loans held
        for sale, net..........   $359,212          $377,171             $411,929            $424,750            $471,987
                                  ========          ========             ========            ========            ========
</TABLE>

                                       7


<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 15 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 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  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
or a flat yield curve 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 $64.8 million and $24.8  million,  respectively,  in fiscal 1998 and
1999.  Coastal  Federal  sold  approximately  $6.9  million  and $36.0  million,
respectively, of mortgages in 1998 and 1999 to FHLMC.

         At September  30, 1999,  approximately  $296.9  million or 62.9% 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 usually 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 current  permanent  loan
rate and varies depending on the terms of the loan and the loan amount. The Bank
customarily  requires personal  guaranties of payment from the principals of the
borrowing entities.

         The  interest  rate  on  commercial  real  estate   construction  loans
presently offered by the Bank is 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 is  dependent
largely upon the accuracy of the initial  appraisal of the  property's  value at
<PAGE>
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.
The  general  practice of Coastal  Federal is to provide 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,  1999,  approximately  $46.7  million or 9.5% of the
Bank's gross loan portfolio  consisted of construction loans on both residential
($31.8 million) and commercial properties ($14.9 million).  Undisbursed proceeds
on these loans amounted to $15.3 million at September 30, 1999.

         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,  1999,  this limited
Coastal Federal's aggregate  non-residential  real estate loans to approximately
$196.8  million.  At such time, the Bank had  non-residential  real estate loans
outstanding  of $114.9  million.  The Bank will  maintain  a level of these loan
types  within the  guidelines  set  forth.  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,
Florence County, the Pee Dee Region,  northeastern Georgetown County, all within
South Carolina and Brunswick County, North Carolina. Additionally, the Bank has,
on a limited basis, originated or purchased commercial real estate loans secured
by properties located in other parts of the Southeast.
<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 amounted to $43.8 million,  or 8.9%  of the total
loan portfolio, at September 30, 1999.

         Coastal Federal has marketed 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 on such loans than on 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.  In the latter case,
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, 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.

         Coastal Federal has been making commercial business loans since 1983 on
both a secured and unsecured  basis with terms which generally do not exceed one
year.  The majority of these loans have interest rates which 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, 1999,  the Bank had $22.8 million  outstanding  in
commercial  business loans,  which  represented  approximately  4.6% 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  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 or of limited use,  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.
<PAGE>
Loan Maturity

         The  following  table sets forth certain  information  at September 30,
1999  regarding  the  dollar  amount of loans  maturing  in the  Company's  loan
portfolio  based on their  contractual  terms to  maturity  but does not include
scheduled  payments or potential  prepayments.  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    More than    More than               More than
                                     One Year     Three Years  Five Years              Ten Years
                          One Year   Through      Through      Through                 Through         Over
                          or Less    Three Years  Five Years   Ten Years   Totals      Twenty Years    Twenty
                          -------    -----------  ----------   ---------   ------      ------------    ------
                                                           (In thousands)
<S>                       <C>         <C>         <C>         <C>         <C>         <C>             <C>
First mortgage loans .    $ 32,110    $  3,517    $  2,634    $ 14,300    $ 60,357    $177,526        $290,444
Other residential and
 non-residential .....      26,415      15,069       5,692      10,835      47,523       9,397         114,931
Equity lines of credit      21,081        --          --          --          --          --            21,081
Consumer loans .......      10,320       4,050       6,029         941       1,373        --            22,713
Commercial loans .....      15,674       2,139       1,970       1,135       1,727         173          22,818
      Total loans ....    $105,600    $ 24,775    $ 16,325    $ 27,211    $110,980    $187,096        $471,987
                          ========    ========    ========    ========    ========    ========        ========
</TABLE>
         The following table sets forth the dollar amount of all loans due after
one year at September 30, 1999 which have fixed  interest  rates and those which
have floating or adjustable interest rates.
<TABLE>
<CAPTION>


                                          Fixed         Floating or
                                          Rates     Adjustable Rates      Totals
                                          -----     ----------------      ------
                                                     (In thousands)
<S>                                       <C>            <C>            <C>
First mortgage loans ..............       $ 59,864       $198,470       $258,334
Other residential and
 non-residential ..................         18,461         70,055         88,516
Consumer loans ....................         11,950            443         12,393
Commercial loans ..................          5,954          1,190          7,144
     Total loans ..................       $ 96,229       $270,158       $366,387
                                          ========       ========       ========
</TABLE>
         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
<PAGE>
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
$500,000  require the approval by members of the Bank's Internal Loan Committee,
Director  Gerald and Executive  Vice  Presidents  Rexroad and Stalvey.  All loan
applications  greater  than  $2,000,000  require the approval of the Bank's Loan
Committee which consists of Directors  Clemmons,  Gerald,  Springs 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, must be approved
by a member of the Banks' Loan Committee.

         Loan applicants are promptly  notified of the decision of the Bank by a
letter setting forth the terms and conditions of the decision. If approved, such
terms and conditions include the amount of the loan, interest rate, amortization
term, a brief  description of real estate to be mortgaged to the Bank and notice
of requirement of insurance coverage necessary to protect the Bank's interest in
the collateral.

         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 require  escrow on these
premiums regardless of the loan-to-value ratio.

         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, 1999, the Bank was servicing  loans
sold to others with a principal balance of approximately $99.4 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, 1999, the Bank's consolidated loan portfolio included
purchased  loans of  approximately  $23.6  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.
<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,
                                                 -------------------------------------
                                                    1997          1998           1999
                                                ---------     ---------     ---------
                                                           (In thousands)

<S>                                              <C>           <C>             <C>
Loans receivable net, at the beginning of the
 period .....................................    $ 377,171     $ 411,929       424,750
                                                 ---------     ---------     ---------

Loans originated:
 Construction ...............................       45,986        62,805        72,456
 Residential ................................       59,289        70,588        96,510
 Nonresidential .............................       13,794        23,622        22,233
 Land .......................................       10,308        20,025        19,060
 Commercial business ........................       33,730        16,076        29,232
 Consumer ...................................       15,396        12,136        16,866
                                                 ---------     ---------     ---------
     Total loans originated .................      178,503       205,252       256,357
                                                 ---------     ---------     ---------

Loans purchased, primarily single
family residential mortgages ................        9,948        10,442         9,078
                                                 ---------     ---------     ---------

Loans sold ..................................      (44,160)      (71,674)      (60,781)
                                                 ---------     ---------     ---------

Loan principal repayments and other .........     (109,946)     (130,286)     (156,518)
                                                 ---------     ---------     ---------

Other .......................................          413          (913)         (899)
                                                 ---------     ---------     ---------

Loans receivable net, at end of period ......    $ 411,929     $ 424,750     $ 471,987
                                                 =========     =========     =========
</TABLE>
<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, 1999, the Company had residential loan origination  commitments of
approximately $5.6 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.  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.
<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,
                                                -------------------------------------------------
                                                1995       1996       1997       1998       1999
                                               ------     ------     ------     ------     ------
                                                             (Dollars in thousands)
<S>                                           <C>       <C>         <C>        <C>        <C>
Loans accounted for on a nonaccrual basis:
Real estate -
   Residential ...........................    $  999     $  307     $   71     $  222     $1,097
   Commercial ............................       134       --         --         --          267
   Commercial business ...................       154         60         99      1,962       --
   Consumer ..............................        36         78         87         73         67
                                              ------     ------     ------     ------     ------
    Total ................................     1,323        445        257      2,257      1,431
                                              ------     ------     ------     ------     ------

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

Restructured loans .......................      --         --         --         --          418
Real estate owned ........................       789        323        250         35         96
Other nonperforming
 assets ..................................      --         --         --         --         --
                                              ------     ------     ------     ------     ------
Total nonperforming
 assets ..................................    $2,112     $  768     $  507     $2,292     $1,945
                                              ======     ======     ======     ======     ======

Total nonaccrual loans to net
 loans ...................................       .36%       .12%       .06%       .54%       .30%

Total nonaccrual loans to total
 assets ..................................       .33%       .10%       .05%       .35%       .20%

Total nonperforming assets
 to total assets .........................       .53%       .17%       .10%       .36%       .27%

</TABLE>
----------
         In fiscal years 1997,  1998 and 1999,  interest income which would have
         been recorded approximated $9,000, $181,000 and $46,000,  respectively,
         had  nonaccruing  loans been current in accordance  with their original
         terms.  At September  30, 1998 and 1999 and during the years then ended
         there are no loans considered to be impaired.
<PAGE>
         The  allowance  for  uncollectible  interest  which is  netted  against
accrued interest  receivable  totaled $202,000 and $70,000 at September 30, 1998
and 1999, respectively.

         The  OTS has  adopted  various  changes  in its  regulations  regarding
problem  assets of  savings  institutions.  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.

         Coastal  Federal had three  individual  classified  assets in excess of
$700,000 as of September 30, 1999. At that date,  classified  assets amounted to
$11.6 million ($5.7 million  substandard;  $288,000 doubtful;  $61,000 loss; and
$5.5 million special  mention).  Substandard  assets consist  primarily of seven
commercial  real estate loans with  balances of  approximately  $2.8 million and
four residential  real estate loans with balances of approximately  $2.0 million
at  September  30,  1999.  Special  mention  assets  consist  primarily  of five
commercial  real estate  loans with  balances of  approximately  $4.1 million at
September 30, 1999.

         Allowance for Loan Losses.  In making loans,  the Bank  recognizes  the
fact that credit losses will be experienced  and that the risk of loss will vary
with, among other things, the type of loan being made, the  creditworthiness  of
the borrower over the term of the loan and, in the case of a secured  loan,  the
quality of the security for the loan.

         The Bank's  management  evaluates the need to establish  allowances for
losses on loans and other assets each year based on estimated losses on specific
loans and on any real estate held for sale or investment  when a finding is made
that a significant  decline in value has occurred.  Such  evaluation  includes a
review of all loans for which full  collectibility may not be reasonably assured
and considers, among other matters, the estimated market value of the underlying
collateral of problem  loans,  prior loss  experience,  economic  conditions and
overall  portfolio  quality.  Additions to the  allowance for losses are charged
against  earnings  in the  year  they  are  established.  The  Bank  established
<PAGE>
provisions for losses on loans for the years ended  September 30, 1997, 1998 and
1999 of $760,000, $865,000 and $750,000, respectively. As a result, the Bank has
a $6.4 million allowance for loan losses as of September 30, 1999. The allowance
as a percentage of loans  receivable was 1.36% at September 30, 1999 compared to
1.33%  at  September  30,  1998.  See  "Management's   Discussion  and  Analysis
--Non-Performing  Assets and  --Allowance  for Loan  Losses" in the 1999  Annual
Report to Stockholders attached hereto and incorporated by reference.

         While the Bank believes it has established  its existing  allowance for
loan losses in  accordance  with GAAP at  September  30,  1999,  there can be no
assurance  that  regulators,  when  reviewing  the Bank's loan  portfolio in the
future, will not request the Bank to significantly change its allowance for loan
losses, thereby affecting the Bank's financial condition and earnings.
<PAGE>
Loan Loss Allowance Analysis

    The following  table sets forth an 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 loss
realized has been charged or credited to the loan loss allowance as a charge-off
or recovery.
<TABLE>
<CAPTION>
                                                                       Year Ended September 30,
                                                       --------------------------------------------------------
                                                         1995      1996       1997          1998          1999
                                                       ------    ------      ------        ------        ------
                                                                       (Dollars in thousands)
<S>                                                    <C>       <C>         <C>           <C>           <C>
Allowance at beginning of
 period...........................................     $3,353    $3,578      $4,172        $4,902        $5,668
Allowance recorded on
 acquired loans...................................          -         -         110           109           112
Provision for loan losses.........................        202       790         760           865           750
                                                       ------    ------      ------        ------        ------
Recoveries:
 Residential real estate..........................        232        --          20             7           184
 Commercial real estate...........................         11        75          14             1            13
 Real estate construction.........................         --        --          --            --            --
 Consumer.........................................         12         7          38            56            55
                                                       ------    ------      ------        ------        ------
   Total recoveries...............................        255        82          72            64           252
                                                       ------    ------      ------        ------        ------

Charge-offs:
 Residential real estate..........................        206        24          46            28            15
 Commercial real estate...........................         18       216          --            17             8
 Real estate construction.........................         --        --          --            --            --
 Consumer.........................................          8        38         166           227           329
                                                       ------    ------      ------        ------        ------
   Total charge-offs..............................        232       278         212           272           352
                                                       ------    ------      ------        ------        ------
   Net charge-offs (recoveries) ..................        (23)      196         140           208           100
                                                       ------    ------      ------        ------        ------
 Allowance at end of period.......................     $3,578    $4,172      $4,902        $5,668        $6,430
                                                       ======    ======      ======        ======        ======

Ratio of allowance to net
 loans outstanding at the
 end of the period................................       1.00%     1.11%       1.19%         1.33%         1.36%

Ratio of net charge-offs (recoveries)
 to average loans outstanding
 during the period................................       (.01%)     .05%        .04%          .05%          .02%

</TABLE>
<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,
                           -----------------------------------------------------------------------------------------------------
                                     1995                                1996                              1997
                           -----------------------------     ----------------------------------------    -----------------------
                                     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 .........    $  803     .31%       72.03%      $     837      .37%     65.35%     1,064         .41%       63.56%
  Commercial ..........     2,371    4.36        24.17           2,875     3.80      22.34      3,261        2.78        28.52
  Consumer ............       404     .80         3.80             460     1.01      12.31        577        1.77         7.92
                           ------               ------       ---------              ------    -------                   ------
  Total allowance for
   loan losses ........    $3,578    1.00%      100.00%      $   4,172     1.11%    100.00%   $ 4,902        1.19%      100.00%
                           ======               ======       =========              ======    =======                   ======

<CAPTION>
                                      1998                                1999
                          -------------------------------   -------------------------------
                                     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
                          ------   --------      -----      ------     --------     -----
<S>                        <C>      <C>        <C>          <C>           <C>        <C>
Real Estate -- mortgage
  Residential .........    $1,375     .47%       67.60%     $   1,747      .56        66.01%
  Commercial ..........     3,685    3.30        26.32          4,191     3.04        29.18
  Consumer ............       608    2.82         6.08            492     2.17         4.81
                           ------               ------       --------                ------
  Total allowance for
   loan losses ........    $5,668    1.33%      100.00%      $  6,430     1.36%      100.00%
                           ======               ======       ========                ======
</TABLE>
<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  Benton,  Creel,  Bishop,
Springs, Clemmons and Gerald, Chief Financial Officer Rexroad and Executive Vice
Presidents  Graham,  Sherry  and  Stalvey  and Vice  President  Loehr.  The ALCO
Committee  acts  within  policies  established  by the  Board of  Directors.  At
September  30,  1999,  the Bank's  investment  portfolio  had a market  value of
approximately  $188.2 million.  The investment  securities  portfolio  consisted
primarily of U.S. Government agency securities and  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.
<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,
                                 ------------------------------------------------------------------------------------------
                                            1997                               1998                         1999
                                 --------------------------        --------------------------      ------------------------
                                 Amortized       Percent of         Amortized      Percent of                    Percent of
                                   Cost(1)       Portfolio            Cost(1)      Portfolio       Amortized     Portfolio
                                   -------       ---------            -------      ---------       ---------     ---------
                                                                      (Dollars in thousands)
<S>                                <C>               <C>             <C>                            <C>
U.S. Government agency
securities:
  FHLMC.......................     $  995            3.82%           $    --              --        $   --            --%
  FHLB........................     17,738           67.89%             8,840           90.64%        4,723         75.99%
  FFCB........................      7,391           28.29%               912            9.36            --            --
  FAMA........................         --           --                    --              --          1,492        24.01%

   Total......................    $26,124          100.00%           $ 9,752          100.00%       $6,215        100.00%
                                  =======          =======           =======          =======       ======        =======
</TABLE>

(1)  The market value of the Bank's investment  securities portfolio amounted to
     $26.2  million,  $9.8 million and $6.1 million at September 30, 1997,  1998
     and 1999, respectively.

         The  following  table  sets  forth the final  maturities  and  weighted
average yields of the securities at amortized cost at September 30, 1999.
<TABLE>
<CAPTION>

                                      Less Than               One to                Five to
                                       One Year             Five Years             Ten Years
                                 ----------------        -----------------     ------------------
                                 Amount     Yield        Amount      Yield      Amount     Yield
                                 ------     -----        ------      -----      ------     -----
                                                     (Dollars in thousands)
<S>                               <C>        <C>          <C>         <C>       <C>         <C>
U.S. Government and agency
Securities:
  FHLB .....................       --        --           2,770       6.86%     1,953       6.86
  FAMA .....................       --        --              --         --      1,492       5.93%

     Total .................      $--        --%         $2,770       6.86%    $3,445       6.46%
                                  ===        ===         ======       ====     ======       =====
</TABLE>
<PAGE>
         The  following  table  sets  forth  Coastal  Federal's  mortgage-backed
securities portfolio at amortized cost at the dates indicated.
<TABLE>
<CAPTION>
                                                                      September 30,
                               -----------------------------------------------------------------------------------------
                                            1997                          1998                           1999
                               ----------------------------      -----------------------     ---------------------------
                               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 ...................    $ 14,048            62.79%       $ 24,901         14.69%       $ 35,175         18.98%
  FNMA ....................       1,861             8.31          95,024         56.05         103,117         55.64
  GNMA ....................       6,471            28.90          49,586         29.26          23,349         12.60
  CMO .....................          --               --              --         --             23,680         12.78
                               --------           ------        --------        ------        --------        ------

   Total ..................    $ 22,380           100.00%        $169,511       100.00%       $185,321        100.00%
                               ========           ======         ========       ======        ========        ======
</TABLE>
---------

(1)  The  market  value  of  the  Bank's  mortgage-backed  securities  portfolio
     amounted to $23.0  million,  $170.2 million and $182.1 million at September
     30, 1997, 1998 and 1999, respectively.

         The  following  table sets forth the  maturities  and weighted  average
yields of the securities at September 30, 1999.
<TABLE>
<CAPTION>
                                         Less Than          One to          Five to              Ten Years
                                         One Year          Five Years       Ten Years         and Thereafter
                                    ----------------    -------------    --------------   -----------------------
                                    Amount     Yield    Amount  Yield    Amount   Yield     Amount         Yield
                                                                  (Dollars in thousands)
<S>                                   <C>               <C>                              <C>                <C>
Mortgage-Backed Securities:
  FHLMC ...................           $--         --%    $ --      --%      --    --%    $    35,175        7.30%
  FNMA ....................            --         --               --       --    --         103,117        7.12
  GNMA ....................                                --      --       --    --          23,349        7.48
  CMO .....................                                --      --       --    --          23,680        6.62
                                       ----      ---      ----    ----     ---    --     -----------        ----
Total .....................            $--        --%     $ --      --%    $--    --%    $   185,321        7.14%
                                       ====      ===      ====    ====      ===   ===    ===========        ====

</TABLE>
<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 FEDERAL    |

                     |                        |     +-------------------+
                     +------------------------+     |  COASTAL FEDERAL  |
                                 |      |           |      HOLDING      |
                                 |      |-----------|   CORPORATION     |
                                 |                  +-------------------+
                                 |                  +-------------------+
                                 |                  |   COASTAL REAL    |
                                 |                  | ESTATE INVESTMENT |
                     +------------------------+     |   CORPORATION     |
                     |                        |     +-------------------+
                     |     COASTAL MORTGAGE   |
                              BANKERS*        |
                     |                        |
                     +------------------------+


+------------------+  +-----------------+  +---------------+
|   North Beach    |  |  Shady Forest   |  |  Sherwood     |
| Investments, Inc.|  |  Development    |  |  Development  |
|                  |  |  Corporation    |  |  Corporation  |
|                  |  |                 |  |               |
+------------------+  +-----------------+  +---------------+


 +----------------+   +-------------------+
 | Ridge          |   |  501 Development  |
 | Development    |   |  Corporation      |
 | Corporation    |   |                   |
 |                |   |                   |
 +----------------+   +-------------------+
--------------
*        Inactive
(1)      First  tier  operating  subsidiary  of  Coastal  Federal  Savings  Bank
         consolidated   with  Coastal   Federal   Savings  Bank  for  regulatory
         reporting.  On December 10, 1998 Coastal Federal exchanged its stock of
         Coastal Real Estate Investment  Corporation for 100% of the outstanding
         stock of Coastal Federal Holding Corporation.

<PAGE>
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 on a short-term  basis to compensate
for reductions in the availability of funds from other sources. They may also be
used on a longer term basis 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.



<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,
                                   -------------------------------------------------------------------------------------------------
                                              1997                              1998                              1999
                                   ----------------------------      ----------------------------     ------------------------------
                                            Percent                            Percent                           Percent
                                               of      Increase                  of     Increase                   of      Increase
                                   Amount     Total   (Decrease)     Amount     Total  (Decrease)     Amount      Total   (Decrease)
                                   ------     -----   ----------     ------     -----  ----------     ------      -----   ----------
                                                                      (Dollars in thousands)
<S>                              <C>          <C>    <C>           <C>          <C>    <C>           <C>          <C>     <C>
Transaction accounts:
  NOW checking ..................$  38,773    11.17% $   3,119     $  42,434    10.99% $   3,661     $  50,774    12.70%  $   8,340
  Commercial checking ...........   23,765     6.85      3,839        27,285     7.06      3,520        37,256     9.32       9,971
                                 ---------    -----  ---------     ---------    -----  ---------     ---------    -----   ---------
Total transaction accounts ......   62,538    18.02      6,958        69,719    18.05      7,181        88,030    22.03      18,311
                                 ---------    -----  ---------     ---------    -----  ---------     ---------    -----   ---------
Money market demand accounts ....  104,476    30.10     19,479       124,207    32.15     19,731       138,188    34.58      13,981
Savings accounts ................   39,445    11.36     (3,395)       37,242     9.64     (2,203)       39,212     9.81       1,970

Fixed-rate certificates
(original maturity):
 3 months .......................    1,826      .53       (296)        2,045      .53        219         4,440     1.11       2,395
 6 months .......................   22,185     6.39     (1,294)       25,563     6.62      3,378        23,367     5.85      (2,196)
 9 months .......................    7,342     2.12     (1,951)        5,396     1.40     (1,946)        5,220     1.31        (176)
 12 months ......................   43,901    12.64     (3,158)       46,121    11.94      2,220        37,955     9.50      (8,166)
 18 months ......................   32,250     9.29     11,269        35,140     9.10      2,890        16,016     4.01     (19,124)
 24 months ......................    7,390     2.13      3,341        17,348     4.49      9,958        19,104     4.78       1,756
 30 months ......................    4,809     1.39      2,620         6,558     1.70      1,749        13,677     3.42       7,119
 36 months ......................    9,215     2.65        271         4,740     1.23     (4,475)        4,622     1.16        (118)
 48 months ......................    5,664     1.63        936         6,852     1.77      1,188         4,870     1.22      (1,982)
 96 months ......................       27      .01          1            29      .01          2            31      .01           2
                                 ---------    -----  ---------     ---------    -----  ---------     ---------    -----   ---------
                                   134,609    38.78     11,739       149,792    38.77     15,183       129,302    32.35     (20,490)
                                 ---------    -----  ---------     ---------    -----  ---------     ---------    -----   ---------
Variable rate certificates:
 (original maturity)
 18 months ......................    3,678     1.06       (915)        3,137      .81       (541)        2,716      .68        (421)
 30 months ......................    2,370      .68       (180)        2,224      .58       (146)        2,227      .56           3
                                 ---------    -----  ---------     ---------    -----  ---------     ---------    -----   ---------
Total variable ..................    6,048     1.74     (1,095)        5,361     1.39       (687)        4,943     1.24        (418)
                                 ---------    -----  ---------     ---------    -----  ---------     ---------    -----   ---------
Total certificates ..............  140,657    40.52     11,644       155,153    40.16     14,496       134,243    33.59     (20,910)
                                 ---------    -----  ---------     ---------    -----  ---------     ---------    -----   ---------
Total deposits ..................$ 347,116   100.00% $  33,686     $ 386,321   100.00% $  39,205     $ 399,673   100.00%    $13,352
                                 =========   ======  =========     =========   ======  =========     =========   ======     =======

</TABLE>
<PAGE>
Time Deposits by Maturity and Rate

    The following table sets forth the amount and maturities of time deposits at
September 30, 1999.
<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%...........      $107,873     $19,785        $4,870          $  1,123           --      $133,651
 6.00 - 8.00%...........           217          --            --                --           --           217
 8.01 - 10.00%..........            45          --           330                --           --           375
                              --------     -------        ------            ------        -----      --------

   Total................      $108,135     $19,785        $5,200            $1,123           --      $134,243
                              ========     =======        ======            ======        =====       =======
</TABLE>

    The  following  table sets forth the amount and  maturities of time deposits
with balances of $100,000 or more at September 30, 1999. Included in certificate
accounts  were $5.3 million at September  30, 1999,  originated by brokers for a
fee.
<TABLE>
<CAPTION>

                                         Amount Due
Within             Over 3                 Over 6                Over 12
3 months       through 6 months         through 12 months        Months         Total
--------       ----------------         -----------------        ------         -----
                                        (In thousands)
<S>               <C>                       <C>                   <C>          <C>
$4,692            $21,514                   $8,935                $6,772       $41,913
======            =======                   ======                ======       =======

</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, 1999,
Coastal  Federal had advances  totaling  $164.0 million from the FHLB of Atlanta
due on various  dates  through  2008 with a weighted  average  interest  rate of
5.33%.
<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 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 borrowings  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, 1999, the
Bank had  $92.1  million  in  broker  repurchase  agreements.  The Bank has also
offered  repurchase  agreements to its customers  which are borrowings  that are
collateralized by underlying government  securities.  At September 30, 1999, the
Bank had $4.8 million outstanding in customer repurchase agreements.

         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,
                                               -------------------------------
                                               1997        1998          1999
                                               ----        ----          ----
                                                   (Dollars in thousands)
<S>                                          <C>          <C>          <C>
Outstanding balance:
  Securities sold under agreements
    to repurchase:
    Customer ............................    $  2,666     $  4,214     $  4,848
    Broker ..............................        --         55,000        2,100
  Short-term FHLB advances (1) ..........      68,620      120,235      118,000

Weighted average rate paid on:
  Securities sold under agreements
    to repurchase:
    Customer ............................        3.16%        3.43%        3.37%
    Broker ..............................        --           5.69         5.53
  Short-term FHLB advances (1) ..........        5.60         5.10         5.14
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                          <C>          <C>          <C>
Maximum amount of borrowings outstanding
  at any month end:
  Securities sold under agreements
    to repurchase:
    Customer ............................    $  3,257     $  4,214     $  4,848
    Broker ..............................      37,516       86,250       92,100
  Short-term FHLB advances (1) ..........      75,020      120,235      147,135
Approximate average short-term borrowings
  outstanding with respect to:
  Securities sold under agreements
    to repurchase:
    Customer ............................    $  2,100     $  2,989     $  3,199
    Broker ..............................      17,200       56,262       67,100
  Short-term FHLB advances (1) ..........      74,023       92,369      118,276


Weighted average rate paid on:
  Securities sold under agreements
    to repurchase:
    Customer ............................        3.36%        3.61%        3.09%
    Broker ..............................        5.60         5.58         5.30
  Short-term FHLB advances (1) ..........        5.60         5.10         5.14
</TABLE>
------
(1) Short-term FHLB advances  include various advances which are subject to call
    by FHLB.

Competition

         As of  September  30, 1999,  Coastal  Federal held a 13.4% share of the
deposits in Horry County S.C. according to Sheshunoff Information Services, Inc.
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 70 offices of other financial  institutions in its primary market area.
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, 1999, the Company had 220 full-time  Associates and
20 part-time  Associates.  The  Associates  are not  represented by a collective
bargaining  unit.  The Bank  believes its  relationship  with its  Associates is
excellent.
<PAGE>
                           REGULATION AND SUPERVISION

General

         As a savings and loan holding  company,  the Corporation is required by
federal law to file reports  with,  and  otherwise  comply  with,  the rules and
regulations  of  the  OTS.  The  Bank  is  regulated,  examined  and  supervised
extensively by the OTS, as its primary federal  regulator,  and the FDIC, as the
deposit  insurer.  The Bank is a member of the Federal Home Loan Bank System and
its  deposit  accounts  are  insured  up to  applicable  limits  by the  Savings
Association  Insurance Fund managed by the FDIC. The Bank must file reports with
the OTS and the FDIC  concerning  its  activities  and  financial  condition  in
addition  to  obtaining   certain   approvals   before   entering  into  certain
transactions   such  as  mergers  with,  or   acquisitions   of,  other  savings
institutions.  The OTS and the FDIC  examine the Bank  periodically  to test the
Bank's safety and soundness and compliance with various regulatory requirements.
This  regulation and supervision  establishes a comprehensive  framework for the
Bank's  activities  and is intended  primarily to protect the insurance fund and
the Bank's depositors.

         The regulatory  structure also gives regulatory  authorities  extensive
discretion in their  supervisory  and  enforcement  activities  and  examination
policies,   including   policies   regarding   asset   classification   and  the
establishment of adequate loan loss reserves for regulatory purposes. Any change
in regulatory  requirements  and  policies,  whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Corporation,  the Bank and
their operations.  The description of statutory  provisions and regulations that
apply to the  Corporation  and the Bank  discussed  below and  elsewhere in this
prospectus is not a complete  description  of them and their effects on the Bank
and the Corporation.

Holding Company Regulation

         The  Corporation is a  nondiversified  unitary savings and loan holding
company under federal law. Formerly,  a unitary savings and loan holding company
was not  restricted  as to the types of  business  activities  in which it could
engage,  provided  that its  subsidiary  savings  association  continued to be a
qualified  thrift  lender.   See  "--Federal  Savings   Institution   Regulation
--Qualified Thrift Lender Test." Recent legislation,  however, restricts unitary
savings and loan  holding  companies  not  existing or applied for before May 4,
1999 to activities  permissible for a financial holding company as defined under
the  legislation,  including  insurance  and  securities  activities,  and those
permitted for a multiple savings and loan holding company, as described below.
The Corporation qualifies for the grandfather.

         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 and from acquiring or retaining
control of a depository  institution that is not insured by the FDIC,  unless it
first  receives the approval of the OTS. In evaluating  applications  by holding
companies to acquire savings  institutions,  the OTS considers the financial and
managerial  resources  and  future  prospects  of the  holding  company  and the
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.
<PAGE>
         The OTS may not  approve  any  acquisition  that  results in a multiple
savings and loan holding company controlling  savings  institutions in more than
one state.  However,  there are two exceptions to this general rule.  First, the
approval of  interstate  supervisory  acquisitions  by savings and loan  holding
companies.  Second, the acquisition of a savings institution in another state if
the laws of the state of the target savings institution  specifically permit the
acquisition.  The  states  vary in the extent to which  they  permit  interstate
savings and loan holding company acquisitions.

         Although  savings  and loan  holding  companies  do not  have  specific
capital  requirements  or specific  restrictions  on the payment of dividends or
other capital  distributions,  federal  regulations place these  restrictions on
subsidiary savings institutions as described below. The Bank must notify the OTS
30 days before  declaring  any dividend to the  Corporation.  In  addition,  the
financial impact of a holding company on its subsidiary  institution is a matter
that is  evaluated  by the OTS,  which has  authority  to order the  stoppage of
activities or divestiture of subsidiaries  deemed to pose a threat to the safety
and soundness of the institution.

Federal Savings Institution Regulation

         Business Activities. The activities of federal savings institutions are
governed by federal law and  regulations.  These laws and regulations  delineate
the  nature and  extent of the  activities  in which  federal  associations  may
engage. In particular,  many types of lending authority for federal  association
are limited to a specified percentage of the institution's capital or assets.

         Capital  Requirements.  The OTS  capital  regulations  require  savings
institutions to meet three minimum capital  standards:  a 1.5% tangible  capital
ratio, a 3% leverage ratio and an 8% risk-based  capital ratio.  Effective April
1,  1999,  however,   the  minimum  leverage  ratio  increased  to  4%  for  all
institutions  except  those  with the  highest  rating on the  CAMELS  financial
institution  rating system. 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  financial  institution  rating  system)  and,  together  with the
risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The
OTS  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  requires an institution to maintain
Tier 1 or core capital to risk-weighted  assets of at least 4% and total capital
to risk-weighted assets of at least 8%. Total capital is defined as core capital
and supplementary  capital.  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 OTS capital regulation based
on the risks believed  inherent in the type of asset.  Core or Tier 1 capital is
defined  as  common   stockholders'   equity  and  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  include  cumulative   preferred  stock,
long-term  perpetual   preferred  stock,   mandatory   convertible   securities,
subordinated  debt and intermediate  preferred stock, and the allowance for loan
and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall,
the amount of  supplementary  capital  included as part of total capital  cannot
exceed 100% of core capital.
<PAGE>
         The  capital   regulations  also  incorporate  an  interest  rate  risk
component.  Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating  their
risk-based capital requirements.  Presently, the OTS has deferred implementation
of the interest rate risk component. At September 30, 1999, the Bank met each of
its  capital  requirements.  See Note 12  to  Notes  to  Consolidated  Financial
Statements for further information.

         Prompt  Corrective  Regulatory  Action.  The  OTS 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 or  core  capital  to
risk-weighted assets of less than 4%, or a ratio of core capital to total assets
of less than 4%, or 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 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."  Although there is a narrow exception, the OTS is required to
appoint  a  receiver  or  conservator  for an  institution  that is  "critically
undercapitalized"  if the institution is critically  undercapitalized on average
during the calendar quarter 270 days after becoming critically undercapitalized.
The regulation also provides that an institution must file a capital restoration
plan with the OTS within 45 days of the date that the OTS notifies it 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 immediately
apply  to an  undercapitalized  institution,  including,  but  not  limited  to,
increased   monitoring  by  regulators  and  restrictions  on  growth,   capital
distributions  and  expansion.  The OTS  could  also take any one of a number of
discretionary  supervisory  actions,  including  issuing a capital directive and
replacing senior executive officers and directors.

         Insurance  of  Deposit  Accounts.  Deposits  of the Bank are  presently
insured  by the  Savings  Association  Insurance  Fund.  The  FDIC  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
semiannually  by the FDIC and  currently  range from zero  basis  points for the
healthiest institutions to 27 basis points for the riskiest.

         In addition to the assessment for deposit  insurance,  institutions are
required to pay on bonds issued in the late 1980s by the  Financing  Corporation
to  recapitalize  the  predecessor to the Savings  Association  Insurance  Fund.
During 1998, Financing  Corporation  payments for Savings Association  Insurance
Fund members  approximated 6.10 basis points,  while Bank Insurance Fund members
paid 1.22  basis  points.  By law,  there  will be equal  sharing  of  Financing
Corporation  payments between the members of both insurance funds on the earlier
of January 1, 2000 or the date the two insurance funds are merged.
<PAGE>
         The FDIC may terminate an institution's  deposit  insurance if it finds
that the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue  operations or has violated any applicable law,
regulation,  rule,  order or  condition  imposed  by the  FDIC or the  OTS.  The
management  of the Bank does not know of any  practice,  condition  or violation
that might lead to termination of its deposit insurance.

         Financial  Institution  Modernization  Legislation.   Recently  enacted
federal  legislation  designed to  modernize  the  regulation  of the  financial
services  industry  expands the ability of bank  holding  companies to affiliate
with other types of financial services companies such as insurance companies and
investment banking companies.  However,  the legislation provides that companies
that acquire control of a single savings  association after May 4, 1999 (or that
filed an  application  for that purpose after that date) are not entitled to the
unrestricted  activities formerly allowed for a unitary savings and loan holding
company. Rather, these companies will have authority to engage in the activities
permitted "a financial  holding  company" under the new  legislation,  including
insurance  and  securities-related  activities,  and  the  activities  currently
permitted for multiple savings and loan holding companies,  but generally not in
commercial   activities.   The   authority   for   unrestricted   activities  is
grandfathered  for  unitary  savings  and loan  holding  companies,  such as the
Corporation,  that  existed  before  May 4, 1999.  However,  the  authority  for
unrestricted  activities  would  not  apply to any  company  that  acquired  the
Corporation.

         Loans to One Borrower.  Federal law provides that savings  institutions
must generally follow 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, 1999,  the Bank's limit on loans to one borrower was $7.4 million.  The Bank
may apply to have this amount  increased to $14.8 million for borrowers who have
loans  secured by  residential  lending.  At September  30,  1999,  the Bank had
applied for this limit  increase for three  borrowers  with a maximum  aggregate
exposure to the three  borrowers of $24.6  million.  At September 30, 1999,  the
Bank's largest aggregate amount of loans to one borrower was $11.8 million,  all
of which  was  performing  according  to  their  terms.  The  Bank had  received
permission to increase the loan to one borrower limit on this borrower.

         Qualified Thrift Lender Test. Federal law 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" in
certain "qualified thrift investments" in at least 9 months out of each 12 month
period.  "Portfolio  assets" equals total assets less specified liquid assets up
to 20% of  total  assets,  intangibles,  including  goodwill,  and the  value of
property used to conduct business.  "Qualified thrift investments" are primarily
residential mortgages and related investments, including certain mortgage-backed
securities.

         A savings institution that fails the qualified thrift lender test faces
certain  operating  restrictions  and may be required to convert to a commercial
bank  charter.  As of September  30, 1999,  the Bank complied with 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."
<PAGE>
         Limitation on Capital Distributions. OTS regulations impose limitations
upon  all  capital  distributions  by  a  savings  institution,  including  cash
dividends,  payments to repurchase  its shares and payments to  stockholders  of
another  institution in a cash-out merger.  The rule effective through the first
quarter of 1999  established  three tiers of institutions  based primarily on an
institution's   capital  level.  A  Tier  I  institution  exceeded  all  capital
requirements  before and after a proposed capital  distribution and has not been
advised  by the  OTS  that it  needs  more  than  normal  supervision.  A Tier I
institution  could,  after first giving notice to but without obtaining approval
of the OTS,  make capital  distributions  during the calendar  year equal to the
greater of 100% of its net  earnings to date during the  calendar  year plus the
amount that would have reduced by one-half  the excess  capital over its capital
requirements at the beginning of the calendar year, or 75% of its net income for
the previous four quarters.  Any additional capital distributions required prior
regulatory approval.

         Effective  April 1, 1999,  the OTS's  capital  distribution  regulation
changed.  Under the new regulation,  an application to and the prior approval of
the OTS is required before any capital  distribution if the institution does not
meet  the  criteria  for  "expedited   treatment"  of  applications   under  OTS
regulations (generally, compliance with all capital requirements and examination
ratings in one of 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 OTS. If an  application is not required,
the  institution   must  still  give  advance  notice  to  OTS  of  the  capital
distribution. If the Bank's capital fell below its regulatory requirements or if
the OTS  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 OTS could prohibit a proposed capital distribution, which would otherwise be
permitted by the regulation if the OTS determines that the distribution would be
an unsafe or unsound practice.

         Liquidity. The Bank is required to maintain an average daily balance of
specified  liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term  borrowings.
This liquidity requirement is currently 4%, but may be changed from time to time
by the OTS to any amount within the range of 4% to 10%.  Monetary  penalties may
be imposed for failure to meet these liquidity requirements.  The Bank met these
requirements at September 30, 1999.

         Assessments.  Savings  institutions  are required to pay assessments to
the OTS 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 Bank's  assessments  for the  fiscal  year ended
September 30, 1999 totaled $126,000.

         Branching.   OTS  regulations   permit  federally   chartered   savings
associations to branch nationwide under certain conditions.  Generally,  federal
savings  associations  may  establish  interstate  networks  and  geographically
diversify  their  loan  portfolios  and  lines of  business.  The OTS  authority
preempts  any state law  purporting  to regulate  branching  by federal  savings
associations.
<PAGE>
         Transactions  with Related  Parties.  The Bank's authority to engage in
transactions  with  "affiliates"  is  limited  by  federal  law.  Generally,  an
affiliate  is any company  that  controls  or is under  common  control  with an
institution,   including  the  Corporation.  The  aggregate  amount  of  covered
transactions with any individual  affiliate is limited to 10% of the capital and
surplus of the savings institution. The 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%  stockholders,  as well as entities within the control of these persons,
is also  governed  by  federal  law.  These  persons  are often  referred  to as
"insiders"  of a company.  Loans to  insiders  are  required to be made on terms
substantially the same as those offered to unaffiliated  individuals and may 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  OTS  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 a receivership or  conservatorship,  or to 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  serious  cases.  The
FDIC has the authority to recommend to the Director of the OTS that  enforcement
action to be taken with respect to a particular savings  institution.  If action
is not  taken by the  Director,  the FDIC has  authority  to take  action  under
certain  circumstances.  Federal law also  establishes  criminal  penalties  for
certain violations.

         Standards for Safety and Soundness.  The federal banking  agencies have
adopted Interagency  Guidelines  prescribing Standards for Safety and Soundness.
The  guidelines  set forth the safety and soundness  standards  that the federal
banking  agencies  use to identify  and address  problems at insured  depository
institutions  before capital  becomes  impaired.  If the OTS  determines  that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may  require  the  institution  to  submit  an  acceptable  plan to  achieve
compliance with the standard.
<PAGE>
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 of
Atlanta  provides a central credit facility  primarily for member  institutions.
The Bank,  as a member of the Federal Home Loan Bank of Atlanta,  is required to
acquire  and hold  shares of  capital  stock in that  Federal  Home Loan Bank of
Atlanta 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 of Atlanta,  whichever  is greater.  The Bank was in  compliance  with this
requirement  with an  investment  in Federal Home Loan Bank of Atlanta  stock at
September 30, 1999, of $8.2 million.  Federal Home Loan Bank of Atlanta advances
must be secured by specified types of collateral.

         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.

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 require
that reserves be maintained against aggregate  transaction  accounts as follows:
for accounts  aggregating  $46.5  million or less,  subject to adjustment by the
Federal  Reserve  Board  the  reserve   requirement  is  3%;  and  for  accounts
aggregating  greater  than $46.5  million,  the  reserve  requirement  is $1.395
million plus 10%,  subject to adjustment by the Federal Reserve Board between 8%
and 14%, against that portion of total  transaction  accounts in excess of $46.5
million. The first $4.9 million of otherwise reservable balances, as adjusted by
the Federal Reserve Board, are exempted from the reserve requirements.  The Bank
complies with the foregoing requirements.

Community Reinvestment Act

         Under  the  Community   Reinvestment   Act,  as   implemented   by  OTS
regulations,  a savings association has a continuing and affirmative  obligation
consistent  with its safe and sound  operation  to help meet the credit needs of
its entire  community,  including  low and moderate  income  neighborhoods.  The
Community  Reinvestment Act does not establish specific lending  requirements or
programs  for  financial   institutions  nor  does  it  limit  an  institution's
<PAGE>
discretion  to develop the types of products and  services  that it believes are
best  suited  to  its  particular  community,   consistent  with  the  Community
Reinvestment Act. The Community Reinvestment Act requires the OTS, in connection
with its examination of an institution,  to assess the  institution's  record of
meeting the credit needs of its  community  and to take such record into account
in  its  evaluation  of   applications  by  such   institution.   The  Community
Reinvestment  Act  requires  public  disclosure  of an  institution's  Community
Reinvestment Act rating.  The Bank's latest  Community  Reinvestment Act rating,
received from the OTS was
"satisfactory."


                                    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 page 25 note 10 of the Company's Annual Report to
Stockholders for the fiscal year ended September 30, 1999.

         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
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%.  For  years
beginning  before  December  31,  1995,  the excess of the tax bad debt  reserve
deduction  using the percentage of taxable income method over the deduction that
would  have  been  allowable  under  the  experience  method  was  treated  as a
<PAGE>
preference  item for purposes of computing  the AMTI.  In addition,  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  (determined  without  regard to this  preference  and prior to
reduction for net operating losses).  For taxable years beginning after December
31, 1986, and before January 1, 1996, an environmental tax of .12% of the excess
of  AMTI  (with   certain   modification)   over  $2.0  million  is  imposed  on
corporations,  including  the Bank,  whether or not an  Alternative  Minimum Tax
("AMT") is paid.

         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%. 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 10 of the Notes to Consolidated Financial Statements.


<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, 1999.
<TABLE>
<CAPTION>

                                                  Total Investment
                                                  Including Land,             Net Book            Approximate
                                     Year         Building, Furni-           Value as of          Square         Owned/
Location                            Opened        ture and Fixtures            9/30/99            Footage        Leased
--------                            ------        -----------------            -------            -------        ------
                                                              (Dollars in thousands)
<S>                                 <C>                   <C>                    <C>              <C>
Main Office
2619 Oak St.                        1980                  $9,534                 $3,527           25,000         Owned
Myrtle Beach, SC (1)

Dunes Office
7500 North Kings Hwy                1971                     647                    270            2,000         Owned
Myrtle Beach, SC

Ocean Drive Office
521 Main Street                     1973                     960                    532            4,100         Owned
North Myrtle Beach, SC

Surfside Office
112 Highway 17 South                1975                   1,435                  1,007            3,300         Owned
 & Glenns Bay Road
Surfside Beach, SC

Conway Office
310 Highway 378                     1976                     799                    243            2,882         Owned
Conway, SC

Socastee Office
1 Cimerron Drive                    1981                     892                    376            2,275         Owned
Myrtle Beach, SC

Murrells Inlet Office
Highway 17 South                    1986                     954                    569            3,450         Owned
Murrells Inlet, SC

Waccamaw Medical Pk Office
7000 Waccamaw Medical Pk Rd         1986                     566                    289            1,450         Owned
Conway, SC

Florence Office
1385 Alice Drive                    1996                     366                    230            2,500         Leased
Florence, SC

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

                                                  Total Investment
                                                  Including Land,             Net Book            Approximate
                                     Year         Building, Furni-           Value as of          Square         Owned/
Location                            Opened        ture and Fixtures            9/30/99            Footage        Leased
--------                            ------        -----------------            -------            -------        ------
                                                              (Dollars in thousands)
<S>                                 <C>                   <C>                    <C>              <C>
Coastal Investor Services, Inc.
2619 Oak Street                     1987                     129                     25             N/A           N/A
Myrtle Beach, SC

Coastal Federal Mortgage, Inc.
2619 Oak Street                     1995                     173                     73            1,038         Leased
Myrtle Beach, SC 29577

South Brunswick Office
1625 Seaside Road S.W.             1998                    1,010                    933            3,000         Owned
Sunset Beach, NC

Mall Plaza                         1997                    1,156                  1,102           17,500         Owned
504 27th Avenue North
Myrtle Beach, SC

Conway Rental Property             1999                      540                    539           10,000         Owned
1515 4th Avenue
Conway, SC 29526

Little River Office                1999                    1,074                  1,074           2,300          Owned
1602 Highway 17
Little River, SC 29566

Carolina Forest Office  (under construction)                 416                    416           3,500          Owned
3894 Renee Drive
Myrtle Beach, SC 29579

Wilmington Loan Office             1999                        6                      6           1,400          Leased
5710 Oleander Drive, Suite 209
Wilmington, NC 28403
</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 $11.2 million at September 30, 1999.  See Note 5 of 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.
<PAGE>
Year 2000 Compliance

The Company is a user of computers,  computer  software and equipment  utilizing
embedded  microprocessors that will be effected by the year 2000 issue. The year
2000 issue exists because many computer  systems and  applications use two-digit
date  fields  to  designate  a  year.   As  the  century  date  change   occurs,
date-sensitive  systems may recognize the year 2000 as 1900, or not at all. This
inability  to  recognize  or  properly  treat the year 2000 may cause  erroneous
results, ranging from system malfunctions to incorrect or incomplete processing.

The Company's Year 2000 Committee  consists of Senior management  members of the
Company.  The  Committee  makes  a  monthly  progress  report  to the  Board  of
Directors.  The Committee has developed and is implementing a comprehensive plan
to  make  all  information  and  non-information  technology  assets  year  2000
compliant. The plan is comprised of the following phases:

1.       Awareness - Educational  initiatives  on year 2000 issues and concerns.
         This phase is ongoing,  especially as it relates to informing customers
         of the Company's year 2000 preparedness.

2.       Assessment - Inventory of all technology  assets and  identification of
         third-party vendors and service providers.  This phase was completed as
         of August 31, 1998.

3.       Renovation  - Review of vendor and service  providers  responses to the
         Company's  year 2000 inquires and  development  of a follow-up plan and
         timeline. This phase was completed as of October 15, 1998.

4.       Validation - Testing all systems and third-party  vendors for year 2000
         compliance. The Company has currently completed this phase of its plan.
         A third-party  service bureau  processes all customer  transactions and
         has completed  upgrades to its systems to be year 2000  compliant.  The
         Company  tested the  third-party  systems by  reviewing  the results of
         transactions  of  different  test dates  before and after the year 2000
         date  change  covering  all of the  applications  used by the  Company.
         Testing was completed as of November 16, 1998.  The results of the test
         were all positive.  Other parties whose year 2000 compliance may effect
         the Company include the FHLB of Atlanta,  brokerage firms, the operator
         of the  Company's  ATM network and the  Company's  401K  administrator.
         These   third-parties  have  indicated  their  compliance  or  intended
         compliance.  Where it is possible to do so, the Company has tested with
         these third-parties.  All the test results were positive. Where testing
         is not possible,  the Company will rely on certifications  from vendors
         and service providers.

5.       Implementation - Replacement or repair of non-compliant  technology has
         been completed.

The Company  estimates its total cost to replace  computer  equipment,  software
programs or other equipment  containing embedded  microprocessors  that were not
year 2000  compliant to be $200,000,  of which  $172,000 has been incurred as of
September 30, 1999.  System  maintenance  or  modification  costs are charged to
expense as incurred, while the cost of new hardware, software or other equipment
is capitalized and amortized over their estimated useful lives. The Company does
not separately track the internal costs and time that its own employees spend on
year 2000 issues, which are principally payroll costs.
<PAGE>
Because the Company depends  substantially  on its computer systems and those of
third-parties,  the  failure of these  systems to be year 2000  compliant  could
cause substantial disruption of the Company's business and could have a material
adverse  financial  impact on the  Company.  Failure to resolve year 2000 issues
presents  the  following  risks  to the  Company;  (1) the  Company  could  lose
customers to other financial  institutions,  resulting in a loss of revenue,  if
the Company's  third-party service bureau is unable to properly process customer
transactions; (2) governmental agencies, such as the Federal Home Loan Bank, and
correspondent  institutions  could fail to provide  funds to the Company,  which
could materially impair the Company's liquidity and affect the Company's ability
to fund loans and deposit  withdrawals;  (3)  concern on the part of  depositors
that year 2000 issues  could impair  access to their  deposit  account  balances
could result in the Company  experiencing deposit outflows prior to December 31,
1999; and (4) the Company could incur  increased  personnel  costs if additional
staff is required  to perform  functions  that  inoperative  systems  would have
otherwise performed. Management believes that it is not possible to estimate the
potential  lost revenue due to the year 2000 issue,  as the extent and longevity
of any potential problem cannot be predicted.  Because  substantially all of the
Company's loan  portfolio  consists of loans  primarily  secured by real estate,
management  believes  that year 2000  issues  will not impair the ability of the
Company's borrowers to repay their debt.

There can be no assurances  that the Company's  year 2000 plan will  effectively
address the year 2000  issues,  that the  Company's  estimates of the timing and
costs of completing  the plan will  ultimately be accurate or that the impact of
any failure of the Company or its third-party  vendors and service  providers to
be year 2000 compliant will not have a material  adverse effect on the Company's
business,  financial  condition  or  results  of  operations.  The  Company  has
developed a  contingency  plan for year 2000 in the event there is a malfunction
in any of the critical application  software.  The plan provides for alternative
methods to conduct  business until  application  problems can be rectified.  The
Company has recognized  that its  commercial  borrowers may also face risks from
year 2000 issues. The Company has identified its material loan relationships and
completed year 2000 surveys of those customers to assess their  vulnerability to
year 2000 problems and their readiness for year 2000 compliance.  The Company is
continuing to monitor its commercial borrowers for year 2000 risk and feels that
its commercial relationships do not pose an inordinate risk at this time.

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

       The Company is not a defendant in any  lawsuits.  The Bank is a defendant
       in one significant lawsuit. The action commenced on December 1, 1997, and
       the Plaintiffs are seeking  approximately  $1.5 million in actual damages
       as well as punitive  damages.  The cause of action is breach of fiduciary
       duties,  negligence,  fraud,  civil  conspiracy  and  breach of  contract
       arising out of a lending  relationship.  At this date,  the Bank does not
       know if or when the  action  will go to trial.  The Bank will  vigorously
       defend this suit. Based upon discussions with its counsel,  the Bank does
       not expect the results of this  action to be  material  to its  financial
       results.

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

         Not applicable.
<PAGE>
                                     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, 1999
("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.


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 disclosures.

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

         The information  contained under the section  captioned  "Proposal I --
Election of Directors" in the Bank's  definitive  proxy statement for the Bank's
2000 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.
<PAGE>
Executive Officers of the Registrant
------------------------------------


Name, Age and Position                  Business Experience
---------------------                   -------------------

Michael C. Gerald, 50,                  Mr. Gerald has been associated with
President, Chief Executive              Coastal Federal since 1974 and serves as
Officer and a Director                  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
                                        Board of Directors of the North Carolina
                                        Bankers Association and the Board of
                                        Directors of the Financial Institutions
                                        Retirement Fund.

Jimmy R. Graham, 51,                    Mr. Graham serves as Executive Vice
Executive Vice President and            President and Information Systems Group
Information Systems Group               Leader of Coastal Federal. Mr. Graham
Leader                                  serves as Executive Vice President of
                                        Coastal Financial Corporation. He has
                                        been associated with the Bank since
                                        1977.

Jerry L. Rexroad, CPA, 39,              Mr. Rexroad joined the Company in April
Executive Vice President and            1995 and is Executive Vice President and
Chief Financial Officer                 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 the President of the
                                        Financial Manager's Society of South
                                        Carolina.
<PAGE>
Name, Age and Position                  Business Experience
---------------------                   -------------------

                                        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, 43,                 Mr. Stalvey is Executive Vice President
Executive Vice President                and Sales Group Leader for the Bank. He
and Sales Group Leader.                 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 18 years. In addition, Mr.
                                        Stalvey is a member of the Florence
                                        Stake Presidency with his Church, a
                                        committee member of a local Scout Troop
                                        and a Board of Director for the Myrtle
                                        Beach Airforce Base Redevelopment
                                        Authority.

Steven J. Sherry, 48                    Mr. Sherry is Executive Vice President
Executive Vice President and            and Director of Marketing for the Bank.
Director of Marketing.                  He also serves as Executive Vice
                                        President/Chief Marketing Officer for
                                        Coastal Financial Corporation. He has
                                        been associated with Coastal Federal, in
                                        a consultative fashion for over five
                                        years, and formally with the
                                        organization for 18 months. Mr. Sherry
                                        is a member of the Bank Marketing
                                        Association, and holds various
                                        achievement awards for marketing and
                                        advertising.

Susan J. Cooke, 49,                     Ms. Cooke is Vice President and
Vice President and                      Corporate Secretary for Coastal Federal
Corporate Secretary                     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 twelve years. She is a
                                        member of the American Society of
                                        Corporate Secretaries, Inc. and the
                                        National Association for Female
                                        Executives.
<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  "Voting  Securities  and
                  Principal Holders Thereof" of the Proxy Statement.

         (b)      Security Ownership of Management

                  Information  required by this item is  incorporated  herein by
                  reference to the sections captioned "Proposal I -- Election of
                  Directors"  and  "Voting   Securities  and  Principal  Holders
                  Thereof" 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.

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.
<PAGE>
                 PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on
-----------------------------------------------------------------
          Form 8-K
          --------

         1.       Independent Auditors' Report*

         2.       All Financial Statements*

                  (a)       Consolidated Statements of Financial Condition as of
                            September 30, 1998 and 1999.

                  (b)       Consolidated  Statements of Operations for the Years
                            Ended September 30, 1997, 1998 and 1999.

                  (c)       Consolidated  Statements of Stockholders' Equity and
                            Comprehensive  Income for the Years Ended  September
                            30, 1997, 1998 and 1999.

                  (d)       Consolidated  Statements of Cash Flows for the Years
                            Ended September 30, 1997, 1998 and 1999.

                  (e)       Notes to Consolidated Financial Statements.

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

         4.       Exhibits

                   3 (a)      Certificate of Incorporation of Coastal
                              Financial Corporation**
                   3 (b)      Bylaws of Coastal Financial Corporation**
                  10 (a)      Employment Agreement with Michael C. Gerald***
                     (b)      Employment Agreement with Jerry L. Rexroad***
                     (c)      Employment Agreement with Phillip G. Stalvey*****
                     (d)      Employment Agreement with Allen W. Griffin***
                     (e)      Employment Agreement with Jimmy R. Graham***
                     (f)      Employment Agreement with Richard L. Granger***
                     (g)      Employment Agreement with Robert S. O'Harra***
                     (h)      Employment Agreement with Steven J. Sherry******
                     (i)      1990 Stock Option Plan***
                     (j)      Directors Performance Plan****
                  13          Annual Report to Stockholders for the Fiscal
                              Year Ended September 30, 1999*
                  21          Subsidiaries of the Registrant
                  23          Consent of Independent Auditors
                  27          Financial Data Schedule

        5.        No reports on Form 8-K have been filed during the last quarter
                  of the fiscal year covered by this report.

-----------------
<PAGE>

*              Incorporated by reference from the Annual Report to Stockholders
               for the fiscal year ended September 30, 1999, attached as an
               exhibit hereto.

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

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

****           Incorporated by reference to the proxy statement for the 1996
               Annual Meeting of Stockholders.

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

******         Incorporated by reference to 1998 Form 10-K filed with the
               Securities and Exchange Commission on December 29, 1998.
<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 29, 1999          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/James T. Clemmons            By:   /s/ Michael C. Gerald
    --------------------                  ---------------------
    James T. Clemmons                     Michael C. Gerald
    Chairman of the Board                 President/Chief Executive Officer
                                          and a Director
                                          (Principal Executive Officer)

Date: December 29, 1999           Date:   December 29, 1999

By:  /s/Jerry L. Rexroad            By:   /s/Wilson B. Springs
    --------------------                  --------------------
    Jerry L. Rexroad                      Wilson B. Springs
    Executive Vice President              Director
    and Chief Financial Officer
    (Principal Financial and
    Accounting Officer)

Date: December 29, 1999            Date:  December 29, 1999

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

Date: December 29, 1999           Date:   December 29, 1999

By:  /s/Harold D. Clardy             By:  /s/James H. Dusenbury
    --------------------                  ---------------------
    Harold D. Clardy                      James H. Dusenbury
    Director                              Director

Date: December 29, 1999           Date:   December 29, 1999

By: /s/G. David Bishop
    ------------------
    G. David Bishop
    Director

Date: December 29, 1999