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, 1997

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

                         Commission File Number: 0-19684 


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

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

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

       Registrant's telephone number, including area code: (803) 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 [ X ]  NO [   ]

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

         As of November 30, 1997,  there were issued and  outstanding  4,655,982
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  National  Association  of  Securities  Dealers,  Inc.
Automated  Quotation  System under the symbol  "CFCP" on November 30, 1997,  was
$104,759,595(4,655,982  shares at $22.50 per  share,  which is the ending bid on
November 30, 1997.). 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, 1997. (Parts I and II)


         2.  Portions  of the Proxy  Statement  for the 1998  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 Investments Corporation,  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.
engages in the  origination  of conforming  mortgage loans which are sold in the
secondary market generally servicing released.

         On May 7, 1996, the  Corporation  formed Coastal  Technology  Services,
Inc. ("CTS").  CTS primarily develops  specialized  banking software for sale to
financial services companies. Activity for fiscal 1997 was limited for CTS.

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

         Coastal  Federal  conducts its business  from its main office in Myrtle
Beach,  South  Carolina,  nine branch  offices  located in South  Carolina and a
lending  office in Sunset  Beach,  North  Carolina.  The lending  office will be
converted to a full service branch office in fiscal 1998. At September 30, 1997,
Coastal  Financial had total assets of $494.0 million,  total deposits of $347.1
million and stockholders'  equity of $32.4 million. The deposits of the Bank are
insured by the Federal Deposit Insurance  Corporation ("FDIC") under the Savings
Association  Insurance  Fund  ("SAIF").  The  corporate  offices of the Bank are
located at 2619 Oak Street,  Myrtle  Beach,  South  Carolina  and the  telephone
number is (803) 448-5151.

         Eight of Coastal  Federal's  nine  offices are in Horry  County,  South
Carolina.  The  economy  of the Horry  County  area is  dependent  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 significantly adversely affected.
<PAGE>
         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 13.9% of total loans at September  30, 1995 to
22.6% of total loans at September 30, 1997.

         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,
1997, 2.5% and 9.8%, respectively,  of the Bank's total loan portfolio consisted
of commercial business and consumer loans.

Selected Consolidated Financial Data and Other Items

         The information contained in the table captioned "Selected Consolidated
Financial  and  Other  Data" on page 2 of the  Corporation's  Annual  Report  to
Stockholders for the Fiscal Year Ended September 30, 1997 is incorporated herein
by reference.
<PAGE>
Yields Earned and Rates Paid

         The  following  table  sets  forth,  for the  periods  and at the  date
indicated, the weighted average yields earned on Coastal Financial's assets, the
weighted average  interest rates paid on its liabilities,  together with the net
yield on interest-earning assets.
<TABLE>
<CAPTION>

                                                  Year Ended              At
                                                 September 30,       September 30,
                                                ----------------------------------
                                                1995      1996      1997      1997
                                                ----      ----      ----      ----
<S>                                             <C>       <C>       <C>       <C>
Weighted average yield
  on loan portfolio ....................        8.39%     8.57%     8.70%     8.88%
Weighted average yield
 on mortgage-backed
 securities ............................        7.81      7.78      7.25      7.40
Weighted average yield
 on Federal Funds and
 overnight deposits ....................        5.77      5.89      5.27      5.33
Weighted average yield
 on investment securities ..............        5.14      6.55      6.70      6.80
Weighted average yield
  on all interest-
  earning assets .......................        8.27      8.46      8.46      8.63
Weighted average rate
 paid on savings deposits ..............        3.96      4.08      4.15      4.08
Weighted average rate
 paid on Federal Home
 Loan Bank advances ....................        6.53      6.27      5.95      5.82
Weighted average rate
 paid on repurchase
 agreements ............................        3.70      4.63      5.82      4.52
Weighted average rate
  paid on all interest
  bearing liabilities ..................        4.75      4.70      4.57      4.50
Interest rate spread (spread
 between weighted average
 rate on all interest-earning
 assets and all interest-
 bearing liabilities)  .................        3.52      3.76      3.89      4.13
Net interest margin (net
 interest income as a percentage
 of average interest-earning
 assets) ...............................        3.62      3.86      4.03      4.29

</TABLE>
<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,
                                    ------------------------------------------------------------------------------------------
                                                1995 Compared to 1994                        1996 Compared to 1995                  
                                                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 ........................     $1,377      $ 3,346      $ 222      $4,945        $ 615     $ 2,361       $ 51     $3,027       
 Mortgage-backed
  securities...................          4          567         17         588           (4)      1,083         (6)     1,073       
 Investments and
  other........................         11          188         34         233          177          96         19        292       
                                        --         ----         --         ---          ---          --         --        ---       

Total net change in
 income on interest-
 earning assets................      1,392        4,101        273       5,766          788       3,540         64      4,392       
                                     -----        -----        ---       -----          ---       -----         --      -----       

Interest-Bearing
 Liabilities:
 Deposits......................      1,735         (297)       (64)      1,374          300       1,455         44      1,799       
 FHLB advances.................        526        3,215        564       4,305         (289)         51         (2)      (240)      
 Repurchase
  agreements...................         35            3          7          45           16         194         50        260       
                                       ---            -         --          --           --         ---         --        ---       
Total net change in
 expense on interest-
 bearing liabilities...........      2,296        2,921        507       5,724           27       1,700         92      1,819       
                                    ------        -----        ---       -----           --       -----         --      -----       

Net change in net
 interest income...............   $   (904)     $ 1,180     $ (234)      $  42        $ 761      $1,840      $ (28)    $2,573       
                                  =========     =======     =======      =====        =====      ======      ======    ======       

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                             Year Ended September 30,
                                     ------------------------------------------
                                               1997 Compared to 1996             
                                                Increase (Decrease)              
                                                        Due to                   
                                                               Rate/             
                                     Rate         Volume       Volume       Net  
                                     ----         ------       ------      ----  
<S>                                 <C>         <C>            <C>      <C>                                
Interest-Earning Assets:           
 Loans ........................     $ 502       $ 1,545        $ 24     $ 2,071 
 Mortgage-backed                                                                
  securities...................      (123)          820         (56)        641 
 Investments and                                                                
  other........................       (70)          747         (44)        633 
                                      ----          ---         ----        --- 
                                                                                
Total net change in                                                             
 income on interest-                                                            
 earning assets................       309         3,112         (76)      3,345 
                                      ---         -----         ----      ----- 
                                                                                
Interest-Bearing                                                                
 Liabilities:                                                                   
 Deposits......................       200         1,742          19       1,961 
 FHLB advances.................      (361)       (1,425)         73      (1,713)
 Repurchase                                                                     
  agreements...................        50           576         181         807 
                                       --           ---         ---         --- 
Total net change in                                                             
 expense on interest-                                                           
 bearing liabilities...........      (111)          893         273       1,055 
                                     -----          ---         ---       ----- 
                                                                                
Net change in net                                                               
 interest income...............   $   420        $2,219      $ (349)     $2,290 
                                  =======        ======      =======     ====== 
                                                                                
</TABLE>
<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.
<TABLE>
<CAPTION>
                                                                        Year Ended September 30,
                                        -------------------------------------------------------------------------------
                                                       1995                                           1996                    
                                        ------------------------------------       ------------------------------------    
                                        Average                      Yield/         Average                      Yield/    
                                        Balance       Interest        Rate          Balance       Interest        Rate     
                                        -------       --------       ------         -------       --------       ------    
                                                                     (Dollars in thousands)
<S>                                     <C>            <C>            <C>           <C>            <C>           <C>
ASSETS
 Loans................................  $341,557       $28,671         8.39%        $369,733       $31,698        8.57%   
 Investments(1).......................    15,153           925         6.10           16,730         1,217        7.27    
 Mortgage-backed
  securities..........................     9,365           732         7.82           23,214         1,805        7.78    
                                        --------       -------        -----         --------       -------       -----    

Total interest-earning
 assets...............................  $366,075       $30,328         8.28%        $409,677       $34,720        8.46%   
                                        ========       =======        =====         ========       =======       =====    

LIABILITIES
 Transaction accounts.................    80,586         1,678         2.08          114,220         2,862        2.51    
 Passbook accounts....................    55,370         1,314         2.37           44,631         1,160        2.60    
 Certificate accounts.................   124,287         6,898         5.55          134,415         7,667        5.70    
 FHLB advances........................   112,097         7,319         6.53          112,878         7,079        6.27    
 Securities sold
  under repurchase
  agreements..........................     1,705            63         3.70            6,955           323        4.63    
                                         -------       --------       -----         --------        ------       -----    

Total interest-bearing
 liabilities..........................  $374,045       $17,272        4.75%         $413,099       $19,091        4.70%   
                                        ========       =======       =====          ========       =======       =====    

Net interest income/
 interest rate spread.................                 $13,056        3.52%                        $15,629        3.76%   

Net yield on earning
 assets...............................                                3.62%                                       3.86%   


Ratio of earning assets
 to interest-bearing
 liabilities..........................                                1.02x                                       1.02x  
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                     Year Ended September 30, 
                                            --------------------------------------                    
                                                                1997
                                            --------------------------------------
                                               Average                      Yield/    
                                               Balance        Interest       Rate     
                                               -------        --------       -----                                                  
<S>                                         <C>                <C>          <C>
ASSETS                                 
 Loans................................      $  389,196         $33,769      8.70%       
 Investments(1).......................          27,007           1,850      6.85        
 Mortgage-backed                                                                        
  securities..........................          33,738           2,446      7.25        
                                            ----------         -------      ----        
                                                                                        
Total interest-earning                                                                  
 assets...............................      $  449,941         $38,065      8.46%       
                                            ==========         =======      ====        
                                                                                        
LIABILITIES                                                                             
 Transaction accounts.................         153,796           4,894      3.18        
 Passbook accounts....................          41,143           1,015      2.47        
 Certificate accounts.................         135,335           7,741      5.72        
 FHLB advances........................          90,154           5,366      5.95        
 Securities sold                                                                        
  under repurchase                                                                      
  agreements..........................          19,387           1,130      5.82        
                                             ---------         -------      ----        
                                                                                        
Total interest-bearing                                                                  
 liabilities..........................      $  439,815         $20,146      4.57%       
                                            ==========         =======      ====        
                                                                                        
Net interest income/                                                                    
 interest rate spread.................                         $17,919      3.89%       
                                                                                        
Net yield on earning                                                                    
 assets...............................                                      4.03%       
                                                                                        
                                                                                        
Ratio of earning assets                                                                 
 to interest-bearing                                                                    
 liabilities..........................                                      1.03x       
</TABLE>
-------------------------
 (1)     Includes short-term interest-bearing deposits and Federal funds sold.
                                        
<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 commerical 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  $411.9  million at
September 30, 1997,  representing  approximately  83.4% of its total assets.  On
that date,  approximately  63.5% 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, 1997,  adjustable rate
loans constituted approximatley $318 million (or 77.0%) of the Bank's total loan
portfolio. Therefore, at such date, fixed rate loans comprised only 23.0% 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.
<PAGE>
Loan Portfolio Analysis

     The following  tables set forth the composition of the  Corporation's  loan
portfolio by type of loan and type of security as of the dates indicated.
<TABLE>
<CAPTION>

                                                                               At September 30,
                                          -----------------------------------------------------------------------------------------
                                                 1993                  1994                     1995                      1996     
                                          ------------------     ------------------     -------------------      ------------------
                                          Amount     Percent     Amount     Percent     Amount      Percent      Amount     Percent
                                          ------     -------     ------     -------     ------      -------      ------     -------
                                                                           (Dollars in thousands)
<S>                                       <C>        <C>       <C>         <C>          <C>          <C>        <C>          <C>
Type of Loan:

Mortgage loans:
 Construction...........................  $ 12,266     4.08%   $ 23,222       6.67%     $ 27,905       7.34%    $ 34,566       8.65%
 On existing property...................   206,632    68.86     225,544      64.82       228,881      60.23      231,373      57.89 
 Income property (commercial)...........    35,328    11.77      42,207      12.13        54,401      14.31       73,295      18.34 
Commercial business loans...............    13,913     4.64      14,052       4.04        19,610       5.16       14,831       3.71 
Consumer loans:
  Mobile home...........................     1,807      .60       1,497        .43         1,204        .32        1,103        .28 
  Automobiles...........................     5,126     1.71       6,300       1.81         5,941       1.56        7,261       1.82 
  Equity lines of credit................    11,362     3.79      12,763       3.67        13,210       3.48       12,441       3.11 
  Other.................................    13,626     4.55      22,373       6.43        28,887       7.60       24,776       6.20 
                                          --------   ------    --------      -----      --------     ------     --------     ------

 Total loans and loans held for sale....  $300,060   100.00%   $347,958      100.0%     $380,039     100.00%    $399,646     100.00%
                                                     ======                  =====                   ======                  ======
 Less:
  Loans in process......................    (5,607)             (13,087)                 (17,178)                (18,589)           
  Deferred loan(fees)costs..............      (546)                (343)                     (71)                    286            
  Allowance for loan losses.............    (2,753)              (3,353)                  (3,578)                 (4,172)           
                                          --------             --------                 --------                --------  
                                                                                       

 Total loans net........................  $291,154             $331,175                 $359,212                $377,171 
                                          ========             ========                 ========                ========  
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                     At September 30,  
                                                  ---------------------                                                
                                                            1997       
                                                  --------------------- 
                                                    Amount      Percent 
                                                  
<S>                                               <C>            <C>
Type of Loan:                           
                                        
Mortgage loans:                         
 Construction...........................          $ 34,216         7.93%    
 On existing property...................           246,323        57.09     
 Income property (commercial)...........            97,680        22.64     
Commercial business loans...............            10,939         2.54     
Consumer loans:                                                             
  Mobile home...........................             1,291          .30     
  Automobiles...........................             6,055         1.40     
  Equity lines of credit................            15,294         3.54     
  Other.................................            19,659         4.56     
                                                  --------       ------ 
                                                                            
 Total loans and loans held for sale....          $431,457       100.00%  
                                                                 ======  
 Less:                                                                      
  Loans in process......................           (15,084)     
  Deferred loan(fees)costs..............               458      
  Allowance for loan losses.............            (4,902)     
                                                                
                                                                
 Total loans net........................          $411,929      
                                                  ========      
                                                                
</TABLE>
         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 initial  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  adjust  based  upon  either  the cost of  funds,  prime  rate or
treasury securities indices. The interest rates on ARMs generally may not adjust
more than 1-2% per year and 4-6% over the life of the loan. The Bank  originates
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 80%.
Monthly  payments could increase  significantly  at the first repricing  period.
Although Coastal  Federal's ARMs have been 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.
<PAGE>
         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. A large majority of the conforming
fixed rate loans  offered by Coastal  Federal  are  originated  through  Coastal
Federal  Mortgage,  Inc. (CFM).  These loans are generally sold to correspondent
banks servicing released. Loans sold by CFM amounted to $34.5 and $38.4 million,
respectively,  in fiscal 1996 and 1997.  Coastal Federal sold approximately $6.2
and $5.8  million,  respectively,  of  mortgages  in 1996 and 1997  generally to
FHLMC.

         At September  30, 1997,  approximately  $274.2  million or 63.5% 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
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,  1997,  approximately  $34.2  million or 7.9% of the
Bank's gross loan portfolio  consisted of construction loans on both residential
($19.7 million) and commercial properties ($14.5 million).  Undisbursed proceeds
on these loans amounted to $15.1 million at September 30, 1997.
<PAGE>
         Commercial Real Estate Loans.  The Bank may invest,  by OTS regulation,
in non-residential real estate loans up to 400% of its capital as computed under
GAAP plus  general loan loss  reserves.  At  September  30,  1997,  this limited
Coastal Federal's aggregate  non-residential  real estate loans to approximately
$146.1  million.  At such time, the Bank had  non-residential  real estate loans
outstanding  of $120.7  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 years 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.  At
September 30, 1997, the Bank had approximately $97.7 million of loans secured by
commercial real estate,  representing  approximately  22.6% of Coastal Federal's
total loan portfolio.

         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.

         Consumer  Loans.  The Bank 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 $42.3 million,  or 9.8% of the total
loan portfolio, at September 30, 1997.

         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
<PAGE>
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, 1997,  the Bank had $10.9 million  outstanding  in
commercial  business loans,  which  represented  approximately  2.5% 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 often  insufficient  source of
repayment.
<PAGE>
Loan Maturity

         The  following  table sets forth certain  information  at September 30,
1997  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    Twenty Years   Twenty Years      Totals
                              -------      -----------     ----------      ---------    ------------   ------------      ------
                                                                        (In thousands)
<S>                          <C>            <C>            <C>            <C>            <C>            <C>            <C>
First mortgage loans .       $  3,586       $  7,982       $  3,999       $ 10,665       $ 62,545       $221,492       $310,269
Other residential and
 non-residential .....         10,834          4,884          4,282          4,890         32,318          8,249         65,457
Equity lines of credit         15,294           --             --             --             --             --           15,294
Consumer loans .......          2,743          4,906          3,643            795            536           --           12,623
Commercial loans .....          2,386          2,947          1,529            399          1,025           --            8,286
                             --------       --------       --------       --------       --------       --------       --------
     Total loans .....       $ 34,843       $ 20,719       $ 13,453       $ 16,749       $ 96,424       $229,741       $411,929
                             ========       ========       ========       ========       ========       ========       ========
</TABLE>


         The following table sets forth the dollar amount of all loans due after
one year at September 30, 1997 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.........................           $54,317                       $252,366                    $306,683
Other residential and
 non-residential.............................             6,484                         48,139                      54,623
Consumer loans...............................             9,485                            395                       9,880
Commercial loans.............................             2,432                          3,468                       5,900
                                                        -------                       --------                    --------
     Total loans.............................           $72,718                       $304,368                    $377,086
                                                        =======                       ========                    ========
</TABLE>
<PAGE>
Interest Rate Sensitivity Analysis

         The following table illustrates the repricing analysis of the Company's
interest-earning  assets and  interest-bearing  liabilities  as of September 30,
1997.  For purposes of the table,  repricing  characteristics  of loans  include
estimated annual prepayment rates.
<TABLE>
<CAPTION>
                                               Zero to            Four Months         One Year to           Greater than
                                            Three Months          to One Year         Five Years             Five Years      Total
                                            ------------          -----------         ----------             ----------      -----
                                                                                    (In thousands)
<S>                                           <C>                  <C>                  <C>                    <C>          <C> 
Rate Sensitive Assets(1):
 Mortgage loans and
  mortgage-backed securities...............    $57,040             $223,641              $91,460               $23,324      $395,465
 Mortgage-backed securities................     $1,147               $2,943              $14,089                $4,200      $ 22,379
 Non-mortgage loans........................      9,059                3,699                8,150                    --        20,908
 Interest-bearing deposits and
  investment securities....................      1,159                1,913               20,220                 3,391        26,683
                                               -------             --------             --------               -------      --------
     Total.................................    $68,405             $232,196             $133,919               $30,915      $465,435
                                               =======             ========             ========               =======      ========
Rate Sensitive Liabilities:
 Core deposits(2)..........................    $42,058              $69,741              $62,219               $32,441      $206,459
 Time deposits.............................     67,494               48,433               24,730                    --       140,657
 Borrowings................................     52,858               23,720               27,802                 1,957       106,337
                                               -------             --------             --------               -------      --------
                                               
     Total.................................   $162,410             $141,894             $114,751               $34,398      $453,453
                                              ========             ========             ========               =======      ========
Off-Balance Sheet Positions:
 Commitments to originate
  mortgage loans...........................     $1,772               $2,468              $(4,756)                 $516            --

Interest rate sensitivity gap..............   $(92,233)             $92,770              $14,412               $(2,967)      $11,982

Cumulative interest
 sensitivity gap...........................   $(92,233)                $537              $14,949               $11,982            --

Cumulative interest sensitivity
 gap as a percent of total assets              (18.77%)                0.11%                3.04%                2.44%            --
</TABLE>                                       
(1)  Prepayments  have  been  applied  to  all  loans.  Prepayment  speeds  vary
     according to the instrument's original maturity, coupon rate and age.
(2)  Decay rates have been applied to all core deposits as follows:<PAGE>
<TABLE>
<CAPTION>
                                                    NOW              MMDA            Passbook           Non-interest
                                                  Accounts         Accounts          Accounts              Demand
                                                  --------         --------          --------              ------
<S>                                                <C>             <C>                <C>                  <C>
    Percent Repricing:
    1 - 12 months............................       37.00%          79.00%             17.00%               37.00%
    13 - 36 months...........................       33.87           11.00              25.82                33.87
    37 - 60 months...........................        9.06            5.24              16.83                 9.06
    Over 60 months...........................       20.07            4.76              40.35                20.07
                                                   ------          ------             ------               ------ 
    Total....................................      100.00%         100.00%            100.00%              100.00%
                                                   =======         =======            =======              =======
</TABLE>
<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 Office of
Thrift Supervision ("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, 1997.  This  information is an estimate and may not
be  indicative   of  actual   changes  in  market  values  should  rates  change
significantly at a future date.
<PAGE>
<TABLE>
<CAPTION>
                          -400       -300        -200        -100                    +100         +200        +300         +400
                          Basis      Basis       Basis       Basis         No        Basis        Basis       Basis        Basis
                          Points     Points      Points      Points      Change      Points       Points      Points       Points
                          ------     ------      ------      ------      ------      ------       ------      ------       ------
                                                                      (In thousands)
<S>                     <C>         <C>         <C>         <C>         <C>         <C>         <C>          <C>          <C>
ASSETS
Mortgage loans and
 securities .........   $ 440,467   $ 436,263   $ 432,780   $ 429,505   $ 425,152   $ 418,999   $ 411,243    $ 402,373    $ 392,891
Non-mortgage loans ..      22,352      22,177      22,006      21,842      21,680      21,523      21,369       21,218       21,073
Cash, deposits and
 securities .........      44,022      43,074      42,161      41,282      40,436      39,621      38,836       38,080       37,351
Repossessed assets ..         253         253         253         253         253         253         253          253          253
Premises and equipmen       7,383       7,383       7,383       7,383       7,383       7,383       7,383        7,383        7,383
Other assets ........       9,584      10,928      12,846      15,563      19,326      23,372      27,170       30,774       34,197
                        ---------   ---------   ---------   ---------   ---------   ---------   ---------    ---------    ---------
TOTAL ...............     524,061     520,078     517,429     515,828     514,230     511,151     506,254      500,081      493,148
                        =========   =========   =========   =========   =========   =========   =========    =========    =========

LIABILITIES
Deposits ............   $ 348,602   $ 347,730   $ 346,876   $ 346,030   $ 345,198   $ 344,380   $ 343,576    $ 342,785    $ 342,004
Borrowings ..........     114,383     112,743     111,158     109,625     108,142     106,707     105,317      103,971      102,666
Other liabilities ...       6,495       6,495       6,495       6,495       6,495       6,495       6,496        6,495        6,496
                        ---------   ---------   ---------   ---------   ---------   ---------   ---------    ---------    ---------
TOTAL ...............     469,480     466,968     464,529     462,150     459,835     457,582     455,389      453,251      451,165
                        =========   =========   =========   =========   =========   =========   =========    =========    =========

OFF BALANCE SHEET
 POSITIONS ..........   $     992   $     814   $     661   $     516   $     320   $      49   $    (230)   $    (498)   $    (774)

MARKET VALUE OF
 PORTFOLIO EQUITY ...   $  58,573   $  53,924   $  53,561   $  54,194   $  54,715   $  53,617   $  50,635    $  46,331    $  41,209

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

         Detailed loan  applications  are obtained to determine  the  borrower's
ability  to repay,  and the more  significant  items on these  applications  are
verified   through  the  use  of  credit  reports,   financial   statements  and
confirmations through verification forms. After analysis of the loan application
and property or collateral  involved,  including an appraisal of the property by
independent appraisers approved by the Bank's Board of Directors and reviewed by
the Bank's underwriter,  a lending decision is made by the Bank. With respect to
commercial  loans,  the Bank also reviews the capital  adequacy of the business,
the ability of the  borrower  to repay the loan and honor its other  obligations
and general  economic and industry  conditions.  All  residential  mortgage loan
applications  over $400,000  require the approval of the Bank's Loan  Committee,
which consists of Directors Clemmons,  Gerald, Smart, Springs and Executive Vice
Presidents  Rexroad and Stalvey.  All first mortgage loan applications in excess
of 95% of the  appraised  value of the property must be approved by the Board of
Directors.

         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  Department of Housing and Urban  Development,  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 a  qualified
servicer  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, 1997, the Bank was servicing  loans
sold to others with a principal balance of approximately  $104.5 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.  The  majority of the loans sold during the year ended  September  30,
<PAGE>
1997 were conforming  conventional  loans originated and sold by Coastal Federal
Mortgage.  These loans were sold on a servicing released basis. At September 30,
1997, the Bank's loan portfolio included purchased loans of approximately  $22.1
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.

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,
                                                  ---------------------------------------
                                                     1995          1996            1997
                                                  ---------      ---------      ---------
                                                               (In thousands)
<S>                                               <C>            <C>            <C>

Loans receivable net, at the beginning of the
 period .....................................     $ 331,175      $ 359,212      $ 377,171
                                                  ---------      ---------      ---------

Loans originated:
 Construction ...............................        31,849         38,172         45,986
 Residential ................................        46,935         60,683         59,289
 Nonresidential .............................         8,307         11,897         13,794
 Land .......................................         7,263          8,355         10,308
 Commercial business ........................        20,145         23,062         33,730
 Consumer ...................................        26,530         18,201         15,396
                                                  ---------      ---------      ---------
     Total loans originated .................       141,029        160,370        178,503
                                                  ---------      ---------      ---------

Loans purchased, primarily single
family residental mortgages .................         6,337         12,448          9,948
                                                  ---------      ---------      ---------

Loans sold ..................................        (2,806)       (40,672)       (44,160)
                                                  ---------      ---------      ---------

Loan principal repayments and other .........      (116,008)      (112,926)      (109,946)
                                                  ---------      ---------      ---------

Other .......................................          (515)        (1,261)           413
                                                  ---------      ---------      ---------

Loans receivable net, at end of period ......     $ 359,212      $ 377,171      $ 411,929
                                                  =========      =========      =========
</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, 1997,  Coastal Federal had loan commitments of approximately  $3.2
million.  At September 30, 1997, CFM had loan commitments of approximately  $2.3
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.  At each of the dates indicated,
Coastal Federal has no debt that has been restructured.
<TABLE>
<CAPTION>
                                                                 At September 30,
                                              -------------------------------------------------------
                                               1993        1994        1995        1996        1997
                                              ------      ------      ------      ------      ------
                                                              (Dollars in thousands)
<S>                                            <C>         <C>         <C>         <C>         <C>
Loans accounted for on a nonaccrual basis:
Real estate -
   Residential ...........................     $  205      $   79      $  999      $  307      $   71
   Commercial ............................         64       1,056         134        --          --
   Commercial business ...................       --          --           154          60          99
   Consumer ..............................         44          16          36          78          87
                                               ------      ------      ------      ------      ------
    Total ................................        313       1,151       1,323         445         257
                                               ------      ------      ------      ------      ------

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

Restructured loans .......................       --          --          --          --          --
Real estate owned ........................      2,197         781         789         323         250
Other nonperforming
 assets ..................................       --          --          --          --          --
                                               ------      ------      ------      ------      ------
Total nonperforming
 assets ..................................     $2,510      $1,932      $2,112      $  768      $  507
                                               ======      ======      ======      ======      ======

Total nonaccrual loans to net
 loans ...................................        .10%        .03%        .36%        .12%        .06%

Total nonaccrual loans to total
 assets ..................................        .09%        .03%        .33%        .10%        .05%

Total nonperforming assets
 to total assets .........................        .74%        .56%        .53%        .17%        .10%

</TABLE>
         For the year ended  September  30, 1997,  gross  interest  income which
         would  have been  recorded  had  non-accruing  loans  been  current  in
         accordance   with  their   original   terms  would  have   amounted  to
         approximately  $13,000, of which  approximately  $5,000 was included in
         interest income.  There were no impaired loans at September 30, 1996 or
         1997.
<PAGE>
         The  allowance  for  uncollectible  interest  which is  netted  against
accrued  interest  receivable  totaled $50,000 and $36,000 at September 30, 1996
and 1997, 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 three classifications for problem assets: 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 one  individual  classified  asset in  excess  of
$500,000 as of September 30, 1997. At that date,  classified  assets amounted to
$6.8 million  ($1.6  million  substandard;  $15,000  doubtful;  and $5.2 million
special  mention).  In the first quarter of fiscal 1998, the classified asset in
excess of $500,000 was paid in full.

         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
provisions for losses on loans for the years ended  September 30, 1995, 1996 and
1997 of $202,000, $790,000 and $760,000, respectively. As a result, the Bank has
a $4.9 million allowance for loan losses as of September 30, 1997. The allowance
as a percentage of loans  receivable was 1.19% at September 30, 1997 compared to
1.11%  at  September  30,  1996.  See  "Management's   Discussion  and  Analysis
--Non-Performing  Assets and  --Allowance  for Loan  Losses" in the 1997  Annual
Report to Stockholders attached hereto and incorporated by reference.
<PAGE>
         While the Bank believes it has established  its existing  allowance for
loan losses in  accordance  with GAAP at  September  30,  1997,  there can be no
assurance  that  regulators,  when  reviewing  the Bank's loan  portfolio in the
future,  will not request the Bank to  significantly  increase its allowance for
loan losses,  thereby  adversely  affecting the Bank's  financial  condition and
earnings.

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,
                                          -------------------------------------------------------------
                                            1993         1994          1995          1996         1997
                                          -------      -------       -------       -------      -------
                                                              (Dollars in thousands)
<S>                                       <C>          <C>           <C>           <C>          <C>
Allowance at beginning of
 period .............................     $ 1,851      $ 2,753       $ 3,353       $ 3,578      $ 4,172
Allowance recorded on
acquired loans ......................        --           --            --            --            110
Provision for loan losses ...........       1,389          510           202           790          760
                                          -------      -------       -------       -------      -------
Recoveries:
 Residential real estate ............        --              3           232          --             20
 Commercial real estate .............          11          148            11            75           14
 Real estate construction ...........        --           --            --            --           --
 Consumer ...........................         106           79            12             7           38
                                          -------      -------       -------       -------      -------
   Total recoveries .................         117          230           255            82           72
                                          -------      -------       -------       -------      -------

Charge-offs:
 Residential real estate ............          71           38           206            24           46
 Commercial real estate .............         392           13            18           216         --
 Real estate construction ...........        --           --            --            --           --
 Consumer ...........................         141           89             8            38          166
                                          -------      -------       -------       -------      -------
   Total charge-offs ................         604          140           232           278          212
                                          -------      -------       -------       -------      -------
   Net charge-offs (recoveries) .....         487          (90)          (23)          196          140
                                          -------      -------       -------       -------      -------
 Allowance at end of period .........     $ 2,753      $ 3,353       $ 3,578       $ 4,172      $ 4,902
                                          =======      =======       =======       =======      =======

Ratio of allowance to net
 loans outstanding at the
 end of the period ..................        0.98%        1.01%         1.00%         1.11%        1.19%

Ratio of net charge-offs (recoveries)
 to average loans outstanding
 during the period ..................        0.17%        (.03%)        (.01%)         .05%         .04%
</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,
                                   -------------------------------------------------------------------------------------------------
                                               1993                              1994                               1995            
                                   --------------------------------- ---------------------------------  ----------------------------
                                             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...................   $  542    0.25%      75.48%     $  742       .30%      75.05%    $  803       .31%     72.03%    
  Commercial....................    1,901    5.54       12.22       2,296      5.58       11.94      2,371      4.36      14.17     
  Consumer......................      310     .89       12.30         315       .71       13.01        404       .80      13.80     
                                   ------              ------      ------                ------     ------               ------
  Total allowance for
   loan losses..................   $2,753    0.98%     100.00%     $3,353      1.01%     100.00%    $3,578      1.00%    100.00%    
                                   ======              ======      ======                ======     ======               =======    
<CAPTION>
                                                              September 30,
                                 -------------------------------------------------------------------
                                                  1996                               1997                  
                                 ---------------------------------  --------------------------------                       
                                            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...................   $  837     .37%      65.35%     $1,064       .41%      63.56%   
  Commercial....................    2,875    3.80       22.34       3,261      2.78       28.52    
  Consumer......................      460    1.01       12.31         577      1.77        7.92    
                                   ------    ----                  ------                ------                                
  Total allowance for                                                                              
   loan losses..................   $4,172    1.11%    100.00%      $4,902      1.19%     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.  At September  30, 1997,  Coastal  Federal's  regulatory
liquidity was 6.1%, which was in excess of the required 4.0%.

         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,  Griffin and Stalvey. The ALCO Committee acts within policies
established  by the Board of  Directors.  At  September  30,  1997,  the  Bank's
investment  portfolio had a market value of  approximately  $49.2  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,
                                 ------------------------------------------------------------------------------------------------ 
                                            1995                               1996                               1997
                                 ---------------------------         --------------------------         ------------------------- 
                                 Amortized        Percent of         Amortized       Percent of         Amortized     Percent of
                                   Cost(1)        Portfolio           Cost(1)         Portfolio           Cost(1)      Portfolio
                                                                        (Dollars in thousands)
<S>                                <C>             <C>               <C>               <C>               <C>            <C>
U.S. Government agency
securities:               
  FHLMC........................    $   --             -- %           $    --              -- %           $   995          3.82%
  FHLB.........................     1,000           42.94             17,334            98.13             17,738         67.89
  FNMA.........................        --             --                  --              --                  --           --
  FFCB.........................       999           42.89                 --              --               7,391         28.29
  Municipal....................       330           14.17                330             1.87                 --           --
                                      ---         -------             ------            -----              -----        -----

   Total.......................    $2,329          100.00%           $17,664           100.00%           $26,124        100.00%
                                   ======          ======            =======           ======            =======        ====== 
</TABLE>
(1)  The market value of the Bank's investment  securities portfolio amounted to
     $2.3 million,  $17.5 million and $26.2 million at September 30, 1995,  1996
     and 1997, respectively.

         The  following  table  sets  forth the final  maturities  and  weighted
average yields of the securities at amortized cost at September 30, 1997.
<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 agency
securities................................       $ --            --%          $   --            --%         $    --             --%
  FHLMC...................................         --            --               --            --              995           6.89
  FHLB...................................          --            --            6,506          6.72           11,231           6.93
  FNMA...................................          --            --               --            --               --             --
  FFCB...................................          --            --            3,490          6.84            3,902           7.04
  Municipal...............................         --            --               --            --               --             --
                                                 ----           ---           ------          ----          -------           ----

     Total................................       $ --            --%          $9,996(1)       6.78%         $16,128(2)        6.95%
                                                 ====           ===           ======         =====          =======           ==== 
</TABLE>
(1)  Includes  $8.7 million  subject to call  provisions.  Should these bonds be
     called  prior to maturity the Bank may not be able to obtain the same yield
     with similar term securities.
(2)  Includes $13.8 million  subject to call  provisions.  Should these bonds be
     called  prior to maturity the Bank may not be able to obtain the same yield
     with similar term securities.
<PAGE>
         The  following  table  sets  forth  Coastal  Federal's  mortgage-backed
securities portfolio at amortized cost at the dates indicated.
<TABLE>
<CAPTION>
                                                                   September 30,
                               ---------------------------------------------------------------------------------
                                          1995                        1996                      1997
                               -------------------------    ------------------------    ------------------------        
                               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 ...................     $11,246         88.02%       $18,861         70.75%      $14,048        62.79%
  FNMA ....................         538          4.22          2,469          9.26         1,861         8.31
  GNMA ....................         992          7.76          5,330         19.99         6,471        28.90
                                -------        ------        -------        ------       -------       ------

   Total ..................     $12,776        100.00%       $26,660        100.00%      $22,380       100.00%
                                =======        ======        =======        ======       =======       ======
</TABLE>

                                                                             
(1)  The  market  value  of  the  Bank's  mortgage-backed  securities  portfolio
     amounted to $12.9 million, $27.0 million and $23.0 million at September 30,
     1995, 1996 and 1997, respectively.


         The  following  table sets forth the  maturities  and weighted  average
yields of the securities at September 30, 1997.
<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>
Mortgage-Backed Securities: ..............
  FHLMC...................................       $ --          --%            $--            --%             $14,048       7.90%
  FNMA....................................        216        8.67              --            --                1,645       6.57 
  GNMA....................................         --          --              --            --                6,471       7.46
                                                 ----        ----             ---            --              -------       ----  

Total.....................................       $216        8.67%            $--            --%             $22,164       7.67%
                                                 ====        ====             ===            ==              =======       ==== 
</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.
<TABLE>
<CAPTION>

                                        +------------------------+
                                        |                        |
                                        |     COASTAL FEDERAL    |
                                        |                        |                         
                                        |                        |
                                        +------------------------+
                                                    |
                                                    |
                                        +------------------------+
                                        |                        |
                                        |     COASTAL MORTGAGE   |
                                        |         BANKERS*       |       
                                        |                        |
                                        +------------------------+
                                                    |
                                                    |
                                                    |
                                                    |
   +------------------------------------------------+----------------------------------------+
   |                           |                    |                  |                    |
<S>                   <C>                  <C>                <C>                  <C>
+------------------+  +-----------------+  +---------------+  +----------------+   +-------------------+
|   North Beach    |  |  Shady Forest   |  |  Sherwood     |  | Ridge          |   |  501 Development  |
| Investments, Inc.|  |  Development    |  |  Development  |  | Development    |   |  Corporation      |
|                  |  |  Corporation    |  |  Corporation  |  | Corporation    |   |                   |
|                  |  |                 |  |               |  |                |   |                   |
+------------------+  +-----------------+  +---------------+  +----------------+   +-------------------+
</TABLE>

---------------
         * For a description of these subsidiaries, see "Real Estate Development
Activities."
<PAGE>
Real Estate Development Activity

         With the  exception  of one  project,  for  which a joint  venture  was
created to dispose of real estate acquired through foreclosure,  the Corporation
has not entered into any new real estate  activity  since 1984 and has, in fact,
almost eliminated its investment in these real estate activities.  These efforts
are  reflected  in the  reduction  of  Corporation's  investment  and  loans  to
subsidiaries  from $8.5 million at September  30, 1987 to zero at September  30,
1997.

         In prior years, the Bank made loans to purchasers of units in which the
Bank's subsidiaries were involved in a joint venture.

         The  following  table  summarizes  the balances of  permanent  loans to
individual  unit  purchasers,   by  project,  at  September  30,  1997  (net  of
participations sold to other financial institutions).
<TABLE>
<CAPTION>
                                Number of            Total                          Slow Loans(1)
Project                         Borrowers            Amount                  Number             Amount
-------                         ---------            ------                  ------             ------

<S>                                <C>             <C>                         <C>             <C>
Beach Cove                          87             $5,440,601                  --              $  --
Condominium
North Myrtle Beach,
South Carolina

Bluewater                          103             $4,207,632                   1              $55,529
Condominium
Myrtle Beach,
South Carolina

Cobblestone Villas                  58             $2,101,438                  --              $  --
Condominium
Myrtle Beach,
South Carolina

Carolina Pines                      16             $  449,483                  --              $  --
Condominium
Conway, South Carolina
</TABLE>
----------
(1)  Loans over 60 days delinquent



         In most cases,  development  was  undertaken  through joint ventures in
which a subsidiary of Coastal Mortgage Bankers made an equity investment and, as
a partner,  participated in the profits or losses of the joint ventures. Coastal
Federal generally made loans to the joint ventures, subject to Coastal Federal's
underwriting  standards and policies and generally with the personal  guarantees
of  the  partners.   Generally,  Coastal  Federal  sold  participations  in  the
construction  loans,  which  had  interest  and fees at market  rates,  to other
financial institutions.
<PAGE>
         The business of real estate development  involves substantial risks. In
addition,  the  development  and sale of  condominium  projects  is subject to a
number of  federal  and state  statutes,  including,  but not  limited  to,  the
Interstate Land Sales Full Disclosure Act, Federal Securities Act of 1933, state
"Blue Sky" laws,  state real estate laws,  Federal  Unfair Trade  Practices Act,
South  Carolina  Unfair Trade  Practices  Act and the Racketeer  Influenced  and
Corrupt  Organizations  Act, the violation of which could result in liability to
the  participant.  Furthermore,  changes  in the  federal  income  tax laws have
reduced  the  attractiveness  of rental  property  as an  investment,  which may
adversely affect the ability to sell these properties.

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,
                                                ------------------------------------------------------------------------------------
                                                       1995                      1996                             1997
                                                -----------------     ------------------------------  ------------------------------
                                                          Percent               Percent                         Percent
                                                            of                    of      Increase                 of      Increase
                                                Amount     Total      Amount     Total    (Decrease)  Amount      Total   (Decrease)
                                                ------     -----      ------     -----    ----------  ------      -----   ----------
                                                                                   (Dollars in thousands)
<S>                                            <C>         <C>      <C>         <C>      <C>         <C>          <C>     <C>
Transaction accounts:
  NOW checking .............................   $ 29,852     10.93%  $ 35,654     11.38%  $  5,802    $  38,773     11.17  $  3,119
  Commercial checking ......................     16,494      6.04     19,926      6.36      3,432       23,765      6.85     3,839
                                               --------     -----   --------     -----   --------    ---------     -----  --------

Total transaction accounts .................     46,346     16.97     55,580     17.74      9,234       62,538     18.02     6,958
                                               --------     -----   --------     -----   --------    ---------     -----  --------

Money market demand accounts ...............     41,516     15.20     84,997     27.12     43,481      104,476     30.10    19,479
Savings accounts ...........................     46,421     17.00     42,840     13.66     (3,581)      39,445     11.36    (3,395)

Fixed-rate certificates (original maturity):
 3 months ..................................      3,431      1.26      2,122       .68     (1,309)       1,826       .53      (296)
 6 months ..................................      9,522      3.49     23,479      7.49     13,957       22,185      6.39    (1,294)
 9 months ..................................     26,751      9.80      9,293      2.96    (17,458)       7,342      2.12    (1,951)
 12 months .................................     57,315     21.00     47,059     15.01    (10,256)      43,901     12.64    (3,158)
 18 months .................................     12,426      4.55     20,981      6.69      8,555       32,250      9.29    11,269
 24 months .................................      3,845      1.41      4,049      1.29        204        7,390      2.13     3,341
 30 months .................................      1,786       .65      2,189       .70        403        4,809      1.39     2,620
 36 months .................................      9,504      3.48      8,944      2.85       (560)       9,215      2.65       271
 48 months .................................      4,613      1.69      4,728      1.51        115        5,664      1.63       936
 96 months .................................         24        --         26       .01          2           27       .01         1
 Mini-jumbo ................................         --        --         --        --         --           --        --        --
 Jumbo .....................................         --        --         --        --         --           --        --        --
                                               --------     -----   --------     -----   --------    ---------     -----  --------
                                                129,217     47.33    122,870     39.20     (6,347)     134,609     38.78    11,739
                                               --------     -----   --------     -----   --------    ---------     -----  --------
Variable rate certificates:
 (original maturity)
 18 months .................................      7,100      2.60      4,593      1.47     (2,507)       3,678      1.06      (915)
 30 months .................................      2,499       .90      2,550       .81         51        2,370       .68      (180)
                                               --------     -----   --------     -----   --------    ---------     -----  --------
Total variable .............................      9,599      3.50      7,143      2.28     (2,456)       6,048      1.74    (1,095)
                                               --------     -----   --------     -----   --------    ---------     -----  --------

Total certificates .........................    138,816     50.83    130,013     41.48     (8,803)     140,657     40.52    10,644
                                               --------     -----   --------     -----   --------    ---------     -----  --------

Total deposits .............................   $273,099    100.00%  $313,430    100.00%  $ 40,331    $ 347,116    100.00% $ 33,686
                                               ========    ======   ========    ======   ========    =========    ======  ========
</TABLE>
<PAGE>
Time Deposits by Maturity and Rate

    The following table sets forth the amount and maturities of time deposits at
September 30, 1997.
<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%...........      $ 93,712     $13,956        $2,364         $  547           $27      $110,606
 6.00 - 8.00%...........        18,230       9,482         1,164            807            --        29,683
 8.01 - 10.00%..........            --         266           102             --            --           368
                              --------     -------        ------         ------           ---      -------- 
   Total................      $111,942     $23,704        $3,630         $1,354           $27      $140,657
                              ========     =======        ======         ======           ===      ========

</TABLE>

    The  following  table sets forth the amount and  maturities of time deposits
with balances of $100,000 or more at September 30, 1997.
<TABLE>
<CAPTION>

                               Amount Due
  ----------------------------------------------------------------------------
   Within          Over 3                  Over 6                      Over 12
  3 months      through 6 months        through 12 months              Months             
  --------      ----------------        -----------------              ------             
                             (In thousands)
<S>                 <C>                     <C>                        <C>

  $3,639            $11,141                 $7,616                     $8,240
  ======            =======                 ======                     ======
</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.
Substantially all of Coastal Federal's  depositors are residents of the State of
South Carolina.

         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, 1997,
Coastal  Federal had advances  totaling  $101.5 million from the FHLB of Atlanta
due on various  dates  through  2005 with a weighted  average  interest  rate of
5.86%.
<PAGE>
         The FHLB of  Atlanta  functions  as a central  reserve  bank  providing
credit for savings 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, 1997, the
Bank did not have any 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, 1997, the
Bank had $2.7 million outstanding in customer repurchase agreements.
<PAGE>
         The following tables set forth certain information regarding short-term
borrowings by the Bank at the end of and during the periods indicated:
<TABLE>
<CAPTION>
                                                        At September 30,
                                              ---------------------------------
                                               1995          1996          1997
                                               ----          ----          ----
                                                     (Dollars in thousands)
<S>                                           <C>          <C>          <C>
Outstanding balance:
  Securities sold under agreements
    to repurchase:
    Customer ............................     $ 2,677      $ 3,365      $ 2,666
    Broker ..............................        --           --   
  Short-term FHLB advances ..............      36,989       54,404       68,620

Weighted average rate paid on:
  Securities sold under agreements
    to repurchase:
    Customer ............................        3.77%        3.57%       3.16%
    Broker ..............................        --           --           --
  Short-term FHLB advances ..............        6.40         5.68        5.60

Maximum amount of borrowings outstanding
  at any month end:
  Securities sold under agreements
    to repurchase:
    Customer ............................     $ 3,448      $ 3,950      $ 3,257
    Broker ..............................        --         12,840       37,516
  Short-term FHLB advances ..............      85,078       68,213       75,020
Approximate average short-term borrowings
  outstanding with respect to:
  Securities sold under agreements
    to repurchase:
    Customer ............................     $ 1,700      $ 2,900      $ 2,100
    Broker ..............................        --          4,100       17,200
  Short-term FHLB advances ..............      61,400       56,600       74,023


Weighted average rate paid on:
  Securities sold under agreements
    to repurchase:
    Customer ............................        3.70%        3.55%        3.36%
    Broker ..............................        --           5.40         5.60
  Short-term FHLB advances ..............        6.17         5.68         5.60
</TABLE>
Competition

         As of September 30, 1997,  Coastal Federal had the largest market share
(14.0%) of any financial  institution  located in Horry County,  South  Carolina
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
<PAGE>
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, 1997, the Company had 202 full-time  Associates and
15 part-time  Associates.  The  Associates  are not  represented by a collective
bargaining  unit.  The Bank  believes its  relationship  with its  Associates is
excellent.


                         REGULATION OF COASTAL FINANCIAL

General

         The  Corporation  is a savings  and loan  holding  company  within  the
meaning of the Home Owners' Loan Act of 1933 ("HOLA"),  as amended by FIRREA. As
such,  the  Corporation  is  registered  with  the  OTS  and is  subject  to OTS
regulations,  examinations, supervision and reporting requirements. As explained
more fully below under  "Regulation of Coastal  Federal - Federal  Regulation of
Savings  Associations,"  the key provisions of FIRREA  replaced the Federal Home
Loan Bank Board  ("FHLBB") with the OTS,  abolished the Federal Savings and Loan
Insurance Corporation ("FSLIC") and vested the prior insurance  responsibilities
of the FSLIC  with the FDIC.  As a  subsidiary  of a  savings  and loan  holding
company,  the Bank is subject to certain  restrictions  in its dealings with the
Corporation and with other companies affiliated with the Corporation and also is
subject to regulatory  requirements and provisions as a federal savings and loan
association.

Holding Company Acquisitions

         The HOLA and OTS  regulations  generally  prohibit  a savings  and loan
holding  company,  without prior OTS approval,  from acquiring any other savings
association  or  savings  and loan  holding  company or  controlling  the assets
thereof.  They also prohibit,  among other things,  any director or officer of a
savings and loan holding  company,  or any  individual who owns or controls more
than 25 percent of the voting  shares of such holding  company,  from  acquiring
control of any savings  association  not a  subsidiary  of such savings and loan
holding company, unless the acquisition is approved by the OTS.

Holding Company Activities

         As  a  unitary  savings  and  loan  holding  company,  the  Corporation
generally is not subject to activity  restrictions.  If the Corporation acquires
control of another  savings  bank as a separate  subsidiary,  it would  become a
multiple savings and loan holding company, and the activities of the Corporation
and any of its  subsidiaries  (other  than  the Bank or any  other  SAIF-insured
savings association) would become subject to such restrictions unless such other
associations  each  qualify  as  a  QTL  and  were  acquired  in  a  supervisory
acquisition.
<PAGE>
         If the Bank  fails  the QTL  test,  the  Corporation  must  obtain  the
approval of the OTS prior to continuing after such failure,  directly or through
its other  subsidiaries,  any business  activity  other than those  approved for
multiple savings and loan holding companies or their subsidiaries.  In addition,
within one year of such  failure  the  Corporation  must  register  as, and will
become subject to, the restrictions  applicable to bank holding  companies.  The
activities  authorized for a bank holding  company are more limited than are the
activities  authorized  for a  unitary  or  multiple  savings  and loan  holding
company. See "-- Qualified Thrift Lender Test."

         Coastal  Financial must obtain  approval from the OTS before  acquiring
control  of  more  than  5% of  the  voting  shares  of any  other  SAIF-insured
association.  Such  acquisitions  generally  are  prohibited if they result in a
multiple savings and loan holding company  controlling  savings  associations in
more than one state. However,  such interstate  acquisitions are permitted based
on specific  state  authorization  or in a supervisory  acquisition of a failing
savings association.

Affiliate Restrictions

         The  affiliate  restrictions  contained  in Sections 23A and 23B of the
Federal Reserve Act apply to all federally insured savings  associations and any
such  "affiliate." A savings and loan holding company,  its subsidiaries and any
other company under common control are  considered  affiliates of the subsidiary
savings association under the HOLA.  Generally,  Sections 23A and 23B: (i) limit
the extent to which the insured  association or its  subsidiaries  may engage in
certain covered transactions with an affiliate to an amount equal to ten percent
of such institution's capital and surplus, and contain an aggregate limit on all
such  transactions  with all  affiliates to an amount equal to twenty percent of
such capital and surplus,  and (ii)  require  that all such  transactions  be on
terms  substantially  the same, or at least as favorable to the  institution  or
subsidiary, as those provided to a non-affiliate. The term "Covered transaction"
includes the making of loans,  purchase of assets,  issuance of a guarantee  and
similar other types of  transactions.  Also, a savings  association may not make
any loan to an affiliate  unless the  affiliate  is engaged  only in  activities
permissible for bank holding companies. Only the Federal Reserve Board may grant
exemptions from the restrictions of Sections 23A and 23B. The OTS, however,  may
impose more stringent restrictions on savings associations for reasons of safety
and soundness.

Qualified Thrift Lender Test

         Any  savings  and  loan  holding   company  that   controls  a  savings
association  that fails the qualified  thrift  lender test,  as explained  under
"Regulation of Coastal Federal -- Qualified  Thrift Lender Test",  must,  within
one year after the date on which the association ceases to be a qualified thrift
lender,  register  as and  be  deemed  a bank  holding  company  subject  to all
applicable laws and regulations.


                          REGULATION OF COASTAL FEDERAL

General

         The  Bank  is  subject  to  extensive   regulation,   examination   and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by the
"HOLA" and, in certain respects,  the Federal Deposit Insurance Act ("FDIA") and
<PAGE>
the  regulations  issued by the OTS and the FDIC to  implement  these  statutes.
These laws and regulations  delineate the nature and extent of the activities in
which federal  savings  associations  may engage.  Lending  activities and other
investments   must  comply  with  various   statutory  and  regulatory   capital
requirements.  In addition,  the Bank's  relationship  with its  depositors  and
borrowers is also regulated to a great extent, especially in such matters as the
ownership of savings  accounts  and the form and content of the Bank's  mortgage
documents.  The Bank must file reports with the OTS and the FDIC  concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior  to  entering  into  certain   transactions   such  as  mergers  with,  or
acquisitions of, other financial  institutions.  There are periodic examinations
by the OTS and the FDIC to review the Bank's compliance with various  regulatory
requirements.  The regulatory  structure  also gives the regulatory  authorities
extensive  discretion  in  connection  with their  supervisory  and  enforcement
activities  and  examination  policies,  including  policies with respect to the
classification  of assets and the  establishment  of adequate loan loss reserves
for regulatory  purposes.  Any change in such policies,  whether by the OTS, the
FDIC or Congress,  could have a material adverse impact on the Corporation,  the
Bank and  their  operations.  The  Corporation,  as a savings  and loan  holding
company,  is also required to file certain  reports with,  and otherwise  comply
with the rules and regulations of the OTS.

Proposed Federal Legislation

         Legislation  is proposed  periodically  providing  for a  comprehensive
reform of the banking and thrift  industries,  and has included  provisions that
would (i) require federal savings  associations to convert to a national bank or
a  state-chartered  bank or thrift,  (ii)  require all savings and loan  holding
companies  to become bank  holding  companies  and (iii)  abolish the OTS. It is
uncertain  when or if any of this type of  legislation  will be  passed,  and if
passed, in what form the legislation would be passed.
As a result,  management cannot  accurately  predict the possible impact of such
legislation on the Bank.

Federal Regulation of Savings Associations

         Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general  oversight of the Secretary of the Treasury.
Except as modified by FIRREA,  the OTS possesses the  supervisory and regulatory
duties and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among  other  functions,  the OTS  issues  and  enforces  regulations  affecting
federally   insured   savings   associations   and  regularly   examines   these
institutions.

         Federal  Deposit  Insurance  Corporation.  The  FDIC is an  independent
federal agency established  originally to insure the deposits,  up to prescribed
statutory  limits,  of  federally  insured  banks and to preserve the safety and
soundness of the banking industry.  In 1989 the FDIC also became the insurer, up
to the  prescribed  limits,  of the deposit  accounts held at federally  insured
savings  associations  and established two separate  insurance  funds:  the Bank
Insurance  Fund  ("BIF")  and the SAIF.  As  insurer of  deposits,  the FDIC has
examination,   supervisory   and   enforcement   authority   over  all   savings
associations.

         The Bank's accounts are insured by the SAIF. The FDIC insures  deposits
at the Bank to the maximum  extent  permitted  by law. The Bank  currently  pays
deposit insurance  premiums to the FDIC based on a risk-based  assessment system
established  by the  FDIC for all  SAIF-member  institutions.  Under  applicable
<PAGE>
regulations,  institutions are assigned to one of three capital groups which are
based  solely on the level of an  institution's  capital -- "well  capitalized,"
"adequately  capitalized,"  and  "undercapitalized"  -- which are defined in the
same manner as the regulations  establishing the prompt corrective action system
under  Section 38 of the FDIA, as discussed  below.  These three groups are then
divided  into  three  subgroups  which  reflect  varying  levels of  supervisory
concern,  from those  which are  considered  to be  healthy  to those  which are
considered  to be of  substantial  supervisory  concern.  The  matrix so created
results in nine assessment risk  classifications,  with rates currently  ranging
from  .23%  of  insured  deposits  for  well   capitalized,   financially  sound
institutions  with only a few minor  weaknesses to .31% of insured  deposits for
undercapitalized  institutions  that pose a substantial risk of loss to the SAIF
unless effective  corrective action is taken.  Until the first half of 1996, the
same amounts applied to BIF member institutions. The FDIC is authorized to raise
assessment rates in certain  circumstances.  The Bank's assessments expensed for
the year ended September 30,1997, equaled $283,000.

         Until the second half of 1995,  the same matrix  applied to  BIF-member
institutions.  As a result of the BIF  having  reached  its  designated  reserve
ratio,  effective  January  1,  1996,  the FDIC  substantially  reduced  deposit
insurance premiums for well-capitalized,  well-managed,  financial  institutions
that are  members  of the BIF.  Under the new  assessment  schedule,  rates were
reduced  to a range  of 0 to 27  basis  points,  with  approximately  92% of BIF
members paying the statutory minimum annual assessment rate of $2,000.  Pursuant
to the Deposit Insurance Fund ("DIF"),  which was enacted on September 30, 1996,
the FDIC imposed a special  one-time  assessment on each depository  institution
with  SAIF-assessable  deposits  so that  the SAIF may  achieve  its  designated
reserve ratio.  The Bank's  assessment  amounted to $1.6 million and was accrued
during the quarter ended  September  30, 1996.  Beginning  January 1, 1997,  the
assessment  schedule  for SAIF members will be the same as that for BIF members.
In  addition,  beginning  January  1,  1997,  SAIF  members  will be  charged an
assessment of approximately  0.065% of SAIF-assessable  deposits for the purpose
of  paying  interest  on the  obligations  issued by the  Financing  Corporation
("FICO") in the 1980s to help fund the thrift industry  cleanup.  BIF-assessable
deposits will be charged an assessment to help pay interest on the FICO bonds at
a rate of  approximately  0.013%  until the earlier of December  31, 1999 or the
date upon which the last savings  association  ceases to exist, after which time
the assessment will be the same for all insured deposits.

         The FDIC may terminate the deposit insurance of any insured  depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance  temporarily during the hearing process for the permanent  termination
of  insurance,  if the  institution  has no tangible  capital.  If  insurance of
accounts is  terminated,  the  accounts at the  institution  at that time,  less
subsequent withdrawals,  shall continue to be insured for a period of six months
to two years,  as determined by the FDIC.  Management is unaware of any existing
circumstance  which could result in termination of the deposit  insurance of the
Bank.

         Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
now is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the FHLBs
carry out their housing finance mission; ensure that the FHLBs remain adequately
capitalized and able to raise funds in the capital  market;  and ensure that the
FHLBs operate in a safe and sound manner.
<PAGE>
         The Bank, as a member of the  FHLB-Atlanta,  is required to acquire and
hold  shares of  capital  stock in the  FHLB-Atlanta  in an amount  equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or (ii) 1/20 of its advances  (borrowings)  from the FHLB-Atlanta.
The  Bank  is  in  compliance  with  this  requirement  with  an  investment  in
FHLB-Atlanta stock of $5.6 million at September 30, 1997.

         Among  other  benefits,  the FHLB  provides a central  credit  facility
primarily for member institutions.  It is funded primarily from proceeds derived
from the sale of consolidated  obligations of the FHLB System. It makes advances
to members in accordance  with policies and  procedures  established by the FHFB
and the Board of Directors of the FHLB-Atlanta.

         Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings  accounts,  bankers'  acceptances,  and specified U.S.
Government,  state or federal agency  obligations and certain other investments)
equal to a monthly  average of not less than a specified  percentage  (currently
4.0%) of its net  withdrawable  accounts plus  short-term  borrowings.  Monetary
penalties  may be  imposed  for  failure  to meet  liquidity  requirements.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations -- Liquidity and Capital Resources" contained in the Annual Report

         Prompt  Corrective  Action.  Under  the FDIA,  as added by the  Federal
Deposit Insurance Corporation  Improvement Act of 1991 ("FDICIA"),  each federal
banking agency is required to implement a system of prompt corrective action for
institutions  which it regulates.  The federal banking agencies have promulgated
substantially  similar regulations to implement this system of prompt corrective
action.  Under the regulations,  an institution  shall be deemed to be (i) "well
capitalized" if it has a total risk-based  capital ratio of 10.0% or more, has a
Tier I risk-based  capital ratio of 6.0% or more, has a Tier I leverage  capital
ratio of 5.0% or more and is not subject to specified  requirements  to meet and
maintain as specific  capital level for any capital  measure;  (ii)  "adequately
capitalized" if it has a total risk-based  capital ratio of 8.0% or more, a Tier
I risk-based  capital ratio of 4.0% or more and a Tier I leverage  capital ratio
of 4.0% or more  (3.0%  under  certain  circumstances)  and  does  not  meet the
definition of "well  capitalized;"  (iii)  "undercapitalized"  if it has a total
risk-based  capital  ratio that is less than 8.0%, a Tier I  risk-based  capital
ratio  that is less than 4.0% or a Tier I  leverage  capital  ratio that is less
than   4.0%   (3.0%   under   certain   circumstances);    (iv)   "significantly
undercapitalized"  if it has a total risk-based  capital ratio that is less than
6.0%,  a Tier I  risk-based  capital  ratio  that is less  than 3.0% or a Tier I
leverage   capital   ratio  that  is  less  than  3.0%;   and  (v)   "critically
undercapitalized"  if it has a ratio of tangible  equity to total assets that is
equal to or less than 2.0%.

         The FDIA and the  implementing  regulations also provide that a federal
banking agency may, after notice and an opportunity for a hearing,  reclassify a
well  capitalized  institution  as  adequately  capitalized  and may  require an
adequately capitalized institution or an undercapitalized  institution to comply
with  supervisory  actions  as if it  were in the  next  lower  category  if the
institution  is in an unsafe or unsound  condition  or  engaging in an unsafe or
unsound  practice.  (The  OTS  may  not,  however,  reclassify  a  significantly
undercapitalized institution as critically undercapitalized.)
<PAGE>
         An institution  generally must file a written capital  restoration plan
which meets specified  requirements,  as well as a performance  guaranty by each
company that controls the  institution,  with the  appropriate  federal  banking
agency  within 45 days of the date that the  institution  receives  notice or is
deemed   to   have   notice   that   it   is   undercapitalized,   significantly
undercapitalized  or  critically  undercapitalized.  Immediately  upon  becoming
undercapitalized,  an  institution  shall become  subject to the  provisions  of
Section 38 of the FDIA,  which sets forth various  mandatory  and  discretionary
restrictions on its operations.

         At September 30, 1997, the Bank was  categorized as "well  capitalized"
under the prompt corrective action regulations of the OTS.

         Standards  for Safety and  Soundness.  The FDIA  requires  the  federal
banking  regulatory  agencies to  prescribe,  by  regulation,  standards for all
insured depository institutions relating to: (i) internal controls,  information
systems and  internal  audit  systems;  (ii) loan  documentation;  (iii)  credit
underwriting;  (iv) interest  rate risk  exposure;  (v) asset  growth;  and (vi)
compensation,  fees and benefits.  The federal banking agencies recently adopted
final regulations and Interagency  Guidelines  Prescribing  Standards for Safety
and  Soundness  ("Guidelines")  to  implement  safety  and  soundness  standards
required  by the  FDIA.  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. The agencies
also proposed asset quality and earnings  standards  which, if adopted in final,
would  be added to the  Guidelines.  Under  the  final  regulations,  if the OTS
determines  that  the  Bank  fails  to  meet  any  standard  prescribed  by  the
Guidelines,  the  agency  may  require  the  Bank to  submit  to the  agency  an
acceptable  plan to achieve  compliance  with the  standard,  as required by the
FDIA. The final regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.

Qualified Thrift Lender Test

         All savings associations are required to meet a qualified thrift lender
("QTL")  test set forth in the HOLA and  regulations  of the OTS  thereunder  to
avoid operating certain restrictions. A savings institution that fails to become
or  remain a QTL  shall  either  become a  national  bank or be  subject  to the
following  restrictions on its operations:  (i) the association may not make any
new  investment  or engage in  activities  that  would  not be  permissible  for
national  banks;  (ii) the  association  may not establish any new branch office
where a national bank located in the savings  institution's home state would not
be able to establish a branch office;  (iii) the association shall be ineligible
to obtain new advances  from any FHLB;  and (iv) the payment of dividends by the
association shall be subject to the rules regarding the statutory and regulatory
dividend restrictions  applicable to national banks. Also, beginning three years
after the date on which the savings  institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in any
activity not  permissible for a national bank and would be required to repay any
outstanding  advances to any FHLB.  In addition,  within one year of the date on
which  savings  association  controlled  by a company  ceases  to be a QTL,  the
company must register as a bank holding  company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if it
thereafter complies with the QTL test.
<PAGE>
         Currently,  the QTL test requires that either an institution qualify as
a  domestic  building  and  loan  association  under  the Code or that 65% of an
institution's  "portfolio  assets" (as defined)  consist of certain  housing and
consumer-related  assets  on a  monthly  average  basis  in nine out of every 12
months.  Assets that  qualify  without  limit for  inclusion  as part of the 65%
requirement are loans made to purchase, refinance,  construct, improve or repair
loans;  mortgage-backed  securities (where the mortgages are secured by domestic
residential  housing or manufactured  housing);  FHLB stock;  direct or indirect
obligations  of the FDIC;  and loans for  educational  purposes,  loans to small
businesses  and loans made through  credit  cards.  In addition,  the  following
assets,  among others, may be included in meeting the test subject to an overall
limit of 20% of the savings  institution's  portfolio assets: 50% of residential
mortgage  loans  originated  and sold  within  90 days of  origination;  100% of
consumer  loans;  and stock  issued by the FHLMC or the FNMA.  Portfolio  assets
consist  of total  assets  minus the sum of (i)  goodwill  and other  intangible
assets,  (ii) property used by the savings  institution to conduct its business,
and  (iii)  liquid  assets  up to 20%  of the  institution's  total  assets.  At
September 30, 1997, the Bank's qualified thrift investments  exceeded 65% of its
portfolio assets as required by regulation.

         Capital Requirements.  Under OTS regulations a savings association must
satisfy three minimum capital requirements:  core capital,  tangible capital and
risk-based capital. Savings associations must meet all of the standards in order
to comply with the capital  requirements.  The Corporation is not subject to any
minimum capital requirements.

         OTS capital  regulations  establish a 3% core capital ratio (defined as
the ratio of core capital to adjusted total assets).  Core capital is defined to
include common stockholders' equity, noncumulative perpetual preferred stock and
any related surplus,  and minority  interests in equity accounts of consolidated
subsidiaries,  less  (i)  any  intangible  assets;  and  (ii)  equity  and  debt
investments in  subsidiaries  that are not "includable  subsidiaries,"  which is
defined as  subsidiaries  engaged solely in activities not  impermissible  for a
national bank, engaged in activities  impermissible for a national bank but only
as an agent for its customers, or engaged solely in mortgage-banking activities.
In calculating  adjusted total assets,  adjustments  are made to total assets to
give effect to the exclusion of certain assets from capital and to appropriately
account for the investments in and assets of both  includable and  nonincludable
subsidiaries.  Institutions that fail to meet the core capital requirement would
be required to file with the OTS a capital plan that details the steps they will
take to reach  compliance.  In  addition,  the  OTS'  prompt  corrective  action
regulation  provides that a savings institution that has a core capital leverage
ratio  of  less  than  4% (3%  for  institutions  receiving  the  highest  CAMEL
examination rating) will be deemed to be  "undercapitalized"  and may be subject
to certain restrictions. See "-- Prompt Corrective Action."

         As required by federal law,  the OTS has  proposed a rule  revising its
minimum core capital  requirement  to be no less  stringent than that imposed on
national banks. The OTS has proposed that only those savings  associations rated
a composite  one (the highest  rating) under the CAMEL rating system for savings
associations  will be  permitted  to operate at or near the  regulatory  minimum
leverage  ratio of 3%.  All  other  savings  associations  will be  required  to
maintain  a  minimum  leverage  ratio  of 4% to 5%.  The OTS  will  assess  each
individual savings association through the supervisory process on a case-by-case
basis to determine the applicable  requirement.  No assurance can be given as to
the final  form of any such  regulation,  the date of its  effectiveness  or the
requirement applicable to the Bank.
<PAGE>
         Savings  associations  also must maintain  "tangible  capital" not less
than 1.5% of the Bank's  adjusted total assets.  "Tangible  capital" is defined,
generally, as core capital minus any "intangible assets."

         Each savings  institution must maintain total capital equal to at least
8% of  risk-weighted  assets.  Total  capital  consists  of the sum of core  and
supplementary  capital,  provided that supplementary  capital cannot exceed core
capital,  as previously  defined.  Supplementary  capital includes (i) permanent
capital  instruments such as cumulative  perpetual  preferred  stock,  perpetual
subordinated  debt, and mandatory  convertible  subordinated debt, (ii) maturing
capital instruments such as subordinated debt, intermediate-term preferred stock
and mandatory redeemable  preferred stock, subject to an amortization  schedule,
and (iii)  general  valuation  loan and  lease  loss  allowances  up to 1.25% of
risk-weighted assets.

         The risk-based capital regulation assigns each balance sheet asset held
by a savings  institution to one of four risk categories  based on the amount of
credit risk associated with that particular class of assets. Assets not included
for  purposes  of   calculating   capital  are  not   included  in   calculating
risk-weighted  assets. The categories range from 0% for cash and securities that
are  backed by the full  faith and  credit  of the U.S.  Government  to 100% for
repossessed assets or assets more than 90 days past due. Qualifying  residential
mortgage loans (including  multi-family  mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans are
assigned a 100% risk weight, as are nonqualifying residential mortgage loans and
that portion of land loans and  nonresidential  construction  loans which do not
exceed an 80% loan-to-value  ratio. The book value of assets in each category is
multiplied by the weighing  factor (from 0% to 100%)  assigned of that category.
These  products  are then  totaled  to  arrive  at total  risk-weighted  assets.
Off-balance sheet items are included in risk-weighted  assets by converting them
to an approximate balance sheet "credit equivalent amount" based on a conversion
schedule.  These credit equivalent  amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.

         The OTS has  incorporated  an  interest  rate risk  component  into its
regulatory  capital  rule.  Under the rule,  savings  associations  with  "above
normal"  interest rate risk exposure  would be subject to a deduction from total
capital for purposes of calculating  their risk-based  capital  requirements.  A
savings  association's  interest rate risk is measured by the decline in the net
portfolio  value of its  assets  (i.e.,  the  difference  between  incoming  and
outgoing  discounted cash flows from assets,  liabilities and off-balance  sheet
contracts)  that would result from a  hypothetical  200 basis point  increase or
decrease in market interest rates divided by the estimated economic value of the
association's  assets,  as calculated in accordance with guidelines set forth by
the OTS.  A savings  association  whose  measured  interest  rate risk  exposure
exceeds 2% must deduct an interest rate risk component in calculating  its total
capital under the  risk-based  capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%,  multiplied by the  estimated  economic  value of the
association's assets. That dollar amount is deducted from an association's total
capital in calculating compliance with its risk-based capital requirement. Under
the  rule,  there  is a  two  quarter  lag  between  the  reporting  date  of an
institution's  financial  data  and the  effective  date  for  the  new  capital
requirement  based on that data. A savings  association with assets of less than
$300 million and  risk-based  capital  ratios in excess of 12% is not subject to
the interest rate risk component,  unless the OTS determines otherwise. The rule
<PAGE>
also provides  that the Director of the OTS may waive or defer an  association's
interest  rate  risk   component  on  a   case-by-case   basis.   Under  certain
circumstances,  a savings  association may request an adjustment to its interest
rate risk  component if it believes that the  OTS-calculated  interest rate risk
component  overstates  its interest  rate risk  exposure.  In addition,  certain
"well-capitalized"  institutions  may  obtain  authorization  to use  their  own
interest rate risk model to calculate their interest rate risk component in lieu
of the OTS-calculated  amount. The OTS has postponed the date that the component
will  first be  deducted  from an  institution's  total  capital  until  savings
associations  become  familiar with the process for  requesting an adjustment to
its interest rate risk component.

         At September 30, 1997,  Coastal Federal's core capital of approximately
$31.2 million, or 6.31% of adjusted total assets, was $16.5 million in excess of
the OTS requirement of $14.7 million, or 3% of adjusted total assets. As of such
date, the Bank's tangible  capital of approximately  $31.2 million,  or 6.31% of
adjusted  total assets,  was $23.8 million in excess of the OTS  requirement  of
$7.4 million, or 1.5% of adjusted total assets.  Finally, at September 30, 1997,
the Bank had  risk-based  capital of  approximately  $34.7  million or 11.05% of
total  risk-weighted  assets,  which  was  $9.6  million  in  excess  of the OTS
risk-based capital  requirement of $25.1 million or 8% of risk-weighted  assets.
See note 12 on page 28 of the Company's  Annual Report to  Stockholders  for the
fiscal year ended September 30, 1997.

         Limitations On Capital  Distributions.  OTS regulations  impose uniform
limitations  on the  ability of all  savings  associations  to engage in various
distributions  of capital  such as  dividends,  stock  repurchases  and cash-out
mergers. In addition,  OTS regulations require the Bank to give the OTS 30 days'
advance  notice of any proposed  declaration  of dividends,  and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends. The
regulation  utilizes a  three-tiered  approach  which permits  various levels of
distributions based primarily upon a savings association's capital level.

         A Tier 1 savings  association  generally  has  capital in excess of its
fully phased-in capital  requirement (both before and after the proposed capital
distribution)  and has not been  notified  by the OTS that it is in need of more
than  normal  supervision.  A Tier  1  savings  association  may  make  (without
application but upon prior notice to, and no objection made by, the OTS) capital
distributions during a calendar year up to 100% of its net income to date during
the calendar year plus one-half its surplus  capital ratio (i.e.,  the amount of
capital in excess of its fully  phased-in  requirement)  at the beginning of the
calendar year.  Capital  distributions  in excess of such amount require advance
approval from the OTS.

         A savings  association with either (i) capital equal to or in excess of
its  minimum  capital   requirement  but  below  its  fully  phased-in   capital
requirement (both before and after the proposed capital  distribution),  or (ii)
capital in excess of its fully phased-in  capital  requirement  (both before and
after the proposed capital  distribution) but which has been notified by the OTS
that it is in need of more than normal  supervision may be designated by the OTS
as a Tier 2  association.  Such an  association  may make (without  application)
capital  distributions up to an amount equal to 75% of its net income during the
previous four quarters  depending on how close the association is to meeting its
fully phased-in capital requirement. Capital distributions exceeding this amount
require prior OTS approval.
<PAGE>
         Tier 3  associations  include  savings  associations  with  either  (i)
capital  below  the  minimum  capital  requirement  (either  before or after the
proposed capital distribution), or (ii) capital in excess of the fully phased-in
capital  requirement  but  which has been  notified  by the OTS that it shall be
treated  as a Tier 3  association  because  it is in need of  more  than  normal
supervision.  Tier 3 associations may not make any capital distributions without
prior approval from the OTS.

         The Bank is currently  meeting the  criteria to be  designated a Tier 1
association and,  consequently,  could at its option (after prior notice to, and
no objection  made by, the OTS)  distribute  up to 100% of its net income during
the calendar year plus 50% of its surplus  capital ratio at the beginning of the
calendar year less any distributions previously paid during the year.

         Loans  to One  Borrower.  Under  the  HOLA,  savings  institutions  are
generally  subject  to the  national  bank  limit  on  loans  to  one  borrower.
Generally,  this limit is 15% of the Bank's unimpaired capital and surplus, plus
an additional 10% of unimpaired capital and surplus,  if such loan is secured by
readily-marketable  collateral,  which is defined to include  certain  financial
instruments  and  bullion.  The OTS by  regulation  has amended the loans to one
borrower  rule to permit  savings  associations  meeting  certain  requirements,
including  capital  requirements,  to extend loans to one borrower in additional
amounts under circumstances  limited essentially to loans to develop or complete
residential  housing units.  At September 30, 1997, the Bank's limit on loans to
one borrower  was $5.2  million.  However,  the Bank may request to increase its
loan to one borrower for  borrowers  who develop one to four family  residential
projects. At September 30, 1997, the Bank's largest aggregate amount of loans to
one  borrower was $5.6  million,  all of which was  performing  according to its
terms.  The Bank received  permission to increase the loan to one borrower limit
on this borrower.

         Activities  of  Savings  Associations  and Their  Subsidiaries.  FIRREA
provides that, when a savings  association  establishes or acquires a subsidiary
or elects to conduct any new activity  through a subsidiary that the association
controls,  the savings  association shall notify the FDIC and the OTS 30 days in
advance and provide the  information  each agency may, by  regulation,  require.
Savings  associations  also must  conduct  the  activities  of  subsidiaries  in
accordance with existing regulations and orders.

         The OTS may determine that the continuation by a savings association of
its ownership  control of, or its relationship to, the subsidiary  constitutes a
serious risk to the safety,  soundness or  stability  of the  association  or is
inconsistent  with sound  banking  practices  or with the  purposes of the FDIA.
Based upon that  determination,  the FDIC or the OTS has the  authority to order
the savings association to divest itself of control of the subsidiary.  The FDIC
also may  determine by regulation  or order that any specific  activity  poses a
serious  threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.

         Transactions with Affiliates.  Pursuant to FIRREA, savings associations
must comply with Sections 23A and 23B of the Federal  Reserve Act ("Sections 23A
and 23B") relative to transactions with affiliates in the same manner and to the
same extent as if the savings  association were a Federal Reserve member bank. A
savings and loan holding  company,  its subsidiaries and any other company under
common control are considered  affiliates of the subsidiary savings  association
under the HOLA.  Generally,  Sections 23A and 23B: (i) limit the extent to which
the  insured  association  or its  subsidiaries  may engage in  certain  covered
transactions  with an affiliate to an amount equal to 10% of such  institution's
<PAGE>
capital and surplus and place an aggregate limit on all such  transactions  with
affiliates  to an amount  equal to 20% of such  capital  and  surplus,  and (ii)
require that all such  transactions  be on terms  substantially  the same, or at
least as favorable to the  institution  or  subsidiary,  as those  provided to a
non-affiliate.  The term  "covered  transaction"  includes  the making of loans,
purchase  of  assets,  issuance  of  a  guaranty  and  similar  other  types  of
transactions.

         Three additional rules apply to savings  associations under FIRREA: (i)
a savings  association  may not make any loan or other extension of credit to an
affiliate  unless that affiliate is engaged only in activities  permissible  for
bank holding companies; (ii) a savings association may not purchase or invest in
securities  issued by an affiliate (other than securities of a subsidiary);  and
(iii) the OTS may, for reasons of safety and  soundness,  impose more  stringent
restrictions on savings  associations  but may not exempt  transactions  from or
otherwise abridge Section 23A or 23B.  Exemptions from Section 23A or 23B may be
granted only by the Federal Reserve Board, as is currently the case with respect
to all FDIC-insured  banks. The Bank has not been significantly  affected by the
rules regarding transactions with affiliates.

         The Bank's authority to extend credit to executive officers,  directors
and 10%  shareholders,  as well  as  entities  controlled  by such  persons,  is
currently  governed by Sections 22(g) and 22(h) of the Federal  Reserve Act, and
Regulation O thereunder. Among other things, these regulations require that such
loans be made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Regulation O also places  individual and aggregate limits on the amount of loans
the  Bank  may make to such  persons  based,  in  part,  on the  Bank's  capital
position, and requires certain board approval procedures to be followed. The OTS
regulations,  with  certain  minor  variances,  apply  Regulation  O to  savings
institutions.

         Regulatory and Criminal Enforcement Provisions. Under the FDIA, the OTS
has primary  enforcement  responsibility  over savings  institutions and has the
authority  to  bring  action  against  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
or directors, receivership, conservatorship or termination of deposit insurance.
Civil  penalties  cover a wide range of violations and can amount to $25,000 per
day, or $1 million per day in especially  egregious  cases.  Under the FDIA, the
FDIC has the authority to recommend to the Director of the OTS that  enforcement
action be taken with respect to a particular savings  institution.  If action is
not taken by the  Director,  the FDIC has  authority  to take such action  under
certain  circumstances.  Federal law also  establishes  criminal  penalties  for
certain violations.

                                    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.
<PAGE>
         Tax Bad Debt Reserves.  For taxable years beginning prior to January 1,
1996, savings institutions such as the Bank which met certain definitional tests
primarily relating to their assets and the nature of their business ("qualifying
thrifts") were permitted to establish a reserve for bad debts and to make annual
additions  thereto,  which additions may, within specified formula limits,  have
been deducted in arriving at their taxable  income.  The Bank's  deduction  with
respect to  "qualifying  loans,"  which are  generally  loans secured by certain
interests in real property,  may have been computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income,  computed  with certain  modifications  and reduced by the amount of any
permitted  additions to the nonqualifying  reserve.  Each year the Bank selected
the most favorable way to calculate the deduction attributable to an addition to
the tax bad debt reserve. The Bank used the percentage-of-taxable-income  method
for the taxable years ended  September 30, 1995 and 1996.  For the period ending
September 30, 1997, the Bank was required to change its tax method of accounting
for bad debts to the experience method.

         Recently enacted legislation  repealed the reserve method of accounting
for bad debt  reserves for tax years  beginning  after  December 31, 1995.  As a
result, savings associations will no longer be able to calculate their deduction
for bad debts using the percentage-of-taxable-income  method. Instead, they will
be required to compute their deduction based on specific  charge-offs during the
taxable year or, if the savings  association or its controlled  group had assets
of less than $500  million,  based on actual  loss  experience  over a period of
years.  For the taxable year ended September 30, 1997, the controlled  group has
assets  less  than  $500  million.   The  legislation   also  requires   savings
associations  to  recapture  into  taxable  income over a six-year  period their
post-1987  additions  to  their  bad  debt  tax  reserves,   thereby  generating
additional  current tax liability.  At September 30, 1997, the Bank's  post-1987
reserves totaled approximately $1.53 million. The recapture may be suspended for
up to two years if, during those years, the institution  satisfies a residential
loan requirement.  The Bank anticipates meeting the residential loan requirement
for the taxable year ending September 30, 1997.

         Under prior law, if the Bank  failed to satisfy the  qualifying  thrift
definition  tests in any taxable year,  it would be unable to make  additions to
its bad debt reserve. Instead, the Bank would be required to deduct bad debts as
they occur and would  additionally be required to recapture its bad debt reserve
deductions  ratably over a multi-year  period. At September 30, 1997, the Bank's
total bad debt reserve for tax purposes was approximately $ 6.71 million.  Among
other things, the qualifying thrift definitional tests required the Bank to hold
at least 60% of its assets as "qualifying  assets".  Qualifying assets generally
include cash,  obligations of the United States or any agency or instrumentality
thereof,  certain obligations of a state or political subdivision thereof, loans
secured  by  interests  in  improved  residential  real  property  or by savings
accounts,  student  loans and  property  used by the Bank in the  conduct of its
banking business.  Under current law, a savings association will not be required
to recapture its pre-1988 bad debt reserves if it ceases to meet the  qualifying
thrift definitional tests.  However, if the Bank fails to meet the definition of
a  "bank"  under  Internal  Revenue  Code  Section  581 it will be  required  to
recapture its pre-1988 tax bad debt reserves.  The Bank anticipates  meeting the
definition of a "bank" in the future.

         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
<PAGE>
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
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.

         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, 1997.
<TABLE>
<CAPTION>
                                                    Total Investment
                                                    Including Land,             Net Book        Approximate
                                    Year           Building, Furni-           Value as of          Square        Owned/
Location                           Opened          ture and Fixtures            9/30/97            Footage       Leased
--------                           ------          -----------------            -------            -------       ------
                                                                (Dollars in thousands)
<S>                                 <C>                   <C>                    <C>              <C>            <C>
Main Office
2619 Oak St.                        1980                  $6,864                 $2,929           25,000         Owned
Myrtle Beach, SC (1)

Dunes Office
7500 North Kings Hwy                1971                     543                    157            2,000         Owned
Myrtle Beach, SC

Ocean Drive Office
521 Main Street                     1973                     989                    535            4,100         Owned
North Myrtle Beach, SC

Surfside Office
112 Highway 17 South                1975                     642                    220            2,300         Owned
 & Glenns Bay Road
Surfside Beach, SC

Conway Office
310 Highway 378                     1976                     909                    315            2,882         Owned
Conway, SC

Socastee Office
1 Cimerron Drive                    1981                     807                    254            2,275         Owned
Myrtle Beach, SC

Murrells Inlet Office
Highway 17 South                    1986                   1,075                    636            3,450         Owned
Murrells Inlet, SC

Waccamaw Medical Pk Office
7000 Waccamaw Medical Pk Rd         1986                     632                    361            1,450         Owned
Conway, SC

Florence Office
1385 Alice Drive                    1996                     365                    317            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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                    Total Investment
                                                    Including Land,             Net Book        Approximate
                                    Year           Building, Furni-           Value as of          Square        Owned/
Location                           Opened          ture and Fixtures            9/30/97            Footage       Leased
--------                           ------          -----------------            -------            -------       ------
                                                                (Dollars in thousands)
<S>                                 <C>                   <C>                    <C>              <C>            <C>
Coastal Investments
 Corporation
2619 Oak Street                     1987                      72                     40             N/A           N/A
Myrtle Beach, SC

Coastal Federal Mortgage, Inc.
1385 Alice Drive                    1995                     170                    138           1,038          Leased
Florence, SC
<CAPTION>


                                                  Total Investment
                                                  Including Land,             Net Book
                                     Year         Building, Furni-           Value as of       Square         Owned/
Location                            Opened        ture and Fixtures            9/30/97         Footage        Leased
--------                            ------        -----------------            -------         -------        ------
                                                                (Dollars in thousands)
<S>                                <C>                  <C>                   <C>              <C>            <C>       
Sunset Beach Office
7290 Beach Drive, SW               1994                    26                     19              900         Leased
Sunset Beach, NC

South Brunswick Office             Under
1625 Seaside Road S.W.             Construction           496                    496            3,000         Owned
Sunset Beach, NC

Mall Plaza                         1997                 1,143                  1,143           17,500         Owned
504 27th Avenue North
Myrtle Beach, SC
------------
</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 $7.6 million at September 30, 1997. See Note 6 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.

         The Company began working on year 2000 compliance issues in early 1997.
Its data  processor is currently  65% complete with their  programming.  Testing
will  begin in July 1998 and the  Company  expects to be in full  compliance  by
December 31, 1998. Internal software applications and hardware compliance issues
will be resolved by  December  31,  1998,  to allow  testing in early 1999.  The
Company  believes it has adequate  resources  and funds to address the year 2000
issues.  The Company is also in the process of addressing any loan relationships
it believes could be materially effected by year 2000 issues.
<PAGE>
Item 3. Legal Proceedings

         The Bank is a defendant in one significant lawsuit as summarized below.

         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 and does not  anticipate  any settlement
discussions.

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

         Not applicable.

                                     PART II


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

         The information  contained under the section  captioned "Market for the
Corporation's Common Stock and Related Stockholder Matters" in the Corporation's
Annual  Report to  Stockholders  for the Fiscal  Year Ended  September  30, 1997
("Annual Report") is incorporated herein by reference.

Item 6.  Selected Financial Data

         The information  contained in the section captioned "Selected 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 words:  anticipate,  estimate,  expect, project,  target, goal, and
similar expressions, when used in disclosure documents, are intended to identify
forward-looking  statements  within the meaning of Section 27A of the Securities
Act of 1933.  Such  forward-looking  statements  are  subject to certain  risks,
uncertainties,  and assumptions  including those set forth below.  Should one or
more  of  these  risks  or  uncertainties  materialize,   or  should  underlying
assumptions  prove  incorrect,  actual  results may vary  materially  from those
expected or projected.  These  forward-looking  statements  speak only as of the
date of the document. The Bank expressly disclaims any obligation or undertaking
to publicly  release any updates or revisions to any  forward-looking  statement
contained herein to reflect any change in the Bank's expectations with regard to
any change in events, conditions or circumstances on which any such statement is
based.
<PAGE>
         The Bank's Asset Liability  Management  Committee ("ALCO") monitors and
considers  methods of  managing  exposure  to  interest  rate  risk.  The Bank's
exposure to interest rate risk is reviewed on at least a quarterly  basis by the
Board of Directors and the ALCO.  Interest rate risk exposure is measured  using
interest  rate  sensitivity  analysis  to  determine  the  Bank's  change in net
portfolio value in the event of hypothetical changes in interest rates. The ALCO
is charged with the  responsibility  to maintain the level of sensitivity of the
Bank's net portfolio value within Board approved limits.

         Net portfolio value represents the market value of portfolio equity and
is equal to the market value of assets  minus the market  value of  liabilities,
with  adjustments  made for  off-balance  sheet  items  over a range of  assumed
changes in market interest  rates.  The Bank's Board of Directors has adopted an
interest rate risk policy which establishes  maximum allowable  decreases in NPV
in the event of a sudden and  sustained  one hundred to four hundred basis point
increase or decrease in market interest rates.  The following table presents the
Bank's projected change in NPV for the various rate shock levels as of September
30, 1997.
<TABLE>
<CAPTION>
                                                    Market Value of
Change in Interest Rates       Board Limit         Portfolio Equity          Percent Change
------------------------       -----------         ----------------          --------------
                                                    (In Thousands)
<S>                            <C>                      <C>                     <C>
400 basis point rise           -44.00 %                 $ 41,209                -24.68 %
300 basis point rise           -32.00 %                 $ 46,331                -15.32 %
200 basis point rise           -20.00 %                 $ 50,635                - 7.46 %
100 basis point rise           -11.00 %                 $ 53,617                - 2.01 %
No Change                          00 %                 $ 54,715
100 basis point decline        -18.00 %                 $ 54,194                - 0.95 %
200 basis point decline        -22.00 %                 $ 53,561                - 2.11 %
300 basis point decline        -37.00 %                 $ 53,924                - 1.45 %
400 basis point decline        -55.00 %                 $ 55,573                  1.57 %
</TABLE>

The  preceding  table  indicates  that at September  30, 1997, in the event of a
sudden and sustained  increase in prevailing  market interest rates,  the Bank's
NPV would be expected to decrease, and that in the event of a sudden decrease in
prevailing  market  interest  rates,  the Bank's NPV would be expected to change
minimally.  At September  30,  1997,  the Bank's  estimated  changes in NPV were
within the limits established by the Board of Directors.

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

The Bank also uses  interest  rate  sensitivity  gap  analysis  to  monitor  the
relationship between the maturity and repricing of its  interest-earning  assets
and  interest-bearing  liabilities.  Interest rate sensitivity gap is defined as
the  difference  between  the  amount of  interest-earning  assets  maturing  or
repricing  within a specific  time  period  and the  amount of  interest-bearing
liabilities  maturing  or  repricing  within  the  same  time  period.  A gap is
considered  positive when the amount of  interest-rate-sensitive  assets exceeds
the amount of interest-rate-sensitive liabilities. Generally, during a period of
rising rates, a positive gap would result in an increase in net interest income.
<PAGE>
Conversely,  during a period of falling  interest  rates,  a positive  gap would
result in a decrease in net interest  income.  Management's  goal is to maintain
reasonable  balance between exposure to interest rate fluctuations and earnings.
The Company's one-year  cumulative gap is a positive $.5 million, or .11% of the
Company's  total  assets of $494.0  million at September  30,  1997.  For futher
information  concerning the Bank's market risk, see the table on page 14 of this
document.

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
1998 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, 48,                  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   Federal
                                        Mortgage    and   Coastal    Investments
                                        Corporation.  He currently serves on the
                                        Board of  Visitors  of Coastal  Carolina
                                        University's  Wall  School  of  Business
                                        Administration and Computer Science, the
                                        Governmental    Affairs   Committee   of
                                        America's  Community Bankers,  the Board
                                        of   Directors   of  the   Institute  of
                                        Financial   Education,   the   Board  of
                                        Trustees of the  Franklin  G.  Burroughs
                                        and Simeon B. Chapin Art Museum and is a
                                        member of the Board of  Directors of the
                                        Coastal Education Foundation.           
                                        

Jimmy R. Graham, 49,                    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, 37,              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  Federal  Mortgage
                                        Bankers & Realty Company,  Inc., Coastal
                                        Investments  Corporation,   and  Coastal
                                        Federal Mortgage. He currently serves as
                                        Chairman of the Junior Achievement Board
                                        of  Directors  and  Advisory  Council of
                                        Horry  County.  He is a Past Chairman of
                                        the  Board  and   Treasurer   of  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
----------------------                  -------------------

Jerry L. Rexroad, CPA, 37,              He is a certified public accountant, and
Executive Vice President and            is a member  of the  AICPA  and  SCACPA.
Chief Financial Officer                 Prior  to  joining  the   Company,   Mr.
(continued)                             Rexroad  was a  partner  with  KPMG Peat
                                        Marwick  LLP  where  he was  partner  in
                                        charge  of  the  Financial  Institutions
                                        practice in South Carolina.             
                                        

Allen W. Griffin, 37,                   Mr. Griffin is currently  Executive Vice
Executive Vice President                President  and  Banking   Administration
and Banking Administration              Group  Leader for  Coastal  Federal.  He
Group Leader                            also   serves  as  an   Executive   Vice
                                        President  of  the  Corporation.  He has
                                        been  associated  with  the Bank for the
                                        past  eleven  years.  Mr.  Griffin  is a
                                        School  Director for  Christian  Academy
                                        and is  past  Director  of  the  Eastern
                                        Group  of   Robert   Morris   Associates
                                        Chapter, Myrtle Beach Rotary Club of the
                                        YMCA, and Junior Achievement.           
                                                                                
                                       
Phillip G. Stalvey, 41,                 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 Investment  Corporation.  He has
                                        been associated with Coastal Federal for
                                        the  past 15  years.  In  addition,  Mr.
                                        Stalvey  is a  member  of  the  Florence
                                        Stake  Presidency  with  his  Church,  a
                                        committee member of a local Scout Troop,
                                        Landscape  Committee  Chairman  for  the
                                        City of  Myrtle  Beach  and a  Board  of
                                        Director for the Myrtle  Beach  Airforce
                                        Base Redevelopment Authority.           
                                                                                
                                        
Susan J. Cooke, 47,                     Ms.   Cooke   is  Vice   President   and
Vice President and                      Corporate Secretary for Coastal Federal,
Corporate Secretary                     Corporate    Secretary    for    Coastal
                                        Financial Corporation,  Coastal Mortgage
                                        Bankers  &  Realty  Company,  Inc.,  and
                                        Coastal  Investments  Corporation.   Ms.
                                        Cooke  has been  employed  with  Coastal
                                        Federal  for ten 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  --  Remuneration  of  Executive  Officers"  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>
                                   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 26, 1997                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 26, 1997                  Date: December 26, 1997

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 26, 1997                   Date: December 26, 1997

By: /s/ James C. Benton                     By: /s/ Samuel A. Smart
    -------------------                         -------------------
    James C. Benton                             Samuel A. Smart
    Director                                    Director

Date: December 26, 1997                   Date: December 26, 1997

By: /s/ Harold D. Clardy                    By: /s/ James P. Creel
    --------------------                        ------------------
    Harold D. Clardy                            James P. Creel
    Director                                    Director

Date: December 26, 1997                   Date: December 26, 1997

By: /s/ G. David Bishop                    By: /s/ James H. Dusenbury
    --------------------                       ----------------------
    G. David Bishop                            James H. Dusenbury
    Director                                   Director
Date: December 26, 1997                  Date: December 26, 1997
<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, 1996 and 1997.

                  (b)      Consolidated  Statements of Operations  for the Years
                           Ended September 30, 1995, 1996 and 1997.

                  (c)      Consolidated  Statements of Stockholders'  Equity for
                           the Years Ended September 30, 1995, 1996 and 1997.

                  (d)      Consolidated  Statements  of Cash Flows for the Years
                           Ended September 30, 1995, 1996 and 1997.

                  (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) 1990 Stock Option Plan***                        
                                                                                
                           (i) Directors Performance Plan****                   
<PAGE>

                  13       Annual  Report to  Stockholders  for the Fiscal  Year
                           Ended September 30, 1997*

                  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.
 
*    Incorporated  by reference from the Annual Report to  Stockholders  for the
     fiscal year ended September 30, 1997, 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 10K 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.