EXHIBIT 13

                      ANNUAL REPORT TO STOCKHOLDERS FOR THE

                      FISCAL YEAR ENDED SEPTEMBER 30, 2005



<PAGE>

                          COASTAL FINANCIAL CORPORATION

                                      2005
                                  ANNUAL REPORT
<PAGE>

                                                  Quest for Excellence

Dedication                                    2005 - A Breakthrough Year In
The Guiding Vision of Coastal           Transforming Our Very Good Organization
Financial Corporation                       Into An Exceptional Organization
--------------------------------------------------------------------------------

In many ways, 2005 really was a breakthrough  year in our quest to Transform Our
Very  Good  Organization  Into  An  Exceptional  Organization.   Thanks  to  our
incredible Associates and their commitment, alignment and passion for delivering
The Experience of FANtastic!  Customer  Service,  we  experienced  unprecedented
acceleration in the momentum which has been rapidly, but quietly,  building over
the years since the  adoption  of our QUEST FOR  EXCELLENCE  Business  Model and
Vision 2005 Strategic Plan.

Looking back at our  Transformation  from 1999, the inception of our Vision 2005
Strategic  Plan, one of the most  interesting  questions  relates to how Coastal
Financial Corporation came back from near extinction in the late 1980s to become
a Good  Organization by the mid 1990s and a Very Good  Organization,  which U.S.
Banker Magazine, in its August 2005 edition, ranked #1 in the Carolinas and 29th
nationally among its peers.

The answer lies in the Vision and Values  which are the essence of our QUEST FOR
EXCELLENCE  Business Model that was formally adopted in 1993. At that transition
point in the history of our Company,  we began the process of  transforming  our
Good Organization Into A Very Good Organization by "inculturating" every element
of  Coastal  Financial  Corporation  with our Vision  and  Values  through  both
Leadership example and curriculum offerings at Coastal Federal University.  This
low key and deliberate  approach has lead us to slowly, but continuously,  build
focus on our QUEST FOR EXCELLENCE  Business Model and positive  momentum  toward
evolving  our  organization  in  alignment  with our  Mission of  Exceeding  the
Expectations of our Customer.

While the momentum  which has  continued to build  through the great  strides we
have made in learning and  practicing  each of the tenets of our Business  Model
over the years has been truly impressive, I think all of us at Coastal Financial
Corporation would agree that the progress we made in 2005 towardTransforming Our
Very  Good   Organization  Into  An  Exceptional   Organization   constitutes  a
breakthrough  and  establishes  a new  transition  point  in  the  life  of  our
exceptional organization.

Over the fifteen years since becoming a publicly  owned company,  we have always
viewed change and continuous  improvement as essential to the  accomplishment of
Our Basic  Corporate  Objective  Of  Maximizing  The Value Of Our  Stockholders'
Investment and Our Long-Term Goal Of Being The Best Financial  Services  Company
In Our Marketplace.

And,  thanks to our incredible  Associates and their  commitment,  alignment and
passion for delivering The Experience of FANtastic!  Customer Service,  2005 was
certainly no exception.  Our ever-increasing  understanding of and commitment to
our QUEST FOR  EXCELLENCE  Business  Model has  allowed us to write the  closing
chapter of our Vision 2005 Plan in a powerful and memorable way. A way which has
enabled another year of exceptional  progress toward The  Transformation  Of Our
Very Good Organization Into An Exceptional Organization and produced outstanding
results for our Stockholders. Going forward, we remain absolutely convinced that
this approach will help to ensure that our best days are yet to come.

Share Price Performance

 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]

<TABLE>
<S>       <C>     <C>    <C>    <C>     <C>     <C>      <C>      <C>      <C>      <C>     <C>     <C>     <C>      <C>     <C>
 $10.00   $10.00  $27.20 $68.31 $85.56  $85.92  $134.94  $217.16  $215.52  $177.72  $113.80 $217.36 $299.07 $374.19  $467.90 $535.19
------------------------------------------------------------------------------------------------------------------------------------
 Initial   Sept.   Sept.  Sept.  Sept.   Sept.    Sept.    Sept.    Sept.    Sept.    Sept.   Sept.   Sept.   Sept.    Sept.   Sept.
 Public     30,     30,    30,    30,     30,      30,      30,      30,      30,      30,     30,     30,     30,      30,     30,
Offering   1991    1992   1993   1994    1995     1996     1997     1998     1999     2000    2001    2002    2003     2004    2005
October 4,
  1990
</TABLE>

      The share price  performance  of Coastal  Financial  Corporation's  common
      stock  increased  14.4%  since  September  30,  2004  and has  grown  at a
      compounded annual rate of over 30% since 1990. The share price performance
      reflects  all stock  splits,  stock  dividends  and  reinvestment  of cash
      dividends.  These historical results may not be indicative of future stock
      price performance.

2
<PAGE>

Financial Highlights

The following  table sets forth  certain  information  concerning  the financial
position of the Company  (including data from operations of its subsidiaries) as
of the dates and for the periods  indicated.  The  consolidated  data is derived
from,  and  should  be read in  conjunction  with,  the  Consolidated  Financial
Statements of the Company and its subsidiaries presented herein.

<TABLE>
<CAPTION>
                                                                                 At or for Years Ended September 30,
                                                                -------------------------------------------------------------------
                                                                   2001         2002          2003           2004           2005
                                                                ---------    ---------    -----------    -----------    -----------
                                                                            (Dollars in thousands, except per share data)
<S>                                                             <C>          <C>          <C>            <C>            <C>
Financial Condition Data:
Total assets ................................................   $ 763,214    $ 950,796    $ 1,181,209    $ 1,305,094    $ 1,543,459
Loans receivable, net .......................................     488,754      536,851        682,737        790,730        924,260
Mortgage-backed securities ..................................     190,553      331,808        383,324        374,283        399,655
Cash, interest-bearing deposits and investment securities ...      36,320       27,816         37,484         62,304        127,141
Deposits ....................................................     530,364      637,081        697,012        753,379      1,070,918
Borrowings ..................................................     160,808      228,622        392,797        451,144        346,408
Stockholders' equity ........................................      57,248       66,386         73,707         85,348         97,221

Operating Data:
Interest income .............................................   $  60,255    $  53,873    $    59,214    $    65,805    $    78,558
Interest expense ............................................      33,323       21,846         22,998         23,524         29,730
                                                                ---------    ---------    -----------    -----------    -----------
Net interest income .........................................      26,932       32,027         36,216         42,281         48,828
Provision for loan losses ...................................         955        1,235          2,655          1,750          1,697
                                                                ---------    ---------    -----------    -----------    -----------
Net interest income after provision for loan losses .........      25,977       30,792         33,561         40,531         47,131
                                                                ---------    ---------    -----------    -----------    -----------
Other Income:
Fees and service charges on loan and deposit accounts .......       2,634        3,148          3,489          3,771          6,137
Gain on sales of loans held for sale ........................       1,295        1,462          2,985          1,523          1,201
Gain (loss) on sales of investment securities, net ..........         (56)         102             --           (100)           226
Gain (loss) on sales of mortgage-backed securities, net .....         727          238            469           (997)          (551)
Gain (loss) from real estate operations .....................        (453)        (137)           (18)             3            (76)
Other income ................................................       3,755        3,326          3,983          4,971          5,587
                                                                ---------    ---------    -----------    -----------    -----------
Total other income ..........................................       7,902        8,139         10,908          9,171         12,524
Total general and administrative expense ....................      19,292       22,824         27,156         27,269         33,519
                                                                ---------    ---------    -----------    -----------    -----------
Income before income taxes ..................................      14,587       16,107         17,313         22,433         26,136
Income taxes ................................................       5,287        5,901          6,141          7,627          8,982
                                                                ---------    ---------    -----------    -----------    -----------
Net income ..................................................   $   9,300    $  10,206    $    11,172    $    14,806    $    17,154
                                                                =========    =========    ===========    ===========    ===========
Net income per common diluted share .........................   $     .48    $     .53    $       .57    $       .74    $       .84
                                                                =========    =========    ===========    ===========    ===========
Cash dividends per common share .............................   $     .11    $     .12    $       .14    $       .15    $       .17
                                                                =========    =========    ===========    ===========    ===========
Weighted average shares outstanding diluted .................      19,478       19,381         19,679         20,116         20,423
                                                                =========    =========    ===========    ===========    ===========
</TABLE>

All share and per share data have been restated as applicable to reflect a 3 for
2 stock dividend declared on July 31, 2001, and 10% stock dividends  declared on
May 27, 2003,  August 28, 2003,  February 18, 2004, July 30, 2004,  December 15,
2004 and October 26, 2005.

Key Operating Ratios:

The table  below sets forth  certain  performance  ratios of the  Company at the
dates or for the periods indicated.

<TABLE>
<CAPTION>
                                                                                    At or for Years Ended September 30,
                                                                               ----------------------------------------------
                                                                                2001      2002      2003      2004      2005
                                                                               ------    ------    ------    ------    ------
<S>                                                                            <C>       <C>       <C>       <C>       <C>
Other Data:
Return on assets (net income divided by average assets) ....................     1.20%     1.23%     1.04%     1.18%     1.20%
Return on average equity (net income divided by average equity) ............    17.75%    16.92%    15.84%    18.77%    18.75%
Average equity to average assets ...........................................     6.59%     7.29%     6.59%     6.31%     6.38%
Book value per share .......................................................   $ 3.02    $ 3.54    $ 3.90    $ 4.44    $ 5.00
Dividend payout ratio ......................................................    21.58%    21.77%    23.20%    19.91%    19.54%
Interest rate spread (difference between average yield
on interest-earning assets and average cost of interest-bearing
liabilities) ...............................................................     3.64%     4.14%     3.65%     3.64%     3.70%
Net interest margin (net interest income as a
percentage of average interest-earning assets)..............................     3.77%     4.24%     3.67%     3.64%     3.69%
Allowance for loan losses to total net loans at end of period ..............     1.42%     1.42%     1.40%     1.39%     1.25%
Ratio of non-performing assets to total assets (1) .........................     0.74%     0.48%     0.77%     0.51%     0.22%
Tangible capital ratio .....................................................     7.28%     6.57%     7.14%     7.44%     7.25%
Core capital ratio .........................................................     7.28%     6.57%     7.14%     7.44%     7.25%
Risk-based capital ratio ...................................................    13.30%    12.74%    13.17%    13.55%    13.29%
</TABLE>

(1)   Non-performing assets consist of nonaccrual loans 90 days or more past due
      and real estate acquired through foreclosure.

                                                                               3
<PAGE>

Dear Friends

Coastal Financial Corporation's  performance was outstanding in 2005, the result
of five  successive  years  of  extraordinary  progress  by our  entire  team in
executing our Vision 2005 Strategic Plan in perfect alignment with our QUEST FOR
EXCELLENCE Business Model.

Continuing  to drive our momentum was the  tremendous  progress we made over the
past three years in the Transformational Element of our Strategic Plan. The 2005
result of our  ever-increasing  focus on this  powerful  component of our Vision
2005 Plan was the launch of Coastal  Federal as The Carolinas'  Most  Convenient
Bank. This initiative,  which was a natural  progression in our evolution toward
perfecting the execution of our Business Model, has created a much more aligned,
simplified  and  consistent  process  for  ensuring  that we always  Exceed  the
Expectations of our Customer.

Thanks  largely to the launch of this new  initiative,  in addition to achieving
record results in Customer Satisfaction  measurements,  Customer Deposits, Loans
Receivable,  Total  Assets,  Net Income and Share  Price  during  2005,  we also
witnessed  a new level of  energy,  enthusiasm  and  excitement  throughout  our
organization.

In  the  2004  Annual  Report,   we  reviewed  and  discussed  our  progress  in
Transforming Coastal Financial Corporation From A Very Good Organization Into An
Exceptional  Organization.  And,  based upon our growth and  development to that
date,  coupled with the  advantages  of our  exceptional  Associates,  our great
markets,   our  new  Customer   Service  and  Convenience   strategies  and  our
ever-increasing  ability  to work  together,  as a team,  toward  building  even
stronger  relationships  with our Customers and our Communities,  our conclusion
was that we were well positioned to realize even greater success in the years to
come.

Our progress this year, in addition to taking our  confidence in and  commitment
to our QUEST FOR  EXCELLENCE  Business Model and Vision 2005 Plan to new levels,
also  produced  another year of  exceptional  financial  results and  noteworthy
accomplishments:

      o     Coastal  Financial  Corporation's  net income for 2005 totaled $17.2
            million,  compared  to $14.8  million  in 2004.  On a fully  diluted
            basis,  these results  equated to a 13.5%  increase,  from $0.74 per
            share in 2004 to $0.84 per share in 2005.  This growth was fueled by
            continued  strong  Customer  Deposit and loan  growth and  effective
            expense control.

      o     Customer  Deposits which are Total Deposits less Brokered  Deposits,
            increased  by  approximately  $147.6  million,  or 19.6%  to  $901.0
            million.  Over the past three  years,  our average  rate of Customer
            Deposit growth has been 12% per year.

      o     Loans grew by 18%,  primarily  reflecting our continued strong focus
            on the Business Banking element of our operations.

      o     Coastal Investor Services,  our Investment  Services  division,  saw
            continued  progress.   Assets  under  our  Raymond  James  Financial
            Advisors' management increased by 18% to $292.5 million.  Based upon
            total  revenues  from this  area of our  operations,  Raymond  James
            Financial  Services ranked Coastal Investor  Services #5, out of 218
            Financial Institution Division offices.

      o     Our branch  distribution system continued to expand to serve more of
            the  Communities  of  coastal  North and South  Carolina.  Since the
            inception  of our  Vision  2005  Strategic  Plan in October of 1999,
            Coastal  Federal has added 11 new  branches  to our rapidly  growing
            network - 58 percent  of our  existing  branches.  During  2005,  we
            completed  construction  of a new branch  facility on 17th Street in
            the heart of the growing  Wilmington,  North  Carolina  marketplace,
            commenced  construction of new branch facilities on Oak Island Drive
            in Oak Island, North Carolina and at the intersection of Hwy 701 and
            Country Club Drive in Conway,  South  Carolina,  and finalized plans
            for construction starts at the intersection of Hwy 544 and Singleton
            Ridge Road in Conway,  South Carolina,  at Sayebrook West on Hwy 544
            in Surfside Beach, South Carolina and at the intersection of Hwys 90
            and 57 in Longs, South Carolina.

      o     During  2005,  our  Finance  Group,  in an effort  to create  better
            clarity on key result areas,  radically revised our branch financial
            management  and  reporting  system.  This  new  system  has  been  a
            significant  enabler in our efforts to add profitable  growth to our
            balance sheet.

      o     Coastal Federal University  experienced another solid year of growth
            and  progress  in its Mission of  providing  a learning  environment
            centered around Coastal Financial Corporation's QUEST FOR EXCELLENCE
            Business Model.  Our philosophy of being a "Learning  Organization,"
            has resulted in the development of a continually enhanced array

4
<PAGE>

                                                                    Dear Friends

            and number of  curriculum  offerings  designed to enable each of our
            Associates  to  achieve   their  full   personal  and   professional
            potential.  This  approach,  which is crucial to our  philosophy  of
            promoting our own Associates into the Leadership positions which are
            created as a result of our  growth,  has enabled  Coastal  Financial
            Corporation   to   significantly   increase  both   individual   and
            organizational  production  capability  and resulted in an empowered
            culture with true competitive distinction.

In addition to the excellent  operating  results and  transformational  progress
achieved this past year, the market price of Coastal  Financial's  common stock,
at September  30, 2005,  was 14.2% higher than the market price at September 30,
2004.

Equally as impressive is the fact that, since 1990, our net income has increased
at a compound annualized rate in excess of 17%.

Since becoming a publicly owned company in 1990, Coastal Financial Corporation's
stock has grown at a  compounded  annual  rate of over 30%,  taking  our  market
capitalization from $4.6 million in October 1990, to $265.7 million at the close
of this fiscal  year.  Put  another  way,  an initial  investment  of $10,000 in
October of 1990, including the reinvestment of cash dividends,  would have grown
to $535,000 at September 30, 2005.

One of the best indicators of performance is Return On Stockholders' Equity, and
this  measure  for  2005  was,  again,   outstanding.   Our  Return  On  Average
Stockholders'  Equity  of  18.8%  ranks us among  the top  performing  financial
services companies in America.

Our own sense of  satisfaction  with these  financial  results  during  2005 was
augmented  with  continued  public   recognition  of  our  progress  toward  the
attainment  of Our Basic  Corporate  Objective  Of  Maximizing  The Value Of Our
Stockholders'  Investment  and Our  Long-Term  Goal Of Being The Best  Financial
Services Company In Our Marketplace. Consider these very good examples:

      o     Coastal  Financial  Corporation,  for the 6th consecutive  year, was
            ranked  the #1  Community  Bank in the  Carolinas  by U.  S.  BANKER
            MAGAZINE,  in its August 2005  publication.  In this edition,  U. S.
            BANKER MAGAZINE  featured its Ranking of the Top 100 Publicly Traded
            Mid - Tier Banks. This ranking spotlighted banks with assets between
            $1 and $10 billion, based upon a 3-year average measure of Return On
            Average Equity.  Coastal Financial Corporation was ranked 1st in the
            Carolinas and 29th nationally in this listing.

      o     The 2005 FDIC SUMMARY OF DEPOSITS  REPORT,  for the 5th  consecutive
            year, ranked Coastal Federal Bank the leader in deposit market share
            for Horry County for the twelve months ended June 30, 2005.  Coastal
            Federal  Bank has enjoyed this top ranking for seven of the past ten
            years.  This report also showed that Coastal  Federal Bank is ranked
            3rd in deposit market share for Brunswick County, North Carolina.

Examples like these  continue to confirm  that,  through the efforts of the best
team imaginable,  and their  ever-increasing  understanding of and commitment to
our  QUEST FOR  EXCELLENCE  Business  Model and our  Vision  2005  Plan,  we are
harnessing our potential and building momentum on a daily basis.

                                                                               5
<PAGE>

2005 Our Best Year Yet

The  continuing  evolution  of our  approach to the  execution  of our QUEST FOR
EXCELLENCE  Business  Model and the  resulting  growth and progress  during 2005
continues  to affirm  what can be  achieved  through  the  aligned  effort of an
organization  which is  anchored  to the Vision  and Values of a  never-changing
Business  Model.  The  consciously-held   commitment  our  Associates  have  for
following our QUEST FOR  EXCELLENCE  Business  Model in executing the strategies
established in our Vision 2005 Plan has enabled the financial performance during
fiscal  2005  which,  again met our high  expectations  and which  will serve to
further  support  our  Transformation  From  A  Very  Good  Organization  To  An
Exceptional Organization.

                  Noteworthy Financial Results for Fiscal 2005

DILUTED EARNINGS PER SHARE

      o     Net income for 2005 totaled $17.2 million, compared to $14.8 million
            in 2004. On a fully diluted basis,  these results equated to a 13.5%
            increase, from $0.74 per share in 2004 to $0.84 per share in 2005.

 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]

     $0.48           $0.53           $0.57           $0.74           $0.84
--------------------------------------------------------------------------------
      2001            2002            2003            2004            2005

BOOK VALUE PER SHARE

      o     Book value per share grew 12.6% to $5.00.

      o     Stockholders' equity advanced 13.9% to $97.2 million.


  [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]

     $3.02           $3.54           $3.90           $4.44           $5.00
--------------------------------------------------------------------------------
      2001            2002            2003            2004            2005

6
<PAGE>

                                                          2005 Our Best Year Yet

ASSETS

      o     Total assets increased 18.3%, from $1.3 billion to $1.5 billion.

      o     Customer  Deposits  increased  19.6%,  from $753.4 million to $901.0
            million.

      o     Net Loans increased 18.0%, from $799.0 million to $942.4 million.

  [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]

(IN MILLIONS)

      $763            $951           $1,181          $1,305          $1,543
--------------------------------------------------------------------------------
      2001            2002            2003            2004            2005

NON-PERFORMING ASSETS TO TOTAL ASSETS

      o     Non-performing Assets to Total Assets declined from 0.51% to 0.22%.

  [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]

      0.74%           0.48%           0.77%           0.51%           0.22%
--------------------------------------------------------------------------------
      2001            2002            2003            2004            2005

ALLOWANCE FOR LOAN LOSSES TO NET LOANS

      o     Allowance for Loan Losses to Net Loans was at 1.25%.

      o     The  Company had Net Loan  Charge-Offs  as a  percentage  of Average
            Loans of 0.12% in 2005

  [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]

      1.42%           1.42%           1.40%           1.39%           1.25%
--------------------------------------------------------------------------------
      2001            2002            2003            2004            2005

Our  success  in  these  key  measures  of  performance  is  the  result  of the
commitment,  dedication  and  aligned  effort  of a truly  outstanding  group of
Associates who share a passion for our QUEST FOR  EXCELLENCE  Business Model and
Vision 2005 Plan.  This  continuing  trend of exceptional  performance  has been
rewarded  in the  financial  markets  by a 3,814%  increase  in the price of our
shares  since  becoming a public  company in October of 1990,  vs.  283% for the
Standard & Poors 500 Index over the same period.

                                                                               7
<PAGE>

2005 Our Best Year Yet

The momentum we have built since our conversion to public ownership has resulted
from  the  methodic  focus  of  our   individual   and  collective   efforts  on
accomplishing  Our Basic  Corporate  Objective  Of  Maximizing  The Value Of Our
Stockholders'  Investment by working  diligently  toward the  achievement of Our
Long-Term Goal Of Being The Best Financial Services Company In Our Marketplace.

Over the past  fifteen  years,  our  compounded  Stockholder  return of 30% has,
indeed, been impressive. In evaluating our progress toward the attainment of Our
Basic Corporate  Objective since becoming publicly owned, it is both informative
and  illustrative  to compare the share price  performance of Coastal  Financial
Corporation to the share price  performance of other publicly  traded  financial
services  companies  operating  within  our  marketplace,  and to the  financial
markets as a whole.

In the following  graphs, we have compared the share price performance of (CFCP)
Coastal  Financial  Corporation to the Nasdaq,  S&P 500 and Dow Indices,  and to
(TSFG) The South  Financial  Group,  the parent  company of Carolina First Bank,
(WB) Wachovia  Corporation,  the parent company of Wachovia Bank,  (SNV) Synovus
Financial Corporation,  the parent company of NBSC, (BBT) BB&T Corporation,  the
parent company of BB&T, (BAC) Bank of America Corporation, the parent company of
Bank of America,  (FFCH) First Financial  Holdings,  Inc., the parent company of
First Federal Savings and Loan Association of Charleston and (COOP)  Cooperative
Bankshares, Inc., the parent company of Cooperative Bank.

As shown by these  graphic  representations,  which  take a look  back  over our
history  as  a  publicly   owned  company,   the  price  of  Coastal   Financial
Corporation's  shares has significantly  outperformed the price of the shares of
the other publicly traded financial  services  companies in our marketplace,  as
well as the Nasdaq, S&P 500 and Dow Indices. These historical results may not be
indicative of future stock price performance.

                      15 Year Peer Group Price Performance

 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]

<TABLE>
<CAPTION>
Pricing Date       CFCP($)     COOP($)    FFCH($)    SNV($)    BAC($)    BBT($)    TSFG($)    WB($)
------------       -------     -------    -------    ------    ------    ------    -------    -----
<S>                <C>        <C>        <C>        <C>        <C>        <C>       <C>        <C>
   Oct-90           100.00      100.00     100.00    100.00    100.00    100.00     100.00   100.00
   Oct-91           100.00      100.00     128.57    123.71    171.69    151.33      99.69   183.37
   Oct-92           217.14      255.88     195.80    152.58    212.50    191.78     135.07   237.78
   Oct-93           562.86      367.65     315.13    191.07    214.34    232.00     167.84   255.79
   Oct-94           637.14      447.06     315.13    195.88    227.57    229.11     179.33   283.37
   Oct-95           654.29      538.97     388.66    258.42    302.21    286.22     188.21   312.46
   Oct-96         1,100.00      459.56     420.17    456.36    433.09    384.67     223.28   458.18
   Oct-97         1,640.00      821.32     811.34    498.28    549.82    604.89     335.07   617.88
   Oct-98         1,768.57      637.50     808.82    796.91    528.49    793.11     353.14   730.47
   Oct-99         1,302.86      514.71     785.29    736.77    592.28    808.44     316.85   538.41
   Oct-00         1,128.57      472.06     709.24    740.89    441.73    708.44     156.05   381.73
   Oct-01         1,500.00      563.97   1,043.70    791.07    542.28    713.33     244.26   360.20
   Oct-02         2,308.57      686.03   1,073.95    704.12    641.54    805.56     331.55   438.16
   Oct-03         3,168.57    1,147.06   1,266.39    948.45    696.14    859.33     400.31   577.70
   Oct-04         3,497.14    1,297.06   1,276.05    934.36    823.35    913.56     459.72   619.77
   Oct-05         3,914.29    1,541.91   1,218.91    943.99    804.04    940.89     422.21   636.27

</TABLE>

The financial results depicted above indicate that our business has continued to
grow and  prosper  over  the  years.  And our 2005  operating  and  share  price
performance  clearly puts Coastal  Financial among the top performing  financial
services companies in the nation. But, as good as these results are, it's always
the future that we are most  interested  in, and it always leads to the question
we're often asked: "Can we keep it up?"

We continue to believe  the answer is a  resounding  "Yes," as long as we remain
focused on our QUEST FOR EXCELLENCE Business Model.

                        CFCP Relative Price Performance

 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]

      Pricing Date    CFCP($)       DJIA        S&P 500      NASDAQ
      ------------    -------       ----        -------      ------
         Oct-90        100.00     2,442.33       304.00      329.84
         Oct-91        100.00     3,068.87       392.45      542.98
         Oct-92        217.14     3,226.28       418.68      605.17
         Oct-93        562.86     3,680.59       467.83      779.26
         Oct-94        637.14     3,908.12       472.35      777.49
         Oct-95        654.29     4,755.48       581.50    1,036.06
         Oct-96      1,100.00     6,029.38       705.27    1,221.51
         Oct-97      1,640.00     7,442.08       914.62    1,593.61
         Oct-98      1,768.57     8,592.10     1,098.67    1,771.39
         Oct-99      1,302.86    10,729.86     1,362.93    2,966.43
         Oct-00      1,128.57    10,971.14     1,429.39    3,369.63
         Oct-01      1,500.00     9,075.14     1,059.78    1,690.20
         Oct-02      2,308.57     8,397.03       885.76    1,329.75
         Oct-03      3,168.57     9,801.12     1,050.71    1,932.21
         Oct-04      3,497.14    10,027.47     1,130.20    1,974.99
         Oct-05      3,914.29    10,440.07     1,207.01    2,120.30

8
<PAGE>

                                                                     A Look Back

Henry David Thoreau once wrote "Man's capabilities have never been measured; nor
are we to judge of what he can do by any precedents,  so little has been tried."
Thoreau was describing the process of continuous improvement, which is essential
to the future success of both organizations and individuals.

Our  Corporate  Philosophy at Coastal  Financial  has long been about  embracing
change as the essential ingredient of continuous improvement.  We are constantly
doing things differently and re-engineering  things that aren't broken today, so
they can't  slow us down  tomorrow.  Likewise,  we  maintain  a strong  focus on
ensuring continuous improvement in strategic areas that can further set us apart
and  distinguish us from other  financial  services  companies in ways which can
offer sustainable competitive advantages.

                                [GRAPHIC OMITTED]

With this basic  understanding of our  organization,  it is easy to see that the
discussion we began in 2003 about  Transforming Our Very Good  Organization Into
An  Exceptional  Organization  was  not  merely  a  description  of yet  another
initiative.  Rather,  it was intended to explain how the momentum which had been
building  over the years from our  philosophy of viewing  change and  continuous
improvement as essential to the achievement of our long-term  objectives was now
beginning to rapidly  accelerate  the evolution of our culture and the growth of
our business in alignment with our QUEST FOR EXCELLENCE Business Model.

This evolution began to gain significant  traction in 1999 with the introduction
of our  Vision  2005  Strategic  Plan  and our  early  conversations  about  the
Transformational  Element of that plan. The  Transformational  Element,  in very
simple terms,  describes our goals related to Exceeding The  Expectations of our
Customer.  It means "We want to consistently  provide every  Customer,  on every
visit, for every transaction, The Experience of FANtastic!  Customer Service; We
want to fulfill all of our Customers'  financial services needs; We want to help
them  be  financially  successful;  We  want  to be the  preferred  provider  of
financial  services in each of the Communities we serve, and We want to be known
as The Carolinas' Most Convenient Bank."

In looking  back at our growth and  progress  since 1999,  it is clear that 2005
really was a breakthrough  year for us in terms of evolving our understanding of
our QUEST FOR  EXCELLENCE  Business  Model,  Our Vision 2005 Strategic Plan and,
particularly  the  Transformational  Element  of  that  strategic  vision.  That
increased understanding, and the results which have followed, have allowed us to
continue to plan our future growth with confidence and optimism.

                                                                               9
<PAGE>

Looking Ahead

While our progress toward The  Transformation  Of Coastal  Financial From A Very
Good Organization  Into An Exceptional  Organization was exceptional in 2005, it
is very  important that we not lose sight of the fact that our efforts can never
be viewed as a sprint to a well-defined  finishing point, but rather,  as merely
one more waypoint in a never-ending marathon.

Accordingly, we must continue to raise the bar in further distinguishing Coastal
Federal Bank from other banks by maintaining a laser-like focus on ensuring that
we become  known as The  Carolinas'  Most  Convenient  Bank.  We will do that by
honing our skills in our two primary focus areas.  The first is providing  every
Customer,  on every visit, for every  transaction,  The Experience of FANtastic!
Customer  Service by executing our Customer  Service and Convenience  strategies
with  consistency,  precision  and  alignment.  And the  second  is to  excel at
marketing and selling The  Carolinas'  Best Totally Free Checking With A Gift by
mastering  and then  improving  upon our  skills  in  executing  our  sales  and
marketing  processes.  In looking ahead,  it is clear that we must  consistently
raise  the bar in each of these  areas  by  looking  ever  more  closely  at our
business through the lens of our Customer.

By  remaining  focused  on our  Mission of  Exceeding  the  Expectations  of our
Customer,  our  continuous  moves  to each of the  next  legs in our  quest  for
Transforming Coastal Financial Corporation From A Very Good Organization Into An
Exceptional Organization will be a natural occurrence.

The  progress,  success  and  building  momentum we have  enjoyed  over the past
fifteen  years as a public  company has well  positioned  us for this  ambitious
quest. And, while we are very fortunate to be located in one of the best markets
in America,  and enjoy many  competitive  advantages,  all of the  success  that
Coastal  Financial has achieved over these years is due to our exceptional  team
of Associates. And we have the best team imaginable.

My sincere  appreciation  goes to our Board of Directors,  Leadership  Group and
Associates for all they do for all of us and our Customers on a daily basis. Our
2005  results  speak  volumes  about  their  commitment  to Our Basic  Corporate
Objective Of  Maximizing  The Value Of Our  Stockholders'  Investment by working
diligently  toward  the  achievement  of Our  Long-TermGoal  Of  Being  The Best
Financial Services Company In Our Marketplace.

Over the past five years,  revenue, net income and share price have continuously
reached record levels.  In fact, in the past two years alone, our net income has
surged over 54%,  and in the last five years,  our net income has  increased  by
more than 103%. Since becoming a publicly owned Company in 1990, we have roughly
doubled our earnings every 4.5 years.

While we are very  pleased  with our past  achievements,  thanks to the momentum
which continues to build as the result of our  exceptional  Associates and their
firm belief in our Vision and Values,  we have great  confidence  that our quest
for Transforming  Our Very Good  Organization  Into An Exceptional  Organization
will  continue to progress  well and that,  as a result,  we will continue to be
better enabled to achieve superior returns for our Stockholders in the future.

All  of  us  at  Coastal   Financial   Corporation   appreciate  your  continued
encouragement, loyalty and support, and look to the future with great enthusiasm
and excitement.


/s/ Michael C. Gerald

Michael C. Gerald
President and
Chief Executive Officer

10
<PAGE>

Management's Report on Internal Control Over Financial Reporting

The management of Coastal Financial Corporation and subsidiaries (the "Company")
is responsible for establishing and maintaining  adequate  internal control over
financial  reporting.  The internal  control process has been designed under our
supervision  to  provide  reasonable  assurance  regarding  the  reliability  of
financial  reporting and the preparation of the Company's  financial  statements
for  external  reporting  purposes  in  accordance  with  accounting  principles
generally accepted in the United States of America.

Management  conducted  an  assessment  of the  effectiveness  of  the  Company's
internal  control over financial  reporting as of September 30, 2005,  utilizing
the framework  established in Internal Control - Integrated  Framework issued by
the Committee of Sponsoring  Organizations of the Treadway Commission.  Based on
this assessment,  management has determined that the Company's  internal control
over financial reporting as of September 30, 2005 is effective.

Our internal control over financial  reporting  includes policies and procedures
that pertain to the  maintenance of records that  accurately and fairly reflect,
in reasonable  detail,  transactions  and  dispositions  of assets;  and provide
reasonable  assurance that (i)  transactions are recorded as necessary to permit
preparation of financial  statements in accordance  with  accounting  principles
generally  accepted in the United  States;  (ii) receipts and  expenditures  are
being  made  only  in  accordance  with  authorizations  of  management  and the
directors of the  Company;  and (iii)  provide  reasonable  assurance  regarding
prevention or timely detection of unauthorized acquisition,  use, or disposition
of the  Company's  assets  that could have a  material  effect on the  Company's
financial statements.

All  internal  control  systems,  no matter  how well  designed,  have  inherent
limitations.  Therefore,  even those  systems  determined  to be  effective  can
provide  only   reasonable   assurance  with  respect  to  financial   statement
preparation   and   presentation.   Also,   projections  of  any  evaluation  of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

Management's  assessment of the effectiveness of the Company's  internal control
over financial  reporting as of September 30, 2005 has been audited by KPMG LLP,
an independent registered public accounting firm, as stated in their report.

                                                                              11
<PAGE>

Report of Independent Registered Public Accounting Firm

The Board of Directors
Coastal Financial Corporation:
Myrtle Beach, South Carolina

We have audited the  consolidated  statements of financial  condition of Coastal
Financial  Corporation and subsidiaries (the "Company") as of September 30, 2005
and 2004, and the related consolidated  statements of operations,  stockholders'
equity  and  comprehensive  income,  and cash flows for each of the years in the
three-year  period ended  September 30, 2005. We also have audited  management's
assessment, included in the accompanying Management's Report on Internal Control
Over Financial Reporting, that the Company maintained effective internal control
over financial reporting as of September 30, 2005, based on criteria established
in Internal Control--Integrated  Framework issued by the Committee of Sponsoring
Organizations of the Treadway  Commission  (COSO).  The Company's  management is
responsible  for  these  consolidated  financial  statements,   for  maintaining
effective internal control over financial  reporting,  and for its assessment of
the   effectiveness   of  internal   control  over  financial   reporting.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements,  an  opinion  on  management's  assessment,  and an  opinion  on the
effectiveness of the Company's  internal control over financial  reporting based
on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements are free of material  misstatement  and whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit of financial statements included examining, on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall financial  statement  presentation.  Our
audit of  internal  control  over  financial  reporting  included  obtaining  an
understanding   of  internal  control  over  financial   reporting,   evaluating
management's  assessment,  testing  and  evaluating  the  design  and  operating
effectiveness  of internal  control,  and performing such other procedures as we
considered necessary in the circumstances.  We believe that our audits provide a
reasonable basis for our opinions.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of the Company as of
September  30,  2005 and 2004,  and the results of its  operations  and its cash
flows for each of the years in the three-year  period ended  September 30, 2005,
in conformity with U.S. generally accepted accounting  principles.  Also, in our
opinion,  management's assessment that the Company maintained effective internal
control over financial  reporting as of September 30, 2005, is fairly stated, in
all   material   respects,   based   on   criteria   established   in   Internal
Control--Integrated   Framework   issued   by  the   Committee   of   Sponsoring
Organizations of the Treadway  Commission (COSO).  Furthermore,  in our opinion,
the Company  maintained,  in all material  respects,  effective internal control
over financial reporting as of September 30, 2005, based on criteria established
in Internal Control--Integrated  Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).


/s/ KPMG LLP

Raleigh, NC
December 14, 2005

12
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 2004 and 2005

<TABLE>
<CAPTION>
                                                                                     2004                2005
                                                                                 -----------         -----------
                                                                                       (Dollars in thousands)
<S>                                                                              <C>                   <C>
                                     ASSETS

Cash and amounts due from banks........................................          $    29,746              52,592
Short-term interest-bearing deposits...................................                1,251              33,742
Federal funds sold.....................................................                   18               5,191
Investment securities available for sale...............................               23,449              25,616
Mortgage-backed securities available for sale..........................              374,283             399,655
Investment securities held to maturity (market value of $7,840
   September 30, 2004 and $10,049 at September 30,2005)................                7,840              10,000
Loans receivable (net of allowance for loan losses of $11,077
   at September 30, 2004 and $11,748 at September 30, 2005)............              790,730             924,260
Loans receivable held for sale.........................................                8,246              18,121
Real estate acquired through foreclosure, net..........................                  785                 818
Office property and equipment, net.....................................               18,844              22,758
Federal Home Loan Bank (FHLB) stock, at cost...........................               16,900              15,775
Accrued interest receivable on loans...................................                2,877               3,807
Accrued interest receivable on securities..............................                2,473               2,351
Bank-owned life insurance..............................................               21,627              22,574
Other assets...........................................................                6,025               6,199
                                                                                 -----------         -----------
                                                                                 $ 1,305,094           1,543,459
                                                                                 ===========         ===========
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Deposits.............................................................              753,379           1,070,918
  Securities sold under agreements to repurchase.......................              107,173              41,937
  Advances from FHLB...................................................              328,507             289,007
  Junior subordinated debt.............................................               15,464              15,464
  Drafts outstanding...................................................                2,792              12,890
  Advances by borrowers for property taxes and insurance...............                1,750               1,221
  Accrued interest payable.............................................                1,502               3,415
  Other liabilities....................................................                9,179              11,386
                                                                                 -----------         -----------
      Total liabilities................................................            1,219,746           1,446,238
                                                                                 -----------         -----------
Stockholders' equity:
  Serial preferred stock, 1,000,000 shares authorized and unissued.....                   --                  --
  Common stock $.01 par value, 25,000,000 shares authorized;
   19,235,462 shares at September 30, 2004 and 19,457,492
   shares at September 30, 2005 issued and outstanding.................                  192                 195
  Additional paid-in capital...........................................               10,607              11,410
  Retained earnings, restricted........................................               73,533              86,723
  Treasury stock, at cost (108,557 shares at September 30, 2004).......               (1,182)                 --
  Accumulated other comprehensive income (loss), net of tax............                2,198              (1,107)
                                                                                 -----------         -----------
      Total stockholders' equity.......................................               85,348              97,221
                                                                                 -----------         -----------
                                                                                 $ 1,305,094           1,543,459
                                                                                 ===========         ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                                                              13
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended September 30, 2003, 2004 and 2005

<TABLE>
<CAPTION>
                                                                                    2003                2004                2005
                                                                               ------------         -----------         -----------
                                                                                            (In thousands, except share data)
<S>                                                                            <C>                 <C>                  <C>
Interest:
  Loans receivable ....................................................        $     41,958              46,765              56,826
  Investment securities ...............................................               1,840               2,886               4,971
  Mortgage-backed securities ..........................................              15,279              16,067              16,392
  Other ...............................................................                 137                  87                 369
                                                                               ------------         -----------         -----------
Total interest income .................................................              59,214              65,805              78,558
                                                                               ------------         -----------         -----------
Interest expense:
  Deposits ............................................................              11,999              10,024              14,079
  Securities sold under agreements to repurchase ......................               1,718               2,114               2,418
  Advances from FHLB ..................................................               9,068              10,724              12,341
  Other borrowings ....................................................                 213                 662                 892
                                                                               ------------         -----------         -----------
     Total interest expense ...........................................              22,998              23,524              29,730
                                                                               ------------         -----------         -----------
     Net interest income ..............................................              36,216              42,281              48,828
Provision for loan losses .............................................               2,655               1,750               1,697
                                                                               ------------         -----------         -----------
     Net interest income after provision for loan losses ..............              33,561              40,531              47,131
                                                                               ------------         -----------         -----------
Other income:
  Fees and service charges on loan and deposit accounts ...............               3,489               3,771               6,137
  Gain on sales of loans held for sale ................................               2,985               1,523               1,201
  Gain (loss) on sales of investment securities, net ..................                  --                (100)                 66
  Gain (loss) on sales of mortgage-backed securities, net .............                 469                (997)               (551)
  Gain on call of investment securities held to maturity ..............                  --                  --                 160
  Gain (loss) from real estate acquired through foreclosure ...........                 (18)                  3                 (76)
  Income from sales of non-depository products ........................               1,176               1,909               1,840
  Federal Home Loan Bank stock dividends ..............................                 453                 499                 668
  Income from ATM and debit card transactions .........................                 906                 954               1,532
  Bank-owned life insurance ...........................................                 664                 962                 948
  Other income ........................................................                 784                 647                 599
                                                                               ------------         -----------         -----------
     Total other income ...............................................              10,908               9,171              12,524
                                                                               ------------         -----------         -----------
General and administrative expenses:
  Salaries and employee benefits ......................................              13,452              16,099              18,460
  Net occupancy, furniture and fixtures and
    data processing expense ...........................................               3,543               4,001               4,844
  Depreciation ........................................................               2,374               2,175               2,757
  FDIC insurance premium ..............................................                 104                 104                 108
  FHLB prepayment penalties ...........................................               2,824                  77                  --
  Marketing expense ...................................................                 649                 905               1,809
  Expense from ATM and debit card transactions ........................                 552                 630               1,039
  Other expense .......................................................               3,658               3,278               4,502
                                                                               ------------         -----------         -----------
    Total general and administrative expense ..........................              27,156              27,269              33,519
                                                                               ------------         -----------         -----------
    Income before income taxes ........................................              17,313              22,433              26,136
Income taxes ..........................................................               6,141               7,627               8,982
                                                                               ------------         -----------         -----------
Net income ............................................................        $     11,172              14,806              17,154
                                                                               ============         ===========         ===========
Net income per common share
  Basic ...............................................................        $       0.59                0.78                0.89
                                                                               ============         ===========         ===========
  Diluted .............................................................        $       0.57                0.74                0.84
                                                                               ============         ===========         ===========
Dividends declared per common share ...................................        $       0.14                0.15                0.17
Average common shares outstanding                                              ============         ===========         ===========
  Basic ...............................................................          18,818,000          19,060,000          19,340,000
                                                                               ============         ===========         ===========
  Diluted .............................................................          19,679,000          20,116,000          20,423,000
                                                                               ============         ===========         ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

14
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended September 30, 2003, 2004 and 2005

<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                                                     Additional                             Other          Total
                                                            Common     Paid-in   Retained    Treasury   Comprehensive  Stockholders'
                                                             Stock     Capital   Earnings      Stock        Income        Equity
                                                            -------    -------    -------     -------       -------      -------
                                                                                      (In thousands)
<S>                                                         <C>        <C>        <C>         <C>         <C>         <C>
Balance at September 30, 2002 ...........................   $   188      9,862     54,954      (4,376)        5,758       66,386
Exercise of stock options ...............................         1        313       (504)      1,343            --        1,153
Cash dividends ..........................................        --         --     (2,592)         --            --       (2,592)
Net income ..............................................        --         --     11,172          --            --       11,172
Other comprehensive income, net of tax:
Unrealized losses arising during period,
  net of taxes of $1,097 ................................        --         --         --          --        (1,779)          --
Less: reclassification adjustment for gains
    included in net income, net of taxes of $178 ........        --         --         --          --          (291)          --
                                                            -------    -------    -------     -------       -------      -------
Other comprehensive loss ................................        --         --         --          --        (2,070)      (2,070)
                                                            -------    -------    -------     -------       -------      -------
Comprehensive income ....................................        --         --         --          --            --        9,102
                                                            -------    -------    -------     -------       -------      -------
Treasury stock repurchases ..............................        --         --         --        (342)           --         (342)
                                                            -------    -------    -------     -------       -------      -------
Balance at September 30, 2003 ...........................       189     10,175     63,030      (3,375)        3,688       73,707
Exercise of stock options ...............................         3        432     (1,355)      2,193            --        1,273
Cash dividends ..........................................        --         --     (2,948)         --            --       (2,948)
Net income ..............................................        --         --     14,806          --            --       14,806
Other comprehensive income, net of tax:
Unrealized losses arising during period,
  net of taxes of $1,330 ................................        --         --         --          --        (2,170)          --
Less: reclassification adjustment for losses included
  in net income, net of tax benefit of $417 .............        --         --         --          --           680           --
                                                            -------    -------    -------     -------       -------      -------
Other comprehensive loss ................................        --         --         --          --        (1,490)      (1,490)
                                                            -------    -------    -------     -------       -------      -------
Comprehensive income ....................................        --         --         --          --            --       13,316
                                                            -------    -------    -------     -------       -------      -------
Balance at September 30, 2004 ...........................       192     10,607     73,533      (1,182)        2,198       85,348
Exercise of stock options ...............................         3        727       (603)      1,182            --        1,309
Stock compensation related to accelerated vesting .......        --         76         --          --            --           76
Cash dividends ..........................................        --         --     (3,361)         --            --       (3,361)
Net income ..............................................        --         --     17,154          --            --       17,154
Other comprehensive income, net of tax:
Unrealized losses arising during period,
  net of taxes of $2,210 ................................        --         --         --          --        (3,606)          --
Less: reclassification adjustment for losses included
  in net income, net of tax benefit of $184 .............        --         --         --          --           301           --
                                                            -------    -------    -------     -------       -------      -------
Other comprehensive loss ................................        --         --         --          --        (3,305)      (3,305)
                                                            -------    -------    -------     -------       -------      -------
Comprehensive income ....................................        --         --         --          --            --       13,849
                                                            -------    -------    -------     -------       -------      -------
Balance at September 30, 2005 ...........................   $   195     11,410     86,723          --        (1,107)      97,221
                                                            =======    =======    =======     =======       =======      =======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                                                              15
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 2003, 2004 and 2005

<TABLE>
<CAPTION>
                                                                                               2003           2004           2005
                                                                                            ---------      ---------      ---------
                                                                                                         (In thousands)
<S>                                                                                         <C>            <C>            <C>
Cash flows from operating activities:
  Net income ..........................................................................     $  11,172         14,806         17,154
  Adjustments to reconcile net income to net cash used in operating activities:
    Depreciation ......................................................................         2,374          2,175          2,757
    Provision for loan losses .........................................................         2,655          1,750          1,697
    (Gain) loss on sale of mortgage-backed securities available for sale ..............          (469)           997            551
    (Gain) loss on sale of investment securities available or sale ....................            --            100            (66)
    Gain on call of investment security called by issuer ..............................            --             --           (160)
    Loss on disposal of office properties and equipment ...............................            --             --            128
    Stock compensation related to accelerated vesting .................................            --             --             76
    Origination of loans receivable held for sale .....................................      (141,404)       (63,448)       (81,207)
    Proceeds from sales of loans receivable held for sale .............................        45,367         27,453         18,704
    Proceeds from securitization and sales of loans receivable held for sale ..........        95,635         46,845         52,628
    Loss on early extinguishment of debt ..............................................         2,824             77             --
    Increase in:
      Cash value of life insurance ....................................................          (665)          (962)          (947)
      Other assets ....................................................................          (157)          (536)          (174)
      Accrued interest receivable .....................................................           (81)        (1,018)          (808)
    Increase (decrease) in:
      Accrued interest payable ........................................................          (210)           239          1,913
      Other liabilities ...............................................................           (65)          (559)         4,233
                                                                                            ---------      ---------      ---------
      Net cash provided by operating activities .......................................        16,976         27,919         16,479
                                                                                            ---------      ---------      ---------
Cash flows from investing activities:
  Proceeds from sales of investment securities available for sale .....................            --          2,881          4,163
  Proceeds from issuer call of investment securities available for sale ...............            --             --          1,950
  Proceeds from issuer call of investment securities held to maturity .................            --             --          8,000
  Proceeds from maturities of investment securities available for sale ................         2,000          2,000             --
  Purchases of investment securities available for sale ...............................       (16,141)       (11,866)        (8,255)
  Purchases of investment securities held to maturity .................................            --         (7,840)       (10,000)
  Proceeds from sales of mortgage-backed securities available for sale ................        39,778        124,479        178,849
  Purchases of mortgage-backed securities available for sale ..........................      (328,245)      (234,672)      (312,217)
  Principal collected on mortgage-backed securities available for sale ................       234,321        115,179        102,155
  Origination of loans receivable, net ................................................      (628,172)      (513,858)      (718,477)
  Proceeds from sale of commercial loan participations ................................            --             --         21,228
  Principal collected on loans receivable .............................................       477,676        403,501        560,469
  Purchase of bank-owned life insurance ...............................................       (15,500)        (4,500)            --
  Proceeds from sales of real estate acquired through foreclosure .....................         1,374          1,456          1,521
  Proceeds from sale of office properties and equipment ...............................            --             58             --
  Purchases of office properties and equipment ........................................        (4,749)        (4,989)        (6,800)
  Change in FHLB stock, net ...........................................................        (3,432)        (2,909)         1,125
                                                                                            ---------      ---------      ---------
      Net cash used in investing activities ...........................................      (241,090)      (131,080)      (176,289)
                                                                                            ---------      ---------      ---------
Cash flows from financing activities:
  Increase in deposits ................................................................        59,931         56,367        317,539
  Increase (decrease) in securities sold under agreements to repurchase ...............        96,718        (26,429)       (65,236)
  Proceeds from FHLB advances .........................................................       715,705        686,476        565,650
  Repayment of FHLB advances ..........................................................      (661,260)      (602,083)      (605,150)
  Repayments of other borrowings, net .................................................        (1,988)           (81)            --
  Issuance of debt associated with trust preferred securities .........................        15,000             --             --
  Cash payments for debt issuance costs ...............................................          (150)            --             --
  Prepayment penalties on early extinguishment of debt ................................        (2,824)           (77)            --
  Increase (decrease) in advance payments by borrowers for property
      taxes and insurance .............................................................           409            (45)          (529)
  Increase in drafts outstanding, net .................................................           127            148         10,098
  Repurchase of treasury stock, at cost ...............................................          (342)            --             --
  Cash dividends to stockholders and cash for fractional shares .......................        (2,592)        (2,948)        (3,361)
  Proceeds from exercise of stock options .............................................         1,153          1,273          1,309
                                                                                            ---------      ---------      ---------
      Net cash provided by financing activities .......................................       219,887        112,601        220,320
                                                                                            ---------      ---------      ---------
Net increase (decrease) in cash and cash equivalents ..................................        (4,227)         9,440         60,510
                                                                                            ---------      ---------      ---------
Cash and cash equivalents at beginning of year ........................................        25,802         21,575         31,015
                                                                                            ---------      ---------      ---------
Cash and cash equivalents at end of year ..............................................     $  21,575         31,015         91,525
                                                                                            ---------      ---------      ---------
Supplemental information:
  Interest paid .......................................................................     $  23,208         23,285         27,817
                                                                                            =========      =========      =========
  Income taxes paid ...................................................................     $   5,325          7,762          6,970
                                                                                            =========      =========      =========
Supplemental schedule of non-cash investing and financing transactions:
Securitization of mortgage loans into mortgage-backed securities ......................     $  95,635         46,845         52,628
                                                                                            =========      =========      =========
Transfer of mortgage loans to real estate acquired through foreclosure ................     $   1,955            614          1,554
                                                                                            =========      =========      =========
  Increase in other assets and junior subordinated debt resulting from
      deconsolidation under FIN 46R ...................................................     $      --            464             --
                                                                                            =========      =========      =========
  Stock compensation related to accelerated vesting ...................................     $      --             --             76
                                                                                            =========      =========      =========
</TABLE>

          See accompanying notes to consolidated financial statements.

16
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      The  following is a summary of the more  significant  accounting  policies
used  in the  preparation  and  presentation  of the  accompanying  consolidated
financial statements. The preparation of financial statements in conformity with
U.S.  generally  accepted  accounting  principles  requires  management  to make
estimates and assumptions.  These estimates and assumptions  affect the reported
amount of assets and  liabilities  and the  disclosure of contingent  assets and
liabilities at the date of the financial  statements.  In addition,  they affect
the reported amounts of income and expenses during the reporting period.  Actual
results could differ from these estimates and  assumptions.  Material  estimates
that  are  particularly   susceptible  to  significant   change  relate  to  the
determination  of the  allowance  for loan  losses  and  income  tax  assets  or
liabilities.  To a lesser extent, significant estimates are also associated with
the valuation of  derivative  instruments  and  valuation of mortgage  servicing
rights.

      (a) Principles of Consolidation

      The accompanying consolidated financial statements include the accounts of
Coastal   Financial   Corporation   (the   "Company"),   and  its   wholly-owned
subsidiaries,  Coastal  Financial  Capital Trust I, a statutory  trust,  Coastal
Investor  Services,  Inc.,  Coastal  Planners  Holding  Corporation (and Coastal
Planners Holding  Corporation's  wholly-owned  subsidiary,  Coastal  Retirement,
Estate and Tax  Planners,  Inc.),  Coastal  Federal  Bank (the  "Bank") (and the
Bank's wholly-owned  subsidiaries,  Coastal Federal Holding Company (and Coastal
Federal  Holding  Company's   wholly-owned   subsidiary,   Coastal  Real  Estate
Investment Corporation)), and Coastal Mortgage Bankers and Realty Co., Inc. (and
Coastal Mortgage Bankers and Realty Co. Inc.'s wholly-owned subsidiary, Sherwood
Development Corporation).

      In consolidation,  all significant  intercompany balances and transactions
have been eliminated.  Coastal Financial Corporation is a unitary thrift holding
company organized under the laws of the state of Delaware.

      (b) Cash and Cash Equivalents

      For purposes of reporting cash flows,  cash and cash  equivalents  include
cash and  amounts  due from  banks,  short-term  interest-bearing  deposits  and
federal funds sold. Cash and cash equivalents have maturities of three months or
less. Accordingly, the carrying amount of such instruments is considered to be a
reasonable estimate of fair value.

      (c) Investment and Mortgage-backed Securities

      Investment and mortgage-backed  securities are accounted for in accordance
with Statement of Financial  Accounting  Standards ("SFAS") No. 115, "Accounting
for  Certain  Investments  in  Debt  and  Equity  Securities".  Investments  are
classified  into  three  categories  as  follows:  (1) Held to  Maturity  - debt
securities  that the  Company  has the  positive  intent and  ability to hold to
maturity,  which are reported at amortized  cost;  (2) Trading - debt and equity
securities that are bought and held  principally for the purpose of selling them
in the near term,  which are reported at fair value,  with unrealized  gains and
losses  included  in  earnings  and (3)  Available  for Sale - debt  and  equity
securities that may be sold under certain conditions, which are reported at fair
value,  with unrealized  gains and losses excluded from earnings and reported in
accumulated other comprehensive  income as a separate component of stockholders'
equity, net of income taxes.

      The  Company   determines   investment  and   mortgage-backed   securities
classification at the time of purchase. Premiums and discounts on securities are
accreted or amortized as an adjustment to income over the estimated  life of the
security using a method which approximates a level yield. Dividends and interest
income are recognized when earned. Unrealized losses on securities, reflecting a
decline in value judged by the Company to be other than  temporary,  are charged
to income in the consolidated statements of operations.

      The  cost   basis  of   securities   sold  is   determined   by   specific
identification.  Purchases and sales of securities  are recorded on a trade date
basis.  The fair value of  securities is based on quoted market prices or dealer
quotes.

(d) Loans Receivable Held for Sale

      Mortgage loans  originated  and intended for sale in the secondary  market
are carried at the lower of cost or estimated market value in the aggregate. Net
unrealized  losses  are  provided  for in a  valuation  allowance  by charges to
operations.  At September 30, 2004 and 2005, the Company had approximately  $8.2
million and $18.1 million in mortgage loans held for sale,  respectively.  Gains
or losses on sales of loans are  recognized  when  control over these assets has
been  surrendered in accordance with SFAS No. 140,  "Accounting for Transfer and
Servicing of Financial  Assets and  Extinguishment  of  Liabilities"  ("SFAS No.
140").

                                                                              17
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

      (e) Loans Receivable

      Loans  receivable  are stated at unpaid  principal  balances  adjusted for
unamortized  premiums and unearned  discounts and deferred loan fees/costs.  The
Company recognizes interest income on loans using the simple interest method.

      The Company follows SFAS No. 114,  "Accounting by Creditors for Impairment
of a Loan," for determining  impairment on certain loans.  SFAS No. 114 requires
that nonhomogenous  impaired loans and certain restructured loans be measured at
the  present  value of  expected  future  cash  flows  discounted  at the loan's
effective  interest rate, at the loan's  observable  market price or at the fair
value of the collateral if the loan is collateral dependent.  A specific reserve
is set up for each impaired loan.  Accrual of interest  income on impaired loans
is  suspended   when,  in  management's   judgment,   doubt  exists  as  to  the
collectibility of principal and interest. If amounts are received on impaired or
restructured  loans for which the accrual of interest has been  discontinued,  a
determination  is made as to whether  payments  received should be recorded as a
reduction  of  the  principal   balance  or  as  interest  income  depending  on
management's  judgment  as to the  collectibility  of  principal.  The  loan  is
returned to accrual  status when,  in  management's  judgment,  the borrower has
demonstrated the ability to make periodic  interest and principal  payments on a
timely basis.

      Loans are charged-off  when the amount of loss is reasonably  quantifiable
and the loss is likely  to  occur.  Commercial  loans  are  generally  placed in
nonaccrual  status  when they  become  90-days  delinquent  or  earlier  if full
collection of principal  and interest  becomes  doubtful.  Consumer and mortgage
loans are placed in  nonaccrual  status when they become 90 days  delinquent  or
earlier if full collection of principal and interest becomes doubtful.  Interest
payments  received  after  a loan is  placed  in  nonaccrual  are  applied  as a
principal  reduction  until such time as the loan is returned to accrual status.
Generally, loans are returned to accrual status when the loan is brought current
and the ultimate collectibility of principal and interest is no longer in doubt.
The  Company  maintains  an  allowance  for  the  loss of  uncollected  interest
primarily  on loans  which  are 90 days or more  past  due.  This  allowance  is
reviewed  periodically  and necessary  adjustments,  if any, are included in the
determination  of current  interest  income.  The  allowance  for  uncollectible
interest  totaled  $605,000  and  $528,000  as of  September  30, 2004 and 2005,
respectively.

      (f) Loan Fees and Discounts

      The net of  origination  fees  received and direct  costs  incurred in the
origination of loans are deferred as part of the basis of loans and amortized to
interest  income  over the  contractual  life of the loans  adjusted  for actual
principal repayments using a method approximating a level yield.

      (g) Allowance for Loan Losses

      The allowance for loan loss is based on management's ongoing evaluation of
the loan  portfolio and reflects an amount,  that in  management's  opinion,  is
adequate to absorb  probable losses in the existing  portfolio.  All loan losses
are charged to the allowance and all  recoveries  are credited to the allowance.
Additions to the allowance for loan losses are provided by charges to operations
based on various  factors  which,  in  management's  judgment,  deserve  current
recognition in estimating losses.  Such factors considered by management include
the market value of the underlying collateral,  growth and composition of credit
risk  within the loan  portfolio,  loss  experience,  review of problem  assets,
delinquency  trends,  and local and  regional  economic  conditions.  Management
evaluates the carrying value of loans periodically and the allowance is adjusted
accordingly.  While  management  uses the  best  information  available  to make
evaluations,  future  adjustments  to the allowance may be necessary if economic
conditions  differ  substantially  from  the  assumptions  used  in  making  the
evaluation.  The allowance for loan losses is subject to periodic  evaluation by
various  regulatory  authorities  and may be  subject to  adjustment  upon their
examination.

      (h) Concentration of Credit Risk

      The Company's primary market area includes northeastern South Carolina and
southeastern  North  Carolina,  predominately  along  the  coastal  regions.  At
September  30,  2005,  the  majority of the total loan  portfolio,  as well as a
substantial  portion of the commercial and real estate loan portfolios,  were to
borrowers within this region.

      The Company has  identified  one  concentration  of credit risk that it is
monitoring.  This  concentration  involves loans for the acquisition of land and
loans for the development of land, which totaled $121.2 million at September 30,
2005 representing  124.6% of total equity and 13.1% of net loans receivable.  At
September 30, 2004 this concentration  totaled $99.7 million representing 116.8%
of total  equity  and 12.6% of net loans  receivable.  Economic  growth  and low
interest rate environments  have created  opportunities for land acquisition and
development  activities in the Company's  market area.  Adverse  changes in such
factors can also slow  absorption  of  developing  projects and moderate  market
values  of land  and  developed  lots.  Management  continues  to  monitor  this
concentration of credit risk at this time and has considered this  concentration
in its evaluation of the allowance for loan losses.  The Company  experienced no
loan losses related to this  identified  risk during the years ending  September
30, 2003, 2004 and 2005.

18
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

      (i) Loan Securitizations

      The  Company   packages  and  sells  loans  receivable  as  securities  to
investors.  These transactions are recorded as sales in accordance with SFAS No.
140 when control over these  assets has been  surrendered.  The Company does not
retain any interest in the securities sold other than the servicing rights.

      (j) Real Estate Owned

      Real estate  acquired in settlement of loans is initially  recorded at the
lower of cost or net fair value (less  estimated costs to sell). If cost exceeds
net fair value,  the asset is written down to net fair value with the difference
being charged against the allowance for loan losses.  Subsequent to foreclosure,
such  assets  are  carried  at the  lower  of cost or net  fair  value  with any
additional write downs being charged as real estate losses.

      (k) Office Properties and Equipment

      Office  properties  and  equipment  are  carried at cost less  accumulated
depreciation.  Depreciation is computed  primarily on the  straight-line  method
over estimated useful lives.  Estimated lives range up to thirty-nine  years for
buildings  and  improvements  and up to ten years for  furniture,  fixtures  and
equipment.   Maintenance  and  repairs  are  charged  to  expense  as  incurred.
Improvements  which extend the lives of the respective  assets are  capitalized.
When  property  or  equipment  is sold or  otherwise  disposed  of, the cost and
related  accumulated  depreciation are removed from the respective  accounts and
the resulting gain or loss is reflected in income.

      (l) Mortgage Servicing Rights

      SFAS No. 140 requires the  recognition  of originated  mortgage  servicing
rights  ("mortgage  servicing  rights" or "MSRs") as assets by allocating  total
costs incurred  between the originated  loan and the servicing  rights  retained
based on their relative fair values.  SFAS No. 140 also requires the recognition
of purchased  mortgage  servicing rights at fair value,  which is presumed to be
the price paid for the rights. MSRs are amortized in proportion to the servicing
income over the estimated life of the related  mortgage  loan. The  amortization
method  is  designed  to   approximate   a  level-yield   method,   taking  into
consideration the estimated  prepayment of the underlying loans. For purposes of
measuring  impairment,  MSRs are  reviewed for  impairment  by  management  on a
quarterly  basis,   primarily   considering   prepayments  and  interest  rates.
Impairment is measured on a  disaggregated  basis.  The Company  establishes  an
impairment  valuation  allowance to record any impairment  for MSRs.  Subsequent
increases in value are recognized only to the extent of the impairment valuation
allowance within the same tranche. (See Note 5).

      (m) Income Taxes

      Deferred  tax assets and  liabilities  are  recognized  for the  estimated
future tax  consequences  attributable  to  differences  between  the  financial
statement  carrying  amounts  of  existing  assets  and  liabilities  and  their
respective tax basis. Deferred tax assets and liabilities are measured using the
enacted  tax rates  expected  to apply to  taxable  income in the years in which
those temporary  differences are expected to be recovered or settled. The effect
of a change in tax rates on deferred tax assets and liabilities is recognized in
the period that  includes  the  statutory  enactment  date. A deferred tax asset
valuation  allowance is recorded  when it is more likely than not that  deferred
tax assets will not be realized.

      (n) Drafts Outstanding

      The Company invests all excess funds on deposit at other banks  (including
amounts on deposit for payment of  outstanding  disbursement  checks) on a daily
basis in an overnight interest-bearing account. Accordingly,  outstanding checks
are reported as a liability.

      (o) Securities Sold Under Agreement to Repurchase

      The Company maintains collateral for certain Customers who wish to deposit
amounts  greater  than  $100,000.  These  agreements  function  similarly  to  a
certificate  of deposit in that the agreement is for a fixed length of time at a
fixed  interest  rate.  However,  these  deposits are not insured by the Federal
Deposit  Insurance  Corporation  (the  "FDIC"),  but  are  collateralized  by an
interest in the pledged securities.  The Company has classified these borrowings
separately from deposits.

      The  Company  enters  into  sales  of  securities   under   agreements  to
repurchase.  Fixed-coupon,  repurchase agreements are treated as financing, with
the obligation to repurchase  securities sold being reflected as a liability and
the securities underlying the agreements remaining as assets.


                                                                              19
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

      (p) Stock Based Compensation

      At  September  30, 2005,  the Company has one stock option plan,  which is
described more fully in note 17.

      The Company  applies the intrinsic  value method of APB Opinion Number 25,
"Accounting  for Stock Issued to  Employees"  ("APB Opinion No. 25") and related
interpretations,  including  FASB  Interpretation  Number  44,  "Accounting  for
Certain Transactions  involving Stock Compensation" ("FIN No. 44") in accounting
for its plan.  Accordingly,  no  compensation  cost has been  recognized for its
fixed  option  plans as all  options  granted  under those plans had an exercise
price equal to or greater than the market value of the  underlying  stock at the
date of grant. In October 1995,  Statement of Financial Accounting Standards No.
123,  "Accounting for  Stock-Based  Compensation"  ("SFAS 123"),  was issued and
encourages,  but does not require, adoption of a fair value method of accounting
for employee  stock-based  compensation plans. In December 2002, the FASB Issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition  and Disclosure-an  Amendment of FASB Statement No. 123"
("SFAS 148").  As permitted by SFAS 123 and SFAS 148, the Company has elected to
disclose  the  proforma  net income and  earnings per share as if the fair value
method had been applied in measuring compensation cost.

      Effective  September 21, 2005,  upon  recommendation  of the  Compensation
Committee  of the Board of  Directors  of  Coastal  Financial  Corporation,  the
Company's  Board of  Directors  accelerated  the  vesting  of, and  vested,  all
unvested  outstanding  options to acquire the Company's  common stock granted in
fiscal years 2003, 2004 and 2005, totaling  approximately  731,000 options, that
would  otherwise  vest at  various  times  through  the end of fiscal  2010 (the
"Acceleration"). All other terms and conditions of such options remain unchanged
as a result of the Acceleration.

      The Board of Directors  determined  that the  Acceleration  is in the best
interests of the Company and its  stockholders  because it reduced  compensation
expense that the Company would otherwise be required to record in future periods
when the Company  becomes subject to the  requirements  of Financial  Accounting
Standards Board ("FASB") Statement No. 123 "Share-Based  Payment (Revised 2004)"
("SFAS  123R").  The  Company  becomes  subject  to SFAS 123R on October 1, 2005
(i.e.,  the first day of its fiscal year ending  September 30, 2006).  SFAS 123R
will generally require that the Company record compensation expense equal to the
fair value of all  equity-based  compensation  over the  vesting  period of each
award.  As a result of the  Acceleration  and based on  estimated  Black-Scholes
value  calculations,  the  Company  expects  to not incur  pre-tax  compensation
expense  related to the options  subject to the  Acceleration  of  approximately
$965,000 in fiscal  2006,  $885,000  in fiscal  2007,  $670,000 in fiscal  2008,
$400,000 in fiscal 2009, and $50,000 in fiscal 2010.

      The Acceleration meets the criteria for variable  accounting under FIN No.
44. Based upon past  experience,  the Company  believes that the majority of the
holders of the  options  subject to the  Acceleration  will  remain  employed or
otherwise  affiliated  with the Company and/or its affiliates over the full term
of the original vesting period.  Consequently,  under the provisions included in
FIN No. 44, the Company  recorded in the fourth fiscal quarter ending  September
30, 2005, a pre-tax charge to earnings of $76,000,  in the form of  compensation
expense, related to the Acceleration.

      In addition,  in September 2005, the Company granted options to employees,
officers  and  directors  of  approximately  390,000  shares,  without a vesting
requirement.

      Had compensation  cost for the Company's  stock-based  compensation  plans
been  determined  consistent  with the SFAS 123,  the  Company's  net income and
earnings  per share would have been reduced to the  proforma  amounts  indicated
below for the years ended September 30, (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                     2003           2004           2005
                                                                  ----------     ----------     ----------
<S>                                                               <C>            <C>            <C>
         Reported Net Income                                      $   11,172         14,806         17,154
         Less: Stock option compensation expense
               determined under fair value method, net of tax           (504)          (599)        (3,710)
                                                                  ----------     ----------     ----------
         Proforma net income                                      $   10,668         14,207         13,444
                                                                  ==========     ==========     ==========
         Reported net income per share:
               Basic                                              $     0.59           0.78           0.89
                                                                  ==========     ==========     ==========
               Diluted                                                  0.57           0.74           0.84
                                                                  ==========     ==========     ==========
         Proforma net income per share:
               Basic                                              $     0.57           0.74           0.70
                                                                  ==========     ==========     ==========
               Diluted                                                  0.54           0.70           0.67
                                                                  ==========     ==========     ==========
</TABLE>

20
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

      (p) Stock Based Compensation - CONTINUED

      The weighted  average fair value of all of the options  granted during the
periods  indicated have been estimated  using the  Black-Scholes  option-pricing
model with the following assumptions:

<TABLE>
<CAPTION>
                                                             2003       2004      2005
                                                            -----      -----     -----
<S>                                                         <C>        <C>       <C>
           Dividend yield                                    1.86%      1.25%     1.50%
           Weighted average risk-free interest rate          3.96%      4.21%     4.01%
           Weighted average expected volatility             46.00%     40.00%    29.00%
           Weighted average expected life in years           7.50       7.50      5.00
</TABLE>

      Included  in fiscal  2005  proforma  net  income  was  pre-tax  expense of
approximately  $3.0 million related to the acceleration of vesting  requirements
for the stock option awards granted in fiscal 2003,  2004 and 2005. In addition,
included in fiscal 2005 proforma net income was pre-tax expense of approximately
$1.4 million  related to the grant of options in September 2005, with no vesting
requirements.

      (q) Comprehensive Income

      SFAS No. 130, "Reporting  Comprehensive  Income" establishes standards for
the reporting and presentation of  comprehensive  income and its components in a
full set of financial  statements.  Comprehensive  income consists of net income
and  net  unrealized  gains  (losses)  on  securities  and is  presented  in the
statements of stockholders' equity and comprehensive income.

      (r) Disclosures Regarding Segments

      The Company  reports  operating  segments in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131").  Operating  segments are components of an enterprise about which separate
financial  information  is available  that is  evaluated  regularly by the chief
operating  decision  maker in  deciding  how to  allocate  resources  and assess
performance.  SFAS No. 131 requires that a public enterprise report a measure of
segment profit or loss,  certain  specific  revenue and expense  items,  segment
assets,  information  about the way that the operating  segments were determined
and other  items.  The Company has one  reportable  operating  segment,  Coastal
Federal Bank.

      (s) Derivative Instruments and Hedging Activities

      Statement of  Financial  Accounting  Standards  No. 133,  "Accounting  for
Derivative  Instruments and Hedging  Activities" ("SFAS 133") as amended by SFAS
No. 137,  138,  and 149  establishes  accounting  and  reporting  standards  for
derivatives  and hedging  activities.  It requires  an entity to  recognize  all
derivatives as either assets or  liabilities in the balance sheet,  and measures
those instruments at fair value.  Changes in the fair value of those derivatives
are reported in current earnings or other comprehensive  income depending on the
purpose for which the  derivative is held and whether the  derivative  qualifies
for hedge  accounting.  The Company does not currently  engage in any activities
that qualify for hedge accounting under SFAS 133.  Accordingly,  changes in fair
value of these  derivative  instruments  are  included in gain on sales of loans
held for sale in the consolidated statements of operations. (See Note 23).

      (t) Reclassifications

      Certain  amounts in the 2003 and 2004  consolidated  financial  statements
have  been   reclassified   to  conform   with  the  2005   presentation.   Such
reclassifications did not change net income or equity as previously reported.

(2) INVESTMENT SECURITIES

      The amortized cost and fair value of investment  securities  available for
sale at September 30, 2004 are summarized as follows:

<TABLE>
<CAPTION>
                                                                                      2004
                                                              --------------------------------------------------
                                                                              Gross          Gross
                                                              Amortized    Unrealized      Unrealized       Fair
                                                                 Cost         Gains          Losses        Value
                                                              ---------    ----------      ----------      -----
                                                                                 (In thousands)
<S>                                                            <C>               <C>             <C>       <C>
         U.S. Government and agency obligations:
             Due after five years .....................        $ 2,901            12              --        2,913
         State and municipal obligations:
             Due after five years .....................         20,123           497             (84)      20,536
                                                               -------       -------         -------      -------
                                                               $23,024           509             (84)      23,449
                                                               =======       =======         =======      =======
</TABLE>

                                                                              21
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(2) INVESTMENT SECURITIES- Continued

      The amortized cost and fair value of investment  securities  available for
sale at September 30, 2005 are summarized as follows:

<TABLE>
<CAPTION>
                                                                                         2005
                                                                    ----------------------------------------------
                                                                                   Gross         Gross
                                                                    Amortized   Unrealized    Unrealized    Fair
                                                                       Cost        Gains        Losses      Value
                                                                    ---------   ----------    ----------    ------
                                                                                     (In thousands)
<S>                                                                  <C>             <C>          <C>       <C>
         U.S. Government and agency obligations:
            Due after five years ............................        $ 3,947           --           (13)      3,934
         State and municipal obligations:
            Due after five years ............................         21,285          434           (37)     21,682
                                                                     -------      -------       -------     -------
                                                                     $25,232          434           (50)     25,616
                                                                     =======      =======       =======     =======
</TABLE>

      The  Company  had no gross  realized  gains or losses  for the year  ended
September 30, 2003. For the year ended  September 30, 2004,  there were no gross
realized gains and losses were $100,000.  For the year ended September 30, 2005,
gross realized gains were $92,000 and gross realized losses were $26,000.

      The  unrealized  losses on  investment  securities  were  attributable  to
increases in interest rates,  rather than credit quality.  The unrealized losses
are comprised of seven  securities that have had continuous  losses of less than
12  months  and six  securities  that  have had  continuous  losses 12 months or
longer.  None of the individual  investment  securities  had an unrealized  loss
which  exceeded 5% of its amortized  cost. At September 30, 2005,  substantially
all investment securities were rated AAA or higher.

      At September 30, 2004 and 2005, investment securities held to maturity due
after five years totaled $7.8 million and $10.0 million, respectively.

      The Company had one investment security held to maturity with an amortized
cost and fair  value  of $7.8  million  that was  called  by the  issuer,  which
resulted in a gross realized gain of $160,000 in fiscal 2005.

      The following table sets forth the final  maturities and weighted  average
yields of the  securities  available for sale and held to maturity at fair value
at September 30, 2005:

<TABLE>
<CAPTION>
                                                                                        2005
                                                  -----------------------------------------------------------------------------
                                                       One year         More than one        More than five       More than
                                                        or less         to five years         to ten years        ten years
                                                  ------------------  ------------------  ------------------  -----------------
                                                  Fair Value   Yield  Fair Value   Yield  Fair Value   Yield  Fair Value  Yield
                                                  ----------   -----  ----------   -----  ----------   -----  ----------  -----
                                                                                (Dollars in thousands)
<S>                                                 <C>          <C>    <C>          <C>    <C>       <C>      <C>        <C>
         U.S. Government and agency obligations:
           FNMA ................................    $    --      --%    $    --      --%    $ 2,982    5.33%    $    --      --%
           FHLB ................................         --      --          --      --      10,049    2.05         952    4.25
           State and municipal obligations .....         --      --          --      --       4,509    4.03      17,173    4.29
             Total .............................    $    --      --%    $    --      --%    $17,540    3.11%    $18,125    4.29%
</TABLE>

The yield on state and municipal obligations is not computed on a tax-equivalent
basis.


22
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(3) MORTGAGE-BACKED SECURITIES

      Mortgage-backed  securities  available  for  sale at  September  30,  2004
consisted of the following:

<TABLE>
<CAPTION>
                                                                                         2004
                                                                -----------------------------------------------------------
                                                                                  Gross           Gross
                                                                Amortized       Unrealized      Unrealized            Fair
                                                                   Cost           Gains           Losses             Value
                                                                ---------       ----------      ----------          -------
                                                                                       (In thousands)
<S>                                                              <C>                <C>             <C>             <C>
         Collateralized Mortgage Obligations ............        $ 51,644              82             (319)          51,407
         FNMA ...........................................         162,371           3,090             (661)         164,800
         GNMA ...........................................          42,205             799               (5)          42,999
         FHLMC ..........................................         114,947             923             (793)         115,077
                                                                 --------        --------         --------         --------
                                                                 $371,167           4,894           (1,778)         374,283
                                                                 ========        ========         ========         ========
</TABLE>

      Mortgage-backed  securities  available  for  sale at  September  30,  2005
consisted of the following:

<TABLE>
<CAPTION>
                                                                                          2005
                                                                -----------------------------------------------------------
                                                                                  Gross           Gross
                                                                Amortized       Unrealized      Unrealized            Fair
                                                                   Cost           Gains           Losses             Value
                                                                ---------       ----------      ----------          -------
                                                                                    (In thousands)
<S>                                                              <C>               <C>             <C>             <C>
         Collateralized Mortgage Obligations ............        $ 84,387              37           (1,130)          83,294
         FNMA ...........................................         152,075           1,052           (1,346)         151,781
         GNMA ...........................................          45,963             274             (416)          45,821
         FHLMC ..........................................         119,399             447           (1,087)         118,759
                                                                 --------        --------         --------         --------
                                                                 $401,824           1,810           (3,979)         399,655
                                                                 ========        ========         ========         ========
</TABLE>

      The Company had gross realized gains of $695,000 and gross realized losses
of $226,000 for the year ended  September 30, 2003. For the year ended September
30, 2004,  the Company had gross  realized  gains of $772,000 and gross realized
losses of $1.8 million.  For the year ended  September 30, 2005, the Company had
gross realized gains of $719,000 and gross realized losses of $1.3 million.

      Gross unrealized  losses on  mortgage-backed  securities and the length of
time the  securities  have been in a continuous  unrealized  loss  position,  at
September 30, 2005, were as follows:

<TABLE>
<CAPTION>
                                                                                         2005
                                                    -----------------------------------------------------------------------------
                                                     Less than 12 Months         12 Months or Longer                Total
                                                    ---------------------     -----------------------     -----------------------
                                                    Fair       Unrealized        Fair      Unrealized       Fair       Unrealized
                                                    Value        Losses         Value         Losses        Value        Losses
                                                    ----       ----------     ---------    ----------     ---------    ----------
                                                                                   (In thousands)
<S>                                               <C>            <C>            <C>             <C>         <C>           <C>
         Collateralized Mortgage Obligations ..   $  55,560          (770)       19,518          (360)       75,078        (1,130)
         FNMA .................................      78,664        (1,189)        5,893          (157)       84,557        (1,346)
         GNMA .................................      32,787          (416)           --            --        32,787          (416)
         FHLMC ................................      81,540          (988)        5,951           (99)       87,491        (1,087)
                                                  ---------     ---------     ---------     ---------     ---------     ---------
                                                  $ 248,551        (3,363)       31,362          (616)      279,913        (3,979)
                                                  =========     =========     =========     =========     =========     =========
</TABLE>

      The unrealized losses on mortgage-backed  securities summarized above were
attributable  to increases in interest rates,  rather than credit  quality.  The
unrealized losses are comprised of 72 securities that have had continuous losses
of less than 12 months  and 10  securities  that have had  continuous  losses 12
months  or  longer.  One of the  individual  mortgage-backed  securities  had an
unrealized loss which exceeded 5% of its amortized cost by a minor amount.  None
of the Company's  securities were considered  impaired at September 30, 2005. At
September 30, 2005 all mortgage-backed securities were rated AAA or higher.

      Certain  mortgage-backed  securities  are pledged to secure other borrowed
money and customer deposits in excess of FDIC insurance  coverage.  The carrying
value of the securities  pledged at September 30, 2005 was $258.4 million with a
fair value of $255.7 million.

                                                                              23
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(3) MORTGAGE-BACKED SECURITIES - CONTINUED

      The  following  table sets  forth the final  contractural  maturities  and
weighted  average  yields of the  mortgage-backed  securities  at fair  value at
September 30, 2005:

<TABLE>
<CAPTION>
                                                                                         2005
                                                    ---------------------------------------------------------------------------
                                                        One year        More than one      More than five        More than
                                                         or less        to five years       to ten years         ten years
                                                    -----------------  -----------------  -----------------  ------------------
                                                    Fair Value  Yield  Fair Value  Yield  Fair Value  Yield  Fair Value   Yield
                                                    ----------  -----  ----------  -----  ----------  -----  ----------   -----
                                                                                (Dollars in thousands)
<S>                                                  <C>          <C>   <C>          <C>     <C>        <C>   <C>         <C>
         Mortgage-backed securities:
           FHLMC ................................    $    --      --%   $    --      --%     $   --     --%   $118,759    5.34%
           FNMA .................................         --      --         --      --          --     --     151,781    5.45
           GNMA .................................         --      --         --      --          --     --      45,821    5.60
           Collateralized Mortgage Obligations ..         --      --         --      --          --     --      83,294    4.80
                                                     -------    ----    -------    ----    --------    ---    --------    ----
              Total .............................    $    --      --%   $    --      --%     $   --     --%   $399,655    5.30%
                                                     =======    ====    =======    ====    ========    ===    ========    ====
</TABLE>

(4) LOANS RECEIVABLE, NET

      Loans receivable, net at September 30 consisted of the following:

<TABLE>
<CAPTION>
                                                                                              2004            2005
                                                                                           ---------       ---------
                                                                                                (In thousands)
<S>                                                                                        <C>               <C>
         Mortgage loans:
              Single family to 4 family units .................................            $ 329,287         352,893
              Land and land development .......................................               99,697         121,170
              Residential lots ................................................               29,839          37,112
              Other, primarily commercial real estate .........................              182,924         211,432
              Residential construction loans ..................................               82,789         127,970
              Commercial construction loans ...................................               10,503          14,989
         Consumer and commercial loans:
              Installment consumer loans ......................................               18,024          19,115
              Mobile home loans ...............................................                4,618           4,308
              Savings account loans ...........................................                2,058           1,883
              Equity lines of credit ..........................................               30,906          34,019
              Commercial and other loans ......................................               32,101          38,691
                                                                                           ---------       ---------
                                                                                             822,746         963,582
         Less:
              Allowance for loan losses .......................................               11,077          11,748
              Deferred loan cost, net .........................................                 (674)           (771)
              Undisbursed portion of loans in process .........................               21,613          28,345
                                                                                           ---------       ---------
                                                                                           $ 790,730         924,260
                                                                                           =========       =========
</TABLE>

      The changes in the allowance for loan losses for the years ended September
30 consisted of the following:

<TABLE>
<CAPTION>
                                                                                2003           2004           2005
                                                                             ---------      ---------      ---------
                                                                                         (In thousands)
<S>                                                                             <C>            <C>            <C>
         Beginning allowance ........................................        $   7,883          9,832         11,077
         Provision for loan losses ..................................            2,655          1,750          1,697
         Loan recoveries ............................................              136            249            224
         Loan charge-offs ...........................................             (842)          (754)        (1,250)
                                                                             ---------      ---------      ---------
                                                                             $   9,832         11,077         11,748
                                                                             =========      =========      =========
</TABLE>

      Nonaccrual  loans,  which are all loans  ninety  days or more  delinquent,
totaled  approximately  $5.9 million and $2.6 million at September  30, 2004 and
2005,  respectively.  In fiscal years 2003, 2004 and 2005, interest income which
would have been recorded would have been  approximately  $623,000,  $277,000 and
$285,000,  respectively,  had non accruing loans been current in accordance with
their original terms.

24
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(4) LOANS RECEIVABLE, NET - CONTINUED

      There were $3.3  million in  impaired  loans at  September  30,  2004.  At
September  30,  2005,  impaired  loans  totaled  $2.6  million.  Included in the
allowance for loan losses at September 30, 2004 was $359,000 related to impaired
loans  compared  to  $434,000  at  September  30,  2005.  The  average  recorded
investment  in  impaired  loans for the year ended  September  30, 2004 was $3.9
million compared to $3.7 million for the year ended September 30, 2005. Interest
income  recognized on impaired loans in fiscal 2003, 2004 and 2005 was $134,000,
$607,000 and $292,000,  respectively.  This decrease in fiscal 2005 over 2004 is
primarily  due to a commercial  loan that was placed in  nonaccrual  status in a
prior fiscal year.  The loan paid off in the fourth fiscal quarter of 2004. As a
result, the Company recognized approximately $330,000 of interest in fiscal 2004
which had been previously reserved.

      In the  normal  course of  business,  to meet the  financing  needs of its
Customers,   the   Company   is  a   party   to   financial   instruments   with
off-balance-sheet  risk.  These  financial  instruments  include  commitments to
extend  credit and stand by letters of credit.  These  instruments  involve,  to
varying  degrees,  elements  of credit and  interest  rate risk in excess of the
amount recognized in the balance sheet.

      The Company's  exposure to credit loss in the event of  non-performance by
the other party to the financial  instrument is represented  by the  contractual
amount of these instruments. The Company uses the same credit policies in making
commitments  and  conditional   obligations  as  it  does  for  on-balance-sheet
instruments.

      Commitments to extend credit are agreements to lend as long as there is no
violation of any condition  established in the contract.  Commitments  generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments may expire without being drawn upon, the
total commitment amounts do not necessarily  represent future cash requirements.
The Company evaluates each Customer's  creditworthiness on a case-by-case basis.
The amount of  collateral  obtained,  if deemed  necessary  by the Company  upon
extension of credit, is based on management's credit evaluation.

      Standby letters of credit  obligate the Company to meet certain  financial
obligations of its Customers,  if, under the contractual terms of the agreement,
the  Customers  are unable to do so.  Payment  is only  guaranteed  under  these
letters of credit upon the borrower's  failure to perform its obligations to the
beneficiary. The Company can seek recovery of the amounts paid from the borrower
and the  letters  of credit  are  generally  collateralized.  Commitments  under
standby  letters of credit are usually one year or less.  At September 30, 2005,
the Company has recorded no  liability  for the current  carrying  amount of the
obligation  to  perform  as a  guarantor,  as such  amounts  are not  considered
material.  The maximum potential amount of undiscounted  future payments related
to standby letters of credit at September 30, 2005 was $5.8 million.

      A summary  of loans  receivable  with  undisbursed  commitments  to extend
credit at September 30, 2004 and September 30, 2005 follows (in thousands):

<TABLE>
<CAPTION>
                                                                                                   2004         2005
                                                                                                 --------    --------
<S>                                                                                              <C>          <C>
         Residential mortgage loans in process ........................................          $ 21,613      28,345
         Business and consumer credit card lines ......................................            14,171      14,065
         Consumer home equity lines ...................................................            37,031      43,388
         Other consumer lines of credit ...............................................             8,361       4,547
         Standby letters of credit ....................................................             5,502       5,777
         Commercial real estate and construction and land development
             lines of credit ..........................................................            52,978     107,731
         Other commercial lines of credit .............................................             8,071      10,527
                                                                                                 --------    --------
                                                                                                 $147,727     214,380
                                                                                                 ========    ========
</TABLE>

      In addition,  the Company had  commitments  to originate  $28.6 million in
residential loans at September 30, 2005.

      Loans serviced for the benefit of others amounted to approximately  $219.8
million, $250.5 million and $291.9 million at September 30, 2003, 2004 and 2005,
respectively.  Loans serviced for others at September 30, 2003 and September 30,
2004 consisted  primarily of residential  mortgage loans. At September 30, 2005,
residential mortgage loans serviced for others was $274.7 million and commercial
mortgage loans serviced for others was $17.2 million.

      During  fiscal 2005,  the Company  securitized  $52.6  million of mortgage
loans and concurrently  sold these  mortgage-backed  securities to outside third
parties and  recognized a net gain on sale of $1.0 million,  which  included the
recognition of a $690,000  mortgage  servicing right asset.  During fiscal 2004,
the Company securitized $46.8 million of mortgage loans and concurrently

                                                                              25
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(4) LOANS RECEIVABLE, NET - CONTINUED

sold these mortgage-backed  securities to outside third parties and recognized a
net gain on sale of $1.4 million,  which included the  recognition of a $637,000
mortgage  servicing right asset. The gain is included in gains on sales of loans
held for sale in the  consolidated  statement of  operations.  The proceeds from
sale are included in proceeds from sales of mortgage-backed securities available
for sale in the consolidated statement of cash flows.

      As  disclosed  in note 9,  certain  mortgage  loans are  pledged to secure
advances from the Federal Home Loan Bank ("FHLB") of Atlanta.

      The  Bank  offers  mortgage  and  consumer  loans  to its  directors,  and
Associates for the financing of their personal residences and for other personal
purposes.  The Bank also offers  commercial  loans to companies  affiliated with
directors.  These  loans are made in the  ordinary  course of  business  and, in
management's  opinion,  are  made on  substantially  the same  terms,  including
interest   rates  and   collateral,   prevailing  at  the  time  for  comparable
transactions with other persons and companies. Management does not believe these
loans  involve  more than the normal  risk of  collectibility  or present  other
unfavorable  features.  At  September  30,  2005,  such loans were  current with
respect to their payment terms.

      The following is a summary of the activity of loans outstanding to certain
executive officers,  directors and their affiliates for the year ended September
30, 2005 (in thousands):

         Balance at September 30, 2004 .................         $ 988
         New loans .....................................           409
         Repayments ....................................          (564)
                                                                 -----
         Balance at September 30, 2005 .................         $ 833
                                                                 =====

(5) MORTGAGE SERVICING RIGHTS

      Mortgage servicing rights, net of the valuation allowance, are included in
other assets and totaled $3.0 million and $3.2 million at September 30, 2004 and
2005, respectively. Amortization expense for MSRs, included in interest on loans
receivable,  totaled $811,000, $1.0 million and $1.0 million for the years ended
September 30, 2003,  2004 and 2005,  respectively.  The  estimated  amortization
expense for MSRs held as of September 30, 2005, is $818,000, $783,000, $733,000,
$597,000 and $261,000 for fiscal 2006, 2007,  2008, 2009 and 2010  respectively.
The estimated  amortization  expense is based on current  information  regarding
loan  payments  and  prepayments.  Amortization  expense  could change in future
periods  based on changes  in the volume of  prepayments  and  various  economic
factors.

      At September 30, 2004 and 2005,  the valuation  allowance for MSRs totaled
$299,000  and  $5,000,  respectively.  In 2004 and 2005,  the  Company  recorded
$162,000 and $294,000 for impairment  recoveries,  respectively.  MSR impairment
recovery is included in other expense.

                                                         2004          2005
                                                       -------       -------
                                                           (In thousands)
         Balance at beginning of year ...........      $ 2,843         3,005
         MSRs capitalized .......................        1,020           941
         MSRs amortized .........................       (1,020)       (1,053)
         Recovery of impairment .................          162           294
                                                       -------       -------
         Balance at end of year .................      $ 3,005         3,187
                                                       =======       =======

(6) OFFICE PROPERTY AND EQUIPMENT, NET

      Office  property  and  equipment,  net at  September  30  consisted of the
following:

                                                         2004          2005
                                                       --------     --------
                                                            (In thousands)
         Land ...................................      $  5,848        7,530
         Building and improvements ..............        13,770       15,493
         Furniture, fixtures and equipment ......        17,341       20,510
                                                       --------     --------
                                                         36,959       43,533
         Less accumulated depreciation                  (18,115)     (20,775)
                                                       --------     --------
                                                       $ 18,844       22,758
                                                       ========     ========

26
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(6) OFFICE PROPERTY AND EQUIPMENT, NET - CONTINUED

      The Company  leases  office  space and  various  equipment.  Total  rental
expense for the years ended September 30, 2003, 2004 and 2005 was  approximately
$259,000, $285,000 and $307,000 respectively.

      Future  minimum  rental  payments for operating  leases  having  remaining
noncancelable  lease  terms in excess of one year at  September  30, 2005 are as
follows (in thousands):

                   2006 .............................       $   286
                   2007 .............................           232
                   2008 .............................           157
                   2009 .............................            67
                   2010 .............................            55
              Thereafter ............................           215
                                                            -------
                                                            $ 1,012
                                                            =======

(7) INVESTMENT REQUIRED BY LAW

      The Bank,  as a member of the FHLB of Atlanta,  is required to acquire and
hold  shares of capital  stock in the FHLB of Atlanta in an amount  equal to the
greater of (i) $500 (ii) 1.0% of the aggregate  outstanding  principal amount of
home mortgage loans, home purchase contracts and similar  obligations at the end
of each calendar year, or (iii) 5% of its advances (borrowings) from the FHLB of
Atlanta at the end of each calendar  year.  The Bank is in compliance  with this
requirement with an investment in FHLB stock of $15.8 million,  carried at cost,
at  September  30,  2005.  No ready  market  exists for this stock and it has no
quoted market value. However,  redemption of this stock has historically been at
par value.

(8) DEPOSITS

      Deposits at September 30 consisted of the following:

<TABLE>
<CAPTION>
                                                                              2004                          2005
                                                                  -------------------------    ------------------------
                                                                                   Weighted                    Weighted
                                                                     Amount          Rate        Amount          Rate
                                                                  ----------      ---------    ----------     ---------
                                                                                   (Dollars in thousands)
<S>                                                               <C>                 <C>      <C>               <C>
         Transaction accounts:
              Noninterest bearing ............................    $  122,357            --%    $  219,080          --%
              NOW ............................................       110,802          0.46        139,810        0.52
              Money market checking ..........................       224,437          1.37        213,078        2.26
                                                                  ----------                   ----------
                   Total transaction accounts ................       457,596          0.79        571,968        0.97
                                                                  ----------                   ----------
         Statement savings accounts:
             Regular .........................................        54,147          0.79         71,119        1.47
             Money market ....................................         1,058          1.00            705        1.24
                                                                  ----------                   ----------
                   Total statement savings accounts                   55,205          0.80         71,824        1.47
                                                                  ----------                   ----------
         Certificate accounts:
             0.00-1.99% ......................................        69,014                       15,660
             2.00-3.99% ......................................       148,493                      381,253
             4.00-5.99% ......................................        22,470                       29,545
             6.00-7.99% ......................................             8                            8
             8.00-10.00% .....................................           593                          660
                                                                  ----------                   ----------
                   Total certificate accounts                        240,578          2.49        427,126        3.39
                                                                  ----------                   ----------
                                                                  $  753,379          1.33%    $1,070,918        1.97%
                                                                  ==========                   ==========
</TABLE>

      The aggregate amount of all deposit  accounts with a minimum  denomination
of $100,000 or more was $364.2  million and $637.9 million at September 30, 2004
and 2005, respectively.

      The amounts and scheduled  maturities of certificate accounts at September
30, are as follows:

<TABLE>
<CAPTION>
                                                                           2004           2005
                                                                         --------      --------
                                                                             (In thousands)
<S>                                                                      <C>            <C>
            Within 1 year ...........................................    $208,130       392,731
            After 1 but within 2 years ..............................      23,512        22,666
            After 2 but within 3 years ..............................       4,960         8,555
            Thereafter ..............................................       3,976         3,174
                                                                         --------      --------
                                                                         $240,578       427,126
                                                                         ========      ========
</TABLE>

                                                                              27
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(8) DEPOSITS - CONTINUED

      Included in  certificate  accounts  ("CDs") are $169.9 million of brokered
CDs at September 30, 2005. There were no brokered CDs at September 30, 2004. The
average rate and remaining  term of brokered CDs at September 30, 2005 was 3.51%
and approximately four months, respectively.

      Interest expense on deposits for the years ended September 30 consisted of
the following:

<TABLE>
<CAPTION>
                                                                     2003          2004         2005
                                                                   -------       -------      -------
                                                                             (In thousands)
<S>                                                                <C>            <C>          <C>
            Transaction accounts ...........................       $ 3,925         3,331        4,457
            Passbook accounts ..............................           427           405          663
            Certificate accounts ...........................         7,647         6,288        8,959
                                                                   -------       -------      -------
                                                                   $11,999        10,024       14,079
                                                                   =======       =======      =======
</TABLE>

(9) ADVANCES FROM FHLB

      Advances from the FHLB at September 30 consisted of the following:

<TABLE>
<CAPTION>
                                                                           2004                         2005
                                                                   ---------------------       ---------------------
                                                                                Weighted                    Weighted
                                                                     Amount       Rate          Amount        Rate
                                                                   --------     --------       --------     --------
            Fiscal Year Maturity                                                 (Dollars in thousands)
<S>                                                                <C>             <C>         <C>             <C>
            2005 ...........................................       $ 64,500        2.78%       $     --          --%
            2006 ...........................................          4,177        2.79           4,177         2.79
            2007 ...........................................         11,560        2.23           3,560         2.83
            2008 ...........................................          3,977        3.18           3,977         3.18
            2009 ...........................................         31,803        2.36          31,803         2.36
            2010 ...........................................         52,651        5.98          63,651         5.74
            2011 or greater ................................        159,839        3.61         181,839         3.64
                                                                   --------                    --------
                                                                   $328,507        3.64%       $289,007         3.93%
                                                                   ========                    ========
</TABLE>

      Stock in the  FHLB of  Atlanta  and  specific  first  mortgage  loans  and
mortgage-backed securities of approximately $357.3 million and $362.5 million at
September 30, 2004 and 2005,  respectively,  are pledged as collateral for these
advances.  The Bank has  adopted  the policy of pledging  excess  collateral  to
facilitate  future  advances.  At September 30, 2005,  the excess first mortgage
loan  collateral  pledged  to the FHLB will  support  additional  borrowings  of
approximately  $73.5 million.  At September 30, 2005,  included in the one, two,
three, and four year maturities were $191.0 million with a weighted average rate
of 3.49% of advances subject to call provisions.  Callable advances at September
30, 2005 are summarized as follows:  $84.0 million callable in fiscal 2006, with
a weighted average rate of 3.99%;  $45.0 million callable in fiscal 2007, with a
weighted  average rate of 3.17%;  $37.0 million  callable in fiscal 2008, with a
weighted  average rate of 2.98%; and $25.0 million callable in fiscal 2009, with
a  weighted  average  rate of  3.13%.  Call  provisions  are more  likely  to be
exercised by the FHLB when interest  rates rise.  If exercised,  the Company may
have to replace called advances with borrowings at a higher interest rate.

      During fiscal 2003,  the Company  prepaid  approximately  $54.6 million of
advances from FHLB and incurred gross penalties of  approximately  $2.8 million.
During fiscal 2004, the Company prepaid  approximately  $4.6 million of advances
from FHLB and incurred gross penalties of approximately  $77,000.  During fiscal
2005,  the Company did not prepay any FHLB  advances.  Prepayment  penalties are
included in general and administrative expenses in the statement of operations.


28
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(10) REPURCHASE AGREEMENTS

      The following tables set forth certain  information  regarding  repurchase
agreements by the Bank at the end of and during the periods indicated:

<TABLE>
<CAPTION>
                                                                                              At September 30,
                                                                                 -----------------------------------------
                                                                                    2003            2004            2005
                                                                                  --------        --------        --------
                                                                                          (Dollars in thousands)
<S>                                                                               <C>             <C>             <C>
         Outstanding balance:
              Securities sold under agreements to repurchase:
                   Customer ...............................................       $  7,703        $ 12,931        $ 31,937
                   Broker .................................................        125,899          94,242          10,000
         Weighted average rate (at month end) paid on:
             Securities sold under agreements to repurchase:
                   Customer ...............................................           0.81%           1.42%           2.82%
                   Broker .................................................           1.64            1.74            2.39
         Maximum amount of borrowings outstanding at any month end:
             Securities sold under agreements to repurchase:
                   Customer ...............................................       $  7,703        $ 12,931        $ 39,317
                   Broker .................................................        125,899         184,129         109,958
         Approximate average outstanding with respect to:
             Securities sold under agreements to repurchase:
                   Customer ...............................................       $  4,812        $  9,033        $ 27,498
                   Broker .................................................         92,476         134,809          73,723
         Weighted average rate (year to date) paid on:
             Securities sold under agreements to repurchase:
                   Customer ...............................................           1.02%           1.01%           2.43%
                   Broker .................................................           2.04            1.50            2.37
</TABLE>

      Securities sold under agreements to repurchase represent borrowings by the
Company with maturities ranging from 1 to 12 months collateralized by securities
of the United States government or its agencies,  which have been delivered to a
third  party  custodian  for   safekeeping.   Assets  pledged  to  collateralize
securities sold under agreements to repurchase had a fair value of $45.9 million
at September 30, 2005 and are included in mortgage-backed  securities  available
for sale in the consolidated balance sheet.

(11) JUNIOR SUBORDINATED DEBT

      The Company determines whether it has a controlling  financial interest in
an entity by first evaluating  whether the entity is a voting interest entity or
a variable interest entity under accounting principles generally accepted in the
United  States of America.  Voting  interest  entities are entities in which the
total equity  investment  at risk is sufficient to enable each entity to finance
itself  independently  and provides the equity  holders with the  obligation  to
absorb  losses,  the right to  receive  residual  returns  and the right to make
decisions  about  the  entity's  activities.  The  Company  consolidates  voting
interest  entities  in which it has all,  or at least a majority  of, the voting
interest.  As defined in  applicable  accounting  standards,  variable  interest
entities ("VIEs") are entities that lack one or more of the characteristics of a
voting interest entity described above. A controlling  financial  interest in an
entity is present when an enterprise has a variable interest or a combination of
variable  interests that will absorb a majority of the entity's expected losses,
receive a majority of the  entity's  expected  residual  returns,  or both.  The
enterprise  with  a  controlling  financial  interest,   known  as  the  primary
beneficiary, consolidates the VIE.

      Prior to  January 1,  2005,  the  Company  consolidated  its  wholly-owned
subsidiary,  Coastal Financial Capital Trust I ("Trust").  In December 2003, the
Financial  Accounting Standards Board issued a revised version of Interpretation
No. 46 ("FIN 46") "Consolidation of Variable Interest Entities." The revised FIN
46 clarifies some of the provisions of the original  interpretation and adds new
scope exceptions.  As a result of the changes,  the Company  deconsolidated  the
Trust,  increasing  other assets by  $464,000,  increasing  junior  subordinated
debt-trust  preferred  securities by $15.5 million and reducing debt  associated
with trust preferred securities ("Capital Securities") by $15.0 million.

      The  junior  subordinated  debentures  are  unsecured  obligations  of the
Company  and are  subordinate  and junior in right of payment to all present and
future  senior  indebtedness  of the  Company.  The Company  has entered  into a
guarantee,  which together with its  obligations  under the junior  subordinated
debentures and the declaration of trust governing the Trust, provides a full and
unconditional guarantee of the Capital Securities.

      The Capital  Securities  accrue and pay  distributions at a rate per annum
equal to  90-day  LIBOR  plus 305 basis  points.  At  September  30,  2005,  the
distribution rate on the Capital Securities was 6.54%. The distributions payable
on the Capital  Securities are cumulative and payable quarterly in arrears.  The
Capital  Securities  interest  payments  for  fiscal  2003,  2004 and 2005  were
$213,000,  $662,000  an  $892,000,  respectively,  and are  included in interest
expense on other  borrowings.  The Company  has the right,  subject to events of
default,  to defer  payments of interest on the Capital  Securities for a period
not to exceed 20 consecutive  quarters.  The Company has no current intention to
exercise its right to defer payment of interest on the Capital Securities.

                                                                              29
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(11) JUNIOR SUBORDINATED DEBT - CONTINUED

      The Capital Securities are mandatorily redeemable upon maturity on July 3,
2033. The Company has the right to redeem the Capital  Securities in whole or in
part,  on or after July 3, 2008.  If the Capital  Securities  are redeemed on or
after July 3, 2008,  the redemption  price will be 100% of the principal  amount
plus  accrued  and unpaid  interest.  In  addition,  the  Company may redeem the
Capital  Securities  in whole  (but not in  part)  at any  time  within  90 days
following the  occurrence  of a tax event,  an investment  company  event,  or a
capital  treatment  event at a  special  redemption  price  (as  defined  in the
indenture).

(12) INCOME TAXES

      Income tax expense (benefit) for the years ended September 30 consisted of
the following:

<TABLE>
<CAPTION>
                                                                   Current         Deferred            Total
                                                                  --------         --------          --------
                                                                               (In thousands)
<S>                                                               <C>                   <C>             <C>
         2003:
              Federal ...................................         $  4,946              507             5,453
              State .....................................              693               (5)              688
                                                                  --------         --------          --------
                                                                  $  5,639              502             6,141
                                                                  ========         ========          ========
         2004:
              Federal ...................................         $  7,070              126             7,196
              State .....................................              433               (2)              431
                                                                  --------         --------          --------
                                                                  $  7,503              124             7,627
                                                                  ========         ========          ========
         2005:
              Federal ...................................         $  7,739              582             8,321
              State .....................................              614               47               661
                                                                  --------         --------          --------
                                                                  $  8,353              629             8,982
                                                                  ========         ========          ========
</TABLE>

      The  tax  effect  of  the  Company's  temporary  differences  between  the
financial  statement  carrying  amounts and tax basis of assets and  liabilities
that give rise to the net deferred tax asset  (liability)  at September 30, 2004
and 2005 relate to the following:

<TABLE>
<CAPTION>
                                                                                                       2004         2005
                                                                                                     --------     --------
<S>                                                                                                  <C>           <C>
         Deferred tax assets:                                                                            (In thousands)
              Allowance for loan losses .........................................................    $  4,031        4,406
              Accrued medical reserves ..........................................................          91           85
              Other real estate reserves and deferred gains on other real estate ................          56           20
              Net operating loss carryforwards ..................................................          38           81
              Unrealized loss on securities available for sale ..................................          --          679
              Other .............................................................................         170          282
                                                                                                     --------     --------
         Total deferred tax assets ..............................................................       4,386        5,553
         Less valuation allowance ...............................................................         (38)         (81)
                                                                                                     --------     --------
         Net deferred tax assets ................................................................       4,348        5,472
                                                                                                     --------     --------
         Deferred tax liabilities:
              Property and equipment principally due to differences in depreciation .............         688          398
              FHLB stock, due to stock dividends not recognized for tax purposes ................          15           --
              Deferred loan fees ................................................................         719          885
              Book over tax basis in investment in unconsolidated subsidiary ....................       4,009        5,053
              Unrealized gain on securities available for sale ..................................       1,347           --
              Mortgage servicing rights .........................................................       1,120        1,221
              Other .............................................................................         349          417
                                                                                                     --------     --------
         Total deferred tax liabilities .........................................................       8,247        7,974
                                                                                                     --------     --------
         Net deferred tax liability .............................................................    $ (3,899)      (2,502)
                                                                                                     ========     ========
</TABLE>

      The valuation allowance for deferred tax assets was $38,000 and $81,000 at
September 30, 2004 and 2005, respectively. The net change in the total valuation
allowance  for the years  ended  September  30, 2004 and 2005 was an increase of
$17,000 and $43,000,  respectively.  In assessing the  realizability of deferred
tax assets,  management  considers  whether it is more likely than not that some
portion or all of the  deferred  tax assets will not be  realized.  The ultimate
realization  of deferred tax assets is dependent  upon the  generation of future
taxable income during the periods in which those  temporary  differences  become
deductible.   Management  considers  the  scheduled  reversal  of  deferred  tax
liabilities,  projected  future taxable income,  and tax planning  strategies in
making this  assessment.  In order to fully realize the deferred tax asset,  the
company will need to generate  future  taxable income prior to the expiration of
the  deferred  tax  assets  governed  by the tax code.  Based  upon the level of
historical  taxable  income and  projections  for future taxable income over the
periods,  which the deferred tax assets are deductible,  management  believes it
more likely than

30
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(12) INCOME TAXES - CONTINUED

not the Company will realize the benefits of these deductible  differences,  net
of the existing  valuation  allowances at September 30, 2005.  The amount of the
deferred tax asset considered realizable,  however, could be reduced in the near
term if estimates of future  taxable income during the  carryforward  period are
reduced.

      The net deferred tax asset (liability) is included in other liabilities in
the consolidated  financial  statements.  The valuation allowance relates to the
state loss carryforwards which may not be ultimately realized to reduce taxes of
the Company.  A portion of the change in the net deferred tax liability  relates
to  unrealized  gains and losses on  securities  available  for sale.  A current
period  deferred  tax  benefit of $2.0  million  unrealized  loss on  securities
available  for sale has been  recorded  directly to  stockholders'  equity.  The
balance of the change in the  deferred  tax  liability  results from the current
period deferred tax expense of $629,000.

      Income taxes of the Company  attributable  to income  before  income taxes
differ from the amounts  computed by applying the Federal income tax rate of 35%
for the years ended September 30 to earnings before income taxes as follows:

<TABLE>
<CAPTION>
                                                                                    2003           2004          2005
                                                                                  --------       --------      --------
                                                                                             (In thousands)
<S>                                                                               <C>              <C>           <C>
         Computed federal income taxes ....................................       $  6,059          7,852         9,148
         State tax, net of federal benefit ................................            447            280           430
         Bank-owned life insurance ........................................           (233)          (337)         (332)
         Tax exempt securities net ........................................            (39)          (220)         (275)
         Other, net .......................................................            (93)            52            11
                                                                                  --------       --------      --------
         Total income tax expense .........................................       $  6,141          7,627         8,982
                                                                                  ========       ========      ========
</TABLE>

      The Bank had been permitted  under the Internal  Revenue Code to deduct an
annual addition to the tax reserve for bad debts in determining  taxable income,
subject to certain limitations.  This addition may differ significantly from the
bad debt expense for financial  reporting purposes and was based on either 8% of
taxable income (the  "Percentage of Taxable Income  Method") or actual loan loss
experience (the "Experience Method") for the years prior to 1997. As a result of
tax legislation, the Bank recaptured tax bad debt reserves in excess of pre-1988
based year amounts over a six-year period ended September 30, 2004.

      Retained  earnings at  September  30,  2005  includes  approximately  $5.2
million  representing  pre-1988 tax bad debt base year reserve amounts for which
no deferred  income tax liability has been provided since these reserves are not
expected to reverse  until  indefinite  future  periods  and may never  reverse.
Circumstances  that  would  require  an  accrual  of a  portion  or all of  this
unrecorded tax liability are a reduction in qualifying  loan levels  relative to
the end of 1987, failure to meet the tax definition of a savings bank,  dividend
payments in excess of current year or accumulated  tax earnings and profits,  or
other  distributions  in  dissolution,  liquidation  or redemption of the Bank's
stock.

(13) BENEFIT PLAN

      The Company has a defined  contribution  plan covering  substantially  all
Associates.  The Company matches Associate  contributions based upon the Company
meeting  certain  return  on equity  operating  results.  Matching  contribution
expense was approximately $340,000, $684,000 and $435,000 for fiscal years 2003,
2004 and 2005, respectively.

(14) REGULATORY MATTERS

      The Bank is  subject  to  various  capital  requirements  administered  by
federal  banking  agencies.  Failure to meet minimum  capital  requirements  can
initiate mandatory and possibly additional  discretionary  actions by regulators
that,  if  undertaken,  could  have a  direct  material  adverse  effect  on the
Company's  financial  statements.  Under  capital  adequacy  guidelines  and the
regulatory  framework for prompt corrective  action, the Bank must meet specific
capital guidelines that involve quantitative measures of the assets, liabilities
and certain  off-balance  sheet items as calculated under regulatory  accounting
practices.  The Bank's capital amounts and  classifications  are also subject to
qualitative  judgments by the regulators about  components,  risk-weighting  and
other factors. Quantitative measures established by regulation to ensure capital
adequacy  require the Bank to maintain  minimum amounts and ratios (set forth in
the following  table) of total and tier 1 capital (as defined in the regulation)
to  risk-weighted  assets (as defined) and to average  assets (as  defined).  At
September 30, 2005, the Bank's  loans-to-one  borrower  limit was  approximately
$18.4 million.  Management believes, as of September 30, 2005, that the Bank met
all capital adequacy requirements and loans-to-one-borrower limits.

      As of  September  30,  2005,  the most recent  notification  from  federal
banking agencies categorized the Bank as "well capitalized" under the regulatory
framework.  To be  categorized  as "well  capitalized,"  the Bank must  maintain
minimum total risk-based capital,  tier 1 capital, and tier 1 leverage ratios as
set forth in the table.  Since September 30, 2005,  there have been no events or
conditions that management believes have changed the Bank's categories. (Dollars
in thousands)

                                                                              31
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(14) REGULATORY MATTERS - CONTINUED

<TABLE>
<CAPTION>
                                                                                                            Amount to be
                                                                                       For Capital         Categorized as
                                                                    Actual          Adequacy Purposes    "Well Capitalized"
                                                             ------------------    ------------------    ------------------
                                                              Amount     Ratio      Amount      Ratio     Amount      Ratio
                                                             --------    ------    --------     -----    --------    ------
<S>                                                          <C>         <C>       <C>          <C>      <C>         <C>
         As of September 30, 2004:
              Total Capital: ............................    $106,851    13.55%    $ 63,077     8.00%    $ 78,847    10.00%
                (To Risk Weighted Assets)
              Tier 1 Capital: ...........................    $ 97,450    12.36%         N/A      N/A     $ 47,308     6.00%
                (To Risk Weighted Assets)
              Tier 1 Capital: ...........................    $ 97,450     7.44%    $ 39,278     3.00%    $ 65,574     5.00%
                (To Adjusted Total Assets)
              Tangible Capital:  ........................    $ 97,450     7.44%    $ 19,672     1.50%         N/A      N/A
                (To Adjusted Total Assets)
         As of September 30, 2005:
              Total Capital: ............................    $122,693    13.29%    $ 73,877     8.00%    $ 92,347    10.00 %
                (To Risk Weighted Assets)
              Tier 1 Capital: ...........................    $112,055    12.13%         N/A      N/A     $ 55,408     6.00%
                (To Risk Weighted Assets)
              Tier 1 Capital: ...........................    $112,055     7.25%    $ 46,356     3.00%    $ 77,260     5.00%
                (To Adjusted Total Assets)
              Tangible Capital:  ........................    $112,055     7.25%    $ 23,178     1.50%         N/A      N/A
                (To Adjusted Total Assets)
</TABLE>

(15) LIQUIDATION ACCOUNT

      In  conjunction  with the  Bank's  conversion  to stock form on October 4,
1990, the Bank  established,  as required by Office of Thrift  Supervision  (the
"OTS")  regulations,  a liquidation  account and maintains  this account for the
benefit of the remaining  eligible  account  holders as defined under the Bank's
plan of conversion. The initial balance of this liquidation account was equal to
the Bank's net worth  defined  by OTS  regulations  as of the date of the latest
statement of financial  condition  contained in the final offering circular.  In
the event of a complete  liquidation  of the Bank (and only in such  event) each
eligible  holder shall be entitled to receive a  liquidation  distribution  from
this  account in the amount of the then  current  adjusted  balance for deposits
then held, before any liquidation  distribution may be made to the stockholders.
The Bank is prohibited from declaring cash dividends or repurchasing its capital
stock if it would  cause a reduction  in the Bank's net worth  below  either the
balance of the liquidation  account or the statutory net worth  requirements set
by the OTS.

      The  Company's  ability to pay dividends  depends  primarily on the Bank's
ability to pay dividends to the Company.  The Bank is prohibited  from declaring
cash  dividends  on its common  stock or  repurchasing  its common  stock if the
effect  thereof  would cause its net worth to be reduced below either the amount
required  for  the  liquidation   account  or  the  minimum  regulatory  capital
requirement.  In  addition,  the Bank is also  prohibited  from  declaring  cash
dividends and repurchasing  its own stock without prior  regulatory  approval if
the total amount of all dividends and stock repurchases  (including any proposed
dividends and stock  repurchases)  for the  applicable  year exceeds its current
year's net income plus its retained net income for the preceding two years.

(16) EARNINGS PER SHARE

      Basic  earnings  per share are  computed  by  dividing  net  income by the
weighted-average number of common shares outstanding. Diluted earnings per share
are  computed by dividing net income by the  weighted  average  number of common
shares and potential common shares outstanding.  Potential common shares consist
of dilutive  stock options  determined  using the treasury  stock method and the
average  market  price of common  stock.  All share and per share data have been
retroactively restated for all common stock dividends. At September 30, 2005 the
Company had antidilutive securities of approximately 227,000 options to purchase
shares by Directors and Associates.  The average  exercise price for such shares
was $15.25 per share.

The following is a summary of the reconciliation of average shares outstanding
for the years ended September 30:

<TABLE>
<CAPTION>
                                                       2003                      2004                         2005
                                            ------------------------    ------------------------    ------------------------
                                               Basic        Diluted        Basic        Diluted        Basic        Diluted
                                            ----------    ----------    ----------    ----------    ----------    ----------
<S>                                         <C>           <C>           <C>           <C>           <C>           <C>
Weighted average shares outstanding         18,818,000    18,818,000    19,060,000    19,060,000    19,340,000    19,340,000
Effect of dilutive securities -
 Stock options                                      --       861,000            --     1,056,000            --     1,083,000
                                            ----------    ----------    ----------    ----------    ----------    ----------
Average shares outstanding                  18,818,000    19,679,000    19,060,000    20,116,000    19,340,000    20,423,000
                                            ==========    ==========    ==========    ==========    ==========    ==========
</TABLE>


32
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(17) STOCK OPTION PLAN

      The  Company's  stock option plan provides for stock options to be granted
primarily to directors, officers and other key Associates. Options granted under
the stock  option plan may be incentive  stock  options or  non-incentive  stock
options. Options vest ratably over a five year period and expire after ten years
from the date of grant, except as discussed below. The remaining shares of stock
reserved  for  the  stock  option  plan  at  September   30,  2005  amounted  to
approximately  97,000 shares.  Options  awarded prior to September 21, 2005 vest
ratably over a five-year  period.  Effective  September  21,  2005,  the vesting
period for  approximately  731,000  options awarded during fiscal 2003, 2004 and
2005  through  September  20, 2005 that would  otherwise  vest at various  times
through fiscal 2010 was  accelerated,  as more fully  described in note 1(p). In
addition, in September 2005, the Company granted options to employees,  officers
and directors of approximately  390,000 shares,  without a vesting  requirement.
All options  expire after ten years from the date of grant.  All other terms and
conditions of such options remain unchanged as a result of the Acceleration. All
outstanding  options have been retroactively  restated to reflect the effects of
the common stock dividends. At September 30, 2005, the Company had the following
options outstanding:

<TABLE>
<CAPTION>
                                                                       Weighted
                                                                        Average        Weighted                    Weighted
                                                           Number      Remaining        Average      Number        Average
               Fiscal                                     Options     Contractual      Exercise     Options        Exercise
                Year      Range of exercise prices:     Outstanding       Life           Price    Exercisable        Price
                ----      -------------------------     -----------   -----------      --------   -----------      --------
<S>                       <C>                            <C>           <C>              <C>        <C>              <C>
                1997      $3.63 - $3.76 ...........        116,369     1.2 Years        $ 3.67       116,369        $ 3.67
                1998      $5.29 - $8.06 ...........        293,717     2.2 Years        $ 5.98       293,717        $ 5.98
                1999      $5.86 - $6.35 ...........        254,841     3.1 Years        $ 5.92       254,841        $ 5.92
                2000      $3.57 - $4.65 ...........        212,587     4.2 Years        $ 4.24       212,587        $ 4.24
                2001      $3.43 - $5.36 ...........        233,702     5.1 Years        $ 3.49       186,962        $ 3.49
                2002      $5.14 - $8.44 ...........        246,622     6.1 Years        $ 5.22       147,973        $ 5.22
                2003      $6.83 - $8.68 ...........        321,490     7.1 Years        $ 8.19       321,490        $ 8.19
                2004      $11.00 - $11.98 .........        343,230     8.2 Years        $11.51       343,230        $11.51
                2005      $12.32 - $15.62 .........        789,051     9.6 Years        $13.55       789,051        $13.55
                                                         ---------     ---------        ------     ---------        ------
                          $3.43 - $15.62 ..........      2,811,609     7.6 Years        $ 8.52     2,666,220        $ 8.74
                                                         =========     =========        ======     =========        ======
</TABLE>

      The  following  is a summary of the activity of the stock option plans for
the years 2003, 2004, and 2005.

<TABLE>
<CAPTION>
                                                             2003                   2004                    2005
                                                   ---------------------    --------------------    ---------------------
                                                                Weighted                Weighted                 Weighted
                                                                Average                  Average                 Average
                                                                Exercise                Exercise                 Exercise
                                                    Shares       Price        Shares      Price       Shares      Price
                                                   ---------    --------    ---------   --------    ---------    --------
<S>                                                <C>           <C>        <C>           <C>        <C>           <C>
            Outstanding, October 1 ...........     2,186,474     $ 4.62     2,313,294     $ 5.21     2,303,342     $ 6.42
            Granted ..........................       383,206       8.12       361,053      11.51       799,759      12.30
            Cancelled ........................       (17,452)      6.24        (6,104)      7.53       (46,969)      9.25
            Exercised ........................      (238,934)      4.35      (364,901)      3.74      (244,523)      4.96
                                                   ---------     ------     ---------     ------     ---------     ------
            Outstanding, September 30 ........     2,313,294     $ 5.21     2,303,342     $ 6.42     2,811,609     $ 8.52
                                                   =========     ======     =========     ======     =========     ======
</TABLE>

(18) COMMON STOCK DIVIDENDS

      On May 27,  2003,  August 28,  2003,  February  18,  2004,  July 30, 2004,
December 15, 2004 and October 26, 2005 the Company declared a 10% stock dividend
aggregating approximately 1,065,000,  1,174,000, 1,308,000, 1,442,000, 1,594,000
and  1,770,000  shares,  respectively.  All share  and per  share  data has been
retroactively restated to give effect to the common stock dividends.

(19) CASH DIVIDENDS

      On each of December  18,  2002 and March 26,  2003,  the Company  declared
quarterly  cash  dividends  of  $0.031  per  share.  On each of June  24,  2003,
September  24, 2003,  December 15, 2003,  March 17, 2004 and June 16, 2004,  the
Company  declared  quarterly  cash  dividends  of $0.037 per  share.  On each of
September 29, 2004,  December 17, 2004 and March 16, 2005, the Company  declared
quarterly cash  dividends of $0.041.  On each of June 22, 2005 and September 21,
2005 the Company  declared  quarterly cash  dividends of $0.045.  Under Delaware
law,  the Company is permitted  to declare and pay  dividends  either out of its
surplus or, if there is no  surplus,  out of its net profits for the fiscal year
in which the dividend is declared and/or the preceding fiscal year.

(20) LEGAL MATTERS

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

                                                                              33
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(21) QUARTERLY FINANCIAL DATA (UNAUDITED)

      Quarterly operating data for the years ended September 30 is summarized as
follows (in thousands, except share data):

<TABLE>
<CAPTION>
                                                                      First           Second          Third          Fourth
                                                                     Quarter          Quarter        Quarter         Quarter
                                                                   -----------     -----------     -----------     -----------
<S>                                                                <C>              <C>             <C>             <C>
      2004:
         Total interest income ...............................     $    15,535          16,155          16,661          17,453
         Total interest expense ..............................           5,725           5,848           5,892           6,059
                                                                   -----------     -----------     -----------     -----------
         Net interest income .................................           9,810          10,307          10,769          11,394
         Provision for loan losses ...........................             550             500             200             500
                                                                   -----------     -----------     -----------     -----------
         Net interest income after provision for
            loan losses ......................................           9,260           9,807          10,569          10,894
         Other income ........................................           2,326           2,430           2,121           2,298
         General and administrative expenses .................           6,614           6,729           6,773           7,156
                                                                   -----------     -----------     -----------     -----------
         Income before income taxes ..........................           4,972           5,508           5,917           6,036
         Income taxes ........................................           1,653           1,831           2,018           2,125
                                                                   -----------     -----------     -----------     -----------
         Net income ..........................................     $     3,319           3,677           3,899           3,911
                                                                   ===========     ===========     ===========     ===========
         Net income per common share - diluted ...............     $       .16             .18             .19             .19
                                                                   ===========     ===========     ===========     ===========
         Weighted average shares outstanding-diluted .........      20,147,000      20,155,000      20,191,000      20,211,000
                                                                   ===========     ===========     ===========     ===========

<CAPTION>
                                                                      First           Second          Third          Fourth
                                                                     Quarter          Quarter        Quarter         Quarter
                                                                   -----------     -----------     -----------     -----------
<S>                                                                <C>              <C>             <C>             <C>
      2005:
         Total interest income ...............................     $    17,946          18,912          20,337          21,363
         Total interest expense ..............................           6,431           7,016           7,831           8,452
                                                                   -----------     -----------     -----------     -----------
         Net interest income .................................          11,515          11,896          12,506          12,911
         Provision for loan losses ...........................             350             625             550             172
                                                                   -----------     -----------     -----------     -----------
         Net interest income after provision for
            loan losses ......................................          11,165          11,271          11,956          12,739
         Other income ........................................           2,767           3,336           3,101           3,320
         General and administrative expenses .................           7,781           8,319           8,420           8,999
                                                                   -----------     -----------     -----------     -----------
         Income before income taxes ..........................           6,151           6,288           6,637           7,060
         Income taxes ........................................           2,106           2,153           2,281           2,442
                                                                   -----------     -----------     -----------     -----------
         Net income ..........................................     $     4,045           4,135           4,356           4,618
                                                                   ===========     ===========     ===========     ===========
         Net income per common share - diluted ...............     $      0.20            0.20            0.21            0.23
                                                                   ===========     ===========     ===========     ===========
         Weighted average shares outstanding-diluted .........      20,364,000      20,524,000      20,497,000      20,515,000
                                                                   ===========     ===========     ===========     ===========
</TABLE>

(22) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY)

      The  following is condensed  financial  information  of Coastal  Financial
Corporation  (parent company only), the primary asset of which is its investment
in its bank subsidiary, for the periods indicated (In thousands):

                          Coastal Financial Corporation
                            Condensed Balance Sheets
                           September 30, 2004 and 2005

<TABLE>
<CAPTION>
                                                                                                      2004              2005
                                                                                                   ----------       ----------
<S>                                                                                                <C>                <C>
      Assets
      Cash .................................................................................       $       86              297
      Investment in subsidiaries ...........................................................           99,754          111,034
      Deferred tax asset ...................................................................               50               50
      Other assets .........................................................................            1,725            2,214
                                                                                                   ----------       ----------
           Total assets ....................................................................       $  101,615          113,595
                                                                                                   ==========       ==========
      Liabilities and Stockholders' Equity
      Accounts payable (principally dividends) .............................................              803              910
      Junior subordinated debt .............................................................           15,464           15,464
      Total stockholders' equity ...........................................................           85,348           97,221
                                                                                                   ----------       ----------
           Total liabilities and stockholders' equity ......................................       $  101,615          113,595
                                                                                                   ==========       ==========
</TABLE>

34
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(22) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY) -
CONTINUED

                          Coastal Financial Corporation
                       Condensed Statements of Operations
                  Years ended September 30, 2003, 2004 and 2005

<TABLE>
<CAPTION>
                                                                                       2003            2004            2005
                                                                                     --------        --------        --------
<S>                                                                                  <C>              <C>             <C>
      Income:
        Interest income ......................................................       $      1               2               2
        Management fees ......................................................            300             242             242
        Dividends from subsidiary ............................................          1,221           2,230           3,400
        Equity in undistributed earnings of subsidiaries .....................         10,087          13,063          14,444
                                                                                     --------        --------        --------
                Total income .................................................         11,609          15,537          18,088
                                                                                     --------        --------        --------
      Expenses:
        Professional fees ....................................................             20              72              83
        Supplies and printing ................................................             12              33              40
        Interest expense .....................................................            213             662             892
        Other expenses .......................................................            277             213             280
        Income tax benefit ...................................................            (85)           (249)           (361)
                                                                                     --------        --------        --------
                Total expenses ...............................................            437             731             934
                                                                                     --------        --------        --------
      Net income .............................................................       $ 11,172          14,806          17,154
                                                                                     ========        ========        ========
</TABLE>

                          Coastal Financial Corporation
                       Condensed Statements of Cash Flows
                  Years ended September 30, 2003, 2004 and 2005

<TABLE>
<CAPTION>
                                                                                       2003            2004            2005
                                                                                     --------        --------        --------
<S>                                                                                  <C>              <C>            <C>
      Operating activities:
        Net income ...........................................................       $ 11,172          14,806          17,154
        Adjustments to reconcile net income to net cash provided
        by operating activities:
           Stock compensation related to accelerated vesting .................             --              --              76
           Equity in undistributed net income of subsidiary ..................        (10,087)        (13,063)        (14,444)
           (Increase) decrease in other assets ...............................           (290)           (624)           (489)
           Increase (decrease) in other liabilities ..........................            134              43             107
                                                                                     --------        --------        --------
                  Total cash provided by operating activities ................            929           1,162           2,404
                                                                                     --------        --------        --------
      Financing activities:
        Cash dividends to stockholders .......................................         (2,592)         (2,948)         (3,361)
        Treasury stock repurchases ...........................................           (342)             --              --
        Proceeds from stock options ..........................................          1,153           1,273           1,309
        Proceeds from trust preferred ........................................         15,000              --              --
        Repayment on line of credit ..........................................         (1,988)            (81)             --
        Capital contribution to subsidiary ...................................        (12,125)           (100)           (150)
        Other financing activities, net ......................................             --               7               9
                                                                                     --------        --------        --------
                  Total cash used by financing activities ....................           (894)         (1,849)         (2,193)
                                                                                     --------        --------        --------
        Net increase (decrease) in cash and cash equivalents .................             35            (687)            211
        Cash and cash equivalents at beginning of the year ...................            738             773              86
                                                                                     --------        --------        --------
        Cash and cash equivalents at end of the years ........................       $    773              86             297
                                                                                     ========        ========        ========
</TABLE>

                                                                              35
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(23) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

      The  carrying  amounts  and fair  value  of  financial  instruments  as of
September 30, 2004 and 2005 are summarized below:

<TABLE>
<CAPTION>
                                                                                        2004                       2005
                                                                              ------------------------    ------------------------
                                                                               Carrying     Estimated      Carrying      Estimated
                                                                                Amount      Fair Value      Amount      Fair Value
                                                                              ----------    ----------    ----------    ----------
                                                                                                  (In thousands)
<S>                                                                           <C>             <C>        <C>              <C>
          Financial Assets
            Cash and cash equivalents ....................................    $   31,015        31,015    $   91,525        91,525
            Investment securities available for sale .....................        23,449        23,449        25,616        25,616
            Mortgage-backed securities available for sale ................       374,283       374,283       399,655       399,655
            Investment securities held to maturity .......................         7,840         7,840        10,000        10,049
            Loans receivable held for sale ...............................         8,246         8,325        18,121        18,126
            Loans receivable, net ........................................       790,730       818,274       924,260       938,058
            FHLB stock ...................................................        16,900        16,900        15,775        15,775
            Bank-owned life insurance ....................................        21,267        21,267        22,574        22,574
          Financial Liabilities
            Deposits:
               Demand accounts ...........................................       512,801       512,801       643,792       643,792
               Certificate accounts ......................................       240,578       241,133       427,126       426,482
            Advances from Federal Home Loan Bank .........................       328,507       333,612       289,007       286,993
            Securities sold under agreements to repurchase
               and reverse repurchase agreements .........................       107,173       107,173        41,937        41,937
            Junior subordinated debt .....................................        15,464        15,464        15,464        15,464
            Drafts outstanding ...........................................         2,792         2,792        12,890        12,890
</TABLE>

      SFAS  107,  "Disclosures  about  Fair  Value  of  Financial  Instruments,"
requires disclosure of fair value information,  whether or not recognized in the
statement of financial  position,  when it is  practicable  to estimate the fair
value. SFAS 107 defines a financial instrument as cash, evidence of an ownership
interest in an entity or contractual obligations,  which require the exchange of
cash, or other financial  instruments.  Certain items are specifically  excluded
from the disclosure requirements, including the Company's common stock, premises
and equipment,  accrued  interest  receivable and payable,  and other assets and
liabilities.

      Fair value approximates book value for the following financial instruments
due to the  short-term  nature  of the  instrument:  cash  and due  from  banks,
interest-bearing bank balances,  federal funds sold, federal funds purchased and
repurchase   agreements  (including  reverse  repurchase   agreements),   drafts
outstanding and other  short-term  borrowings.  Investments and  mortgage-backed
securities are valued using quoted market prices.

      Fair value for variable  rate loans and  bank-owned  life  insurance  that
reprice  frequently  is based on the  carrying  value.  Fair values for mortgage
loans,  consumer  loans and all other loans  (primarily  commercial)  which have
fixed  rates of  interest  are  based  on the  discounted  present  value of the
estimated  future  cash  flows.   Discount  rates  used  in  these  computations
approximates  the rates currently  offered for similar loans of comparable terms
and credit quality.

      Fair value for demand deposit accounts and interest-bearing  accounts with
no fixed  maturity date is equal to the carrying  value.  Certificate of deposit
accounts are estimated by discounting cash flows from expected  maturities using
current interest rates on similar instruments.

      Fair value for FHLB  advances  and fixed rate  long-term  debt is based on
discounted cash flows using the Company's current incremental borrowing rate.

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

      The Company had $243.0 million of off-balance sheet financial  commitments
as of September  30, 2005,  which are  commitments  to originate  loans,  unused
consumer lines of credit,  letters of credit and undisbursed portion of loans in
process. Since these obligations are based on current market rates, the carrying
amount is considered to be a reasonable estimate of fair value.

36
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued

(23) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED

      The  Company  originates  certain  fixed rate  residential  loans with the
intention of selling these loans.  Between the time that the Company enters into
an interest rate lock or a commitment to originate a fixed rate residential loan
with a potential  borrower and the time the closed loan is sold,  the Company is
subject to variability in the market prices  related to these  commitments.  The
Company  believes  that it is  prudent  to limit  the  variability  of  expected
proceeds from the sales through forward sales of "to be issued"  mortgage backed
securities and loans ("forward sales commitments").  The commitment to originate
fixed rate  residential  loans and forward sales  commitments  are  freestanding
derivative  instruments.  They do not  generally  qualify  for hedge  accounting
treatment  so their fair  value  adjustments  are  recorded  through  the income
statement in net gains on sale of loans. The commitments to originate fixed rate
conforming  loans totaled $4.8 million at September,  30 2005. The fair value of
these  commitments was an asset of approximately  $31,000 at September 30, 2005,
and is  reflected  in gain on sales of loans  held for sale in the  consolidated
statements of operations. The forward sales commitments totaled $10.0 million at
September  30,  2005.  The  fair  value  of  these  commitments  was an asset of
approximately  $77,000 at September 30, 2005,  and is reflected in gain on sales
of loans held for sale in the consolidated statements of operations.

      Fair  value  estimates  are made at the dates  indicated  above,  based on
relevant  market  information and  information  about the financial  instrument.
These  estimates  do not reflect any premium or discount  that could result from
offering  for sale the  Company's  entire  holdings  of a  particular  financial
instrument.  Because no active market  exists for a  significant  portion of the
Company's  financial  instruments,  fair value  estimates are based on judgments
regarding future expected loss experience,  current economic conditions, current
interest rates and prepayment trends, risk  characteristics of various financial
instruments,  and other  factors.  These  estimates are subjective in nature and
involve  uncertainties and matters of significant  judgment and therefore cannot
be  determined  with  precision.  Changes  in any of these  assumptions  used in
calculating fair value would also significantly affect the estimates. Changes in
market interest rates and prepayment  assumptions could significantly change the
fair value.

      Fair  value  estimates  are based on  existing  on and  off-balance  sheet
financial  instruments  without  attempting to estimate the value of anticipated
future business and the value of assets and liabilities  that are not considered
financial  instruments.  For  example,  the Company has  significant  assets and
liabilities that are not considered  financial  assets or liabilities  including
deposit franchise value,  loan servicing  portfolio,  real estate,  deferred tax
liabilities,  premises  and  equipment,  and  goodwill.  In  addition,  the  tax
ramifications  related to the realization of the unrealized gains and losses can
have a significant  effect on fair value  estimates and have not been considered
in any of these estimates.

(24) COMMITMENTS, CONTINGENCIES AND OTHER

      The Company signed a letter of intent to lease  approximately 5.5 acres of
land and building  with an initial term of 20 years.  Aggregate  lease  payments
during the initial term approximate $5.4 million.  In addition,  the Company has
the  option  to  purchase  this  land and  building  after  the  first  year for
approximately $2.8 million.  The lease with purchase option is expected to close
during the first quarter of fiscal 2006.

      The Company paid a $50,000  deposit to purchase a tract of land. The final
purchase price will be $19.00 per square foot purchased - estimated between $1.1
and $1.2 million.  This transaction is expected to close during the first fiscal
quarter of 2006.

      The Company has  entered  into a land lease for a new branch,  expected to
close during the first fiscal  quarter of 2006.  Lease  payments  aggregate $2.6
million for the initial  term of 30 years with six  five-year  renewal  options.
Lease payments during the renewal periods aggregate $5.9 million.

      The Company has entered into various  construction  contracts to build new
branches and build out leased facilities.  At September 30, 2005 the undisbursed
future obligations under these signed contracts approximated $682,000.

      The Company has an unsecured unused  short-term line of credit to purchase
federal funds from an unrelated bank totaling $20.0 million. This line of credit
expires January 1, 2006.

                                                                              37
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis

Forward Looking Statements

      This report may contain certain  "forward-looking  statements"  within the
meaning of Section 27A of the Securities Exchange Act of 1934, as amended,  that
represent the Company's  expectations or beliefs  concerning future events.  All
forward-looking  statements  are  based on  assumptions  and  involve  risks and
uncertainties,  many of which are beyond  the  Company's  control  and which may
cause its actual results,  performance or achievements to differ materially from
the results,  performance or achievements  contemplated  by the  forward-looking
statements.  Forward-looking  statements can be identified by the fact that they
do not relate strictly to historical or current facts.  They often include words
such as "believe," "expect," "anticipate," "intend," "plan," "estimate" or words
of similar  meaning,  or future or  conditional  verbs such as "will,"  "would,"
"should," "could" or "may." Forward-looking statements speak only as of the date
they are made. Such risks and uncertainties include, among other things:

      o     Competitive   pressures   among   depository  and  other   financial
            institutions   in  the   Company's   market   areas   may   increase
            significantly.

      o     Adverse  changes  in the  economy  or  business  conditions,  either
            nationally  or  in  the  Company's  market  areas,   could  increase
            credit-related losses and expenses and/or limit growth

      o     Increases in defaults by  borrowers  and other  delinquencies  could
            result in increases in the  Company's  provision for losses on loans
            and related expenses.

      o     The Company's inability to manage growth effectively,  including the
            successful    expansion   of   the   Company's   Customer   support,
            administrative infrastructure and internal management systems, could
            adversely affect the Company's results of operations and prospects.

      o     Fluctuations  in interest  rates and market  prices could reduce the
            Company's  net  interest  margin and asset  valuations  and increase
            expenses.

      o     The  consequences of continued bank  acquisitions and mergers in the
            Company's  market  areas,  resulting  in fewer but much  larger  and
            financially  stronger  competitors,  could increase  competition for
            financial services to the Company's detriment.

      o     The Company's continued growth will depend in part on its ability to
            enter  new  markets  successfully  and  capitalize  on other  growth
            opportunities.

      o     Changes in legislative or regulatory requirements, or actions by the
            Securities and Exchange Commission ("SEC"), the Financial Accounting
            Standards Board ("FASB"), or the Public Company Accounting Oversight
            Board, applicable to the Company and its subsidiaries could increase
            costs,  limit certain  operations  and adversely  affect  results of
            operations.

      o     Changes in tax  requirements,  including tax rate  changes,  new tax
            laws and revised tax law  interpretations may increase the Company's
            tax expense or adversely affect its Customers' businesses.

      o     Company  initiatives  now in place or introduced in the future,  not
            producing  results  consistent with historic growth rates or results
            which justify their costs.

      In light of these risks,  uncertainties  and  assumptions,  you should not
place undue reliance on any forward-looking statements in this report. Except as
may be required by  applicable  law or  regulation,  the Company  undertakes  no
obligation  to  publicly   update  or  otherwise   revise  any   forward-looking
statements, whether as a result of new information, future events or otherwise.

Overview

      Coastal  Financial   Corporation  is  a  unitary  thrift  holding  company
incorporated  in Delaware  with one  wholly-owned  banking  subsidiary,  Coastal
Federal  Bank (the "Bank" or "Coastal  Federal").  The Company also owns Coastal
Planners Holding Corporation,  whose subsidiary,  Coastal Retirement, Estate and
Tax Planners,  Inc.,  offers  fee-based  financial  planning and tax preparation
services.  The primary  business  activities of the Company are conducted by the
Bank. The Company and Bank's principal  executive  offices are located in Myrtle
Beach, South Carolina.

      Coastal Federal Bank is a full service financial  services company with 21
branches  located  in four  counties  throughout  the  coastal  regions of South
Carolina  and North  Carolina.  The Bank has thirteen  offices in Horry  County,
South Carolina; one office in Georgetown County, South Carolina; four offices in
Brunswick County, North Carolina; and three offices in New Hanover County, North
Carolina.

      The Bank's primary  market areas are located along the coastal  regions of
South  Carolina and North  Carolina and  predominately  center  around the Metro
regions of Myrtle Beach,  South Carolina and  Wilmington,  North  Carolina,  and
their surrounding counties.

38
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued

Coastal Federal's primary market is Horry County, South Carolina, where the Bank
has the number one market share of deposits as of June 30, 2005 (the most recent
date for which  published data is available)  with 17.9% of deposits as reported
by the FDIC  Summary of  Deposits  Report.  The Bank also has the third  highest
market  share  of  deposits  as of June  30,  2005 in  Brunswick  County,  North
Carolina,  with 8.1% of deposits  as  reported  by the FDIC  Summary of Deposits
Report.

      The primary  business  activities in Horry County are centered  around the
tourism  industry.  To the extent that Horry County  businesses  rely heavily on
tourism business,  decreased tourism would have a significant  adverse effect on
Coastal  Federal's  primary  deposit base and lending area.  Moreover,  the Bank
would likely experience a higher degree of loan  delinquencies  should the local
economy be materially and adversely affected.

      Coastal Federal's  principal business consists of attracting core deposits
from Customers in its primary market locations and using these funds to meet the
lending needs of its Customers as well as providing  numerous financial products
and services for its Customers.

      Through its branch  locations,  the Bank  provides a wide range of banking
products, including interest-bearing and non-interest bearing checking accounts;
business sweep accounts;  business cash management  services;  statement savings
accounts;  money market accounts;  certificate of deposit  accounts;  individual
retirement accounts;  merchant services;  commercial,  business,  personal, real
estate,  residential  mortgage and home equity loans;  safe deposit  boxes;  and
electronic banking services.  The Bank has six ATMs at off-site locations and an
ATM at each  branch.  The Bank also makes  available  a wide range of  financial
products  through  its  relationship  with  Raymond  James  Financial  Services,
including stocks,  bonds,  mutual funds,  annuities,  insurance,  and retirement
products.

      In the fourth fiscal quarter of 2004, the Bank began two  significant  new
initiatives. The first was "The Experience of FANtastic! Customer Service". This
initiative  focuses on  Customer  service  and  convenience.  The Bank is in the
process of  redesigning  its  infrastructure,  software  and products to improve
Customer  service and convenience and Associate  productivity.  In addition,  in
order  to  improve  Customer   service  and  convenience,   the  Bank  added  an
extended-hours  Call Center and introduced "6 Day Branch  Banking" with extended
operating hours. The Call Center employs  approximately 20 Associates.  The Bank
experienced increased salary and benefit expenses in fiscal 2005 and anticipates
these expenses continuing  thereafter  associated with the hiring,  training and
placement of these new Associates.

      The second  initiative was "The Carolinas' Best Totally Free Checking With
A Gift" that was introduced in September  2004. The Bank has incurred,  and will
continue to incur, significant marketing costs associated with this campaign. In
fiscal 2005,  marketing  expenses were $1.8 million  compared to $905,000 in the
comparable 2004 period.  The Bank expects to realize  significant  benefits from
this strategy  consisting of increased Bank lobby traffic,  increased  number of
personal  checking  accounts and higher fee income as a result of those checking
accounts. In fiscal 2005, checking account balances grew approximately 54%. This
rate of growth could necessitate the hiring of additional Associates to open and
service these accounts. The Associates being hired for these two initiatives are
expected to have total  compensation  averaging  between $28,000 and $35,000 per
Associate.

      In fiscal 2006, the Company plans to open six new branches; five locations
in South Carolina and one location in North  Carolina.  The Oak Island branch is
located in North  Carolina  and has opened in the first  quarter of fiscal  2006
along  with  one of the  branches  located  in South  Carolina.  One  branch  is
scheduled to open in the second  fiscal  quarter,  two branches are scheduled to
open in the third fiscal  quarter and the last planned  location is scheduled to
open in the fourth fiscal  quarter.  It is  anticipated  that each location will
employ six to eight Associates.  As a result of this growth, the Company expects
to incur an increase in  salaries  and  employee  benefit  expenses,  occupancy,
furniture and fixtures and data processing  expenses,  depreciation  expense and
marketing expenses.

Critical Accounting Policies

      The Company's  significant  accounting policies are set forth in Note 1 of
the Notes to Consolidated  Financial Statements.  Of these policies, the Company
considers  the  allowance  for loan  losses and the income  taxes to be the most
critical  accounting  policies,  because they require many of management's  most
subjective  and complex  judgments.  For  additional  discussion  concerning the
Company's allowance for loan losses and related matters, see "Allowance for Loan
Losses" and see  "Income  Taxes" for  additional  discussion  concerning  income
taxes.

General

      The  Company  reported  $17.2  million  in net  income  for the year ended
September 30, 2005,  compared to $14.8 million for the year ended  September 30,
2004.  Net  interest  income  increased  $6.5  million as a result of  increased
interest  income of $12.8  million  offset by an  increase  of $6.2  million  in
interest expense. Provision for loan losses decreased slightly from $1.8 million
for the year

                                                                              39
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued

ended September 30, 2004, to $1.7 million for the year ended September 30, 2005.
Other income  increased 36.6% from $9.2 million in fiscal 2004, to $12.5 million
in 2005. General and administrative  expenses increased $6.3 million,  or 22.9%,
for fiscal 2005 as compared to fiscal 2004.

      Total assets  increased  from $1.3  billion at September  30, 2004 to $1.5
billion at September  30, 2005,  or 18.3%.  Liquid  assets,  consisting of cash,
interest-bearing  deposits,  and  securities,  increased  from $436.6 million at
September 30, 2004, to $526.8  million at September 30, 2005.  Loans  receivable
increased  16.9% from $790.7 million at September 30, 2004, to $924.3 million at
September 30, 2005. Total loan  originations for fiscal 2005 were $799.7 million
as compared to $577.3 million for fiscal 2004.

      The growth in liquid  assets was funded by  increased  deposits  of $317.5
million offset by decreased advances from the Federal Home Loan Bank ("FHLB") of
Atlanta of $39.5 million.  As a result of an increased  number of branches and a
strong emphasis on growing local deposits during fiscal 2005, deposits increased
42.1% from $753.4  million at September  30, 2004,  to $1.1 billion at September
30, 2005. During this same period, noninterest bearing checking accounts and NOW
accounts  increased  $125.7 million,  money market checking  accounts  decreased
$11.4  million,   statement   savings  accounts   increased  $16.6  million  and
certificate  accounts  increased  $186.5  million.  The increase in  certificate
accounts is primarily related to brokered CDs of $169.9 million at September 30,
2005. There were no brokered CDs at September 30, 2004.

      As a result of $17.2 million in net  earnings,  proceeds from the exercise
of stock options of approximately $1.3 million,  less the cash dividends paid to
stockholders  of  approximately  $3.4 million,  and the net change in unrealized
gain (loss) on securities available for sale, net of income tax of $3.3 million,
stockholders' equity increased from $85.3 million at September 30, 2004 to $97.2
million at September 30, 2005.

Liquidity and Capital Resources

      Historically,  the Company has maintained its liquidity at levels believed
by  management  to be  adequate  to  meet  requirements  of  normal  operations,
potential  deposit  outflows  and strong loan demand and still allow for optimal
investment of funds and return on assets.  The following table summarizes future
contractual obligations as of September 30, 2005.

<TABLE>
<CAPTION>
                                                                                    Payment Due by Period
                                                                 -------------------------------------------------------------
                                                                              Less than       1-3          4-5        After 5
                                                                   Total        1 Year       Years        Years        Years
                                                                 ---------    ---------    ---------    ---------    ---------
      Contractual Obligations                                                          (Dollars in thousands)
<S>                                                              <C>          <C>          <C>          <C>          <C>
      Time deposits .........................................    $ 427,126    $ 392,731    $  31,221    $   2,479    $     695
      Short-term borrowings .................................       36,114       36,114           --           --           --
      Long-term debt ........................................      310,294           --        7,537       95,454      207,303
      Construction contracts ................................          682          682           --           --           --
      Operating leases ......................................        1,012          286          389          122          215
                                                                 ---------    ---------    ---------    ---------    ---------
      Total contractual cash obligations ....................    $ 775,228    $ 429,813    $  39,147    $  98,055    $ 208,213
                                                                 =========    =========    =========    =========    =========
</TABLE>

      The Company has entered into various purchase and lease  commitments.  See
Note 24 for information regarding these commitments.

      The  principal  sources of cash flows for the  Company  consist  mainly of
mortgage,  consumer and commercial  loan  payments,  retail  customer  deposits,
repurchase  agreements  securitized by  mortgage-backed  securities and advances
from the FHLB of Atlanta.

      The principal use of cash flows is the  origination  of loans  receivable.
The Company  originated loans  receivable of $769.6 million,  $577.3 million and
$799.7  million  for  the  years  ended  September  30,  2003,  2004  and  2005,
respectively.  A large portion of these loan  originations were financed through
loan principal  repayments which amounted to $477.7 million,  $403.5 million and
$560.5  million  for  the  years  ended  September  30,  2003,  2004  and  2005,
respectively.  In addition, the Company has generally sold conforming fixed rate
mortgage  loans,  primarily  servicing  retained,  to  correspondent   financial
institutions in the secondary  market to finance future loan  originations.  For
the years ended September 30, 2003, 2004 and 2005, the Company sold  residential
loans amounting to $45.4 million, $27.5 million and $18.7 million, respectively.
During fiscal 2005, the Company sold  commercial  loan  participations  totaling
$21.2 million. The Company sold no commercial loan participations in fiscal 2003
or 2004.

      During  fiscal 2005,  the Company  securitized  $52.6  million of mortgage
loans,  concurrently  sold these  mortgage-backed  securities  to outside  third
parties  and  recognized  a net  gain on sale of $1.0  million,  which  included
$690,000 related to mortgage  servicing rights. The gain is included in gains on
sales of loans held for sale in the  consolidated  statement of operations.  The
proceeds  from sale are  included  in  proceeds  from  sales of  mortgage-backed
securities  available for sale in the consolidated  statement of cash flows. The
Company has no retained interest in the securities that were sold other than the
servicing rights.

      In fiscal 2005  deposits  increased  from $753.4  million at September 30,
2004, to $1.1 billion at September 30, 2005. During fiscal

40
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued

2004 and 2005, the Company has placed significant emphasis on growth in checking
accounts.  As a result,  Core  Deposits  (defined as  transaction  and statement
savings  accounts)  increased $131.0 million or 25.5%. This was accompanied by a
$186.5 million  increase in certificate  accounts of which $169.9 million of the
increase is from brokered CDs.

      At September  30, 2005,  the Company had  commitments  to originate  $28.6
million in loans,  disburse $28.3 million in mortgage loans,  and $186.0 million
in  unused  lines of  credit,  which the  Company  expects  to fund from  normal
operations.  Traditionally,  a significant portion of the unused lines of credit
may never be used by the Customer.

      At September 30, 2005, the Company had $392.7 million of  certificates  of
deposit,  including  $169.9  million of brokered  CDs,  which were due to mature
within one year.  Based upon previous  experience,  the Company  believes that a
major  portion  of these  certificates,  excluding  the  brokered  CDs,  will be
redeposited. At September 30, 2005, the Company had excess collateral pledged to
the FHLB  which  would  support  additional  FHLB  advance  borrowings  of $73.5
million.  Additionally,  at  September  30,  2005,  the Company  had  repurchase
agreement  lines of credit and  available  collateral  consisting  of investment
securities and mortgage-backed securities of $178.3 million as well as a federal
funds line available of $20.0 million.

      As a condition of deposit insurance, OTS regulations require that the Bank
calculate and maintain a minimum regulatory  capital  requirement on a quarterly
basis and satisfy such  requirement at the  calculation  date and throughout the
ensuing  quarter.  The Bank's  tangible  and core  capital  approximated  $112.1
million at September 30, 2005,  exceeding  the Bank's  tangible and core capital
requirements by $88.9 million and $50.2 million,  respectively. At September 30,
2005,  the Bank's  capital  exceeded  its  current  risk-based  minimum  capital
requirement by $48.8 million. The risk-based capital requirement may increase in
the future. Also see Note 14 of the Notes to Consolidated Financial Statements.

Results of Operations
Comparison of the Years Ended September 30, 2004 and 2005

Interest Income

      Interest income for the year ended September 30, 2005,  increased to $78.6
million as compared to $65.8 million for the year ended  September 30, 2004. The
earning asset yield for the year ended September 30, 2005, was 5.94% compared to
a yield of 5.67% for the year ended  September  30, 2004.  The average  yield on
loans  receivable  for the year ended  September 30, 2005, was 6.50% compared to
6.17% for the year ended  September 30, 2004.  The  increased  yield on loans is
primarily due to the increased  yield on  commercial  loans with interest  rates
tied to the prime lending rate.  The prime rate was 6.75% at September 30, 2005,
compared to 4.75% at September 30, 2004. The yield on  investments  increased to
4.84% for the year  ended  September  30,  2005,  from  4.72% for the year ended
September 30, 2004. Total average  interest-earning assets were $1.3 billion for
the year ended September 30, 2005 as compared to $1.2 billion for the year ended
September 30, 2004. The increase in average interest-earning assets is primarily
due to an increase in average loans receivable of  approximately  $116.2 million
resulting  primarily  from  growth in the  commercial  loan  portfolio.  Average
investment  securities,  mortgage-backed  securities and other  interest-earning
assets  increased  $45.8  million,  primarily  funded by  borrowings,  including
brokered CD's.

Interest Expense

      Interest expense on interest-bearing liabilities was $29.7 million for the
year ended  September  30, 2005, as compared to $23.5 million for the year ended
September  30, 2004.  The average cost of deposits for the year ended  September
30, 2005, was 1.58% compared to 1.39% for the year ended September 30, 2004. The
cost of interest-bearing  liabilities was 2.24% for the year ended September 30,
2005 compared to 2.03% for the year ended  September 30, 2004.  The cost of FHLB
advances,  reverse  repurchase  agreements and other borrowings was 3.83%, 2.37%
and 5.95%,  respectively,  for the year ended  September 30, 2005.  For the year
ended  September  30,  2004,  the  cost of  FHLB  advances,  reverse  repurchase
agreements and other borrowings was 3.81%,  1.50% and 4.41%,  respectively.  The
increased cost of funds on other  borrowings is due to the increased  short-term
interest rates. At September 30, 2005, the federal funds rate was 3.93% compared
to 1.94% at  September  30, 2004.  Total  average  interest-bearing  liabilities
increased  from $1.2 billion at September  30, 2004 to $1.3 billion at September
30, 2005.  The  increase in average  interest-bearing  liabilities  is due to an
increase in average deposits of approximately  $171.9 million as a result of the
Company's  focus on checking  growth,  increased  average FHLB advances of $40.7
million used to fund loan and investment securities growth and increased average
Customer repurchase  agreements of $18.5 million.  Included in increased average
deposits,  were  brokered  CD's  which  increased  by $79.4  million  in average
balances when comparing the two periods. This increase was partially offset by a
decrease in average reverse repurchase agreements of $61.1 million.

                                                                              41
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued

Net Interest Income

      Net interest  income was $48.8  million for the year ended  September  30,
2005,  as compared to $42.3 million for the year ended  September 30, 2004.  The
net interest margin was 3.70% for the year ended September 30, 2005, compared to
3.64% for the year ended September 30, 2004.

      The following  table  summarizes the average balance sheet and the related
yields on interest-earning assets and deposits and borrowings for the year ended
September 30, 2004 and 2005 (Dollars in thousands):

<TABLE>
<CAPTION>
                                                                       2004                                    2005
                                                      ------------------------------------    -------------------------------------
                                                        Average      Income/                    Average      Income/
                                                      Balance (1)    Expense    Yield/Rate    Balance (1)    Expense     Yield/Rate
                                                      -----------    -------    ----------    -----------    -------     ----------
<S>                                                   <C>           <C>            <C>        <C>           <C>             <C>
Assets
Earning assets
  Loans (2) ......................................    $  757,633    $   46,765     6.17%      $  873,797    $   56,826      6.50%
  Investment securities,
    MBS securities and others (3) ................       403,610        19,040     4.72%         449,402        21,732      4.84%
                                                      ----------    ----------                ----------    ----------
Total earning assets .............................    $1,161,243    $   65,805     5.67%      $1,323,199    $   78,558      5.94%
                                                      ==========    ----------                ==========    ----------

Liabilities
  Deposits .......................................    $  719,125    $   10,024     1.39%      $  890,992    $   14,079      1.58%
  Borrowings .....................................       440,279        13,500     3.07%         438,329        15,651      3.57%
                                                      ----------    ----------                ----------    ----------
Total interest-bearing liabilities ...............    $1,159,404    $   23,524     2.03%      $1,329,321    $   29,730      2.24%
                                                      ==========    ----------                ==========    ----------

Net interest income ..............................                  $   42,281                              $   48,828
                                                                    ==========                              ==========
Net interest margin ..............................                                 3.64%                                    3.70%
Net yield on earning assets ......................                                 3.64%                                    3.69%
</TABLE>

      (1)   The average balances are derived from monthly balances.

      (2)   Nonaccrual loans are included in average balances for yield
            computations.

      (3)   Investment securities include taxable and tax-exempt securities. Net
            interest income has not been adjusted to produce a tax-equivalent
            yield.

Provision for Loan Losses

      The  Company's  provision  for loan losses  decreased  slightly  from $1.8
million for the year ended  September  30,  2004,  to $1.7  million for the year
ended  September  30,  2005  primarily  due to the risk  factors  related to the
underlying portfolio. The allowance for loan losses as a percentage of loans was
1.25% at September  30, 2005 as compared to 1.39% at September  30, 2004.  Loans
delinquent  90 days or more  were  $2.6  million  or  0.28%  of  total  loans at
September  30,  2005,  compared  to $5.9  million  or 0.73%  of  total  loans at
September 30, 2004.  The allowance for loan losses was 445% of loans  delinquent
90 days or more at September  30, 2005,  compared to 189% at September 30, 2004.
Net charge-offs for the year ended September 30, 2005 were $1.0 million compared
to $505,000 for the year ended  September 30, 2004.  Included in charge-offs for
the year ended September 30, 2005 were two loans totaling $196,000 guaranteed by
the Small Business  Administration (SBA). The SBA has denied the guarantee.  The
Bank is  appealing  this  decision.  Management  believes  that the level of the
allowance  for loan losses at  September  30, 2005 is adequate  considering  the
composition of the loan portfolio, the portfolio's loss experience,  delinquency
trends, current regional and local economic conditions and other factors at that
date.

Other Income

      For the year ended  September  30, 2005,  other  income was $12.5  million
compared to $9.2 million for the year ended September 30, 2004. Fees and service
charges from deposit  accounts  increased  $2.4 million or 62.7% to $6.1 million
for the year ended  September  30,  2005,  compared to $3.8 million for the year
ended  September  30, 2004.  The majority of this  increase is due to fee income
from increased number of personal checking  accounts.  In fiscal 2005,  checking
account  balances grew  approximately  54%.  During the year ended September 30,
2004, the Company  securitized and  concurrently  sold $46.8 million of mortgage
loans compared

42
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued

to $52.6 million for the year ended  September  30, 2005.  Gain on sale of loans
was $1.2 million for the year ended September 30, 2005, compared to $1.5 million
for the year ended September 30, 2004.  Losses on sales of securities  available
for sale were $485,000 for the year ended September 30, 2005, compared to losses
of $1.1 million for the year ended September 30, 2004. In addition,  the Company
had a gain on call of an  investment  security  held to  maturity  called by the
issuer of  $160,000  for the year ended  September  30, 2005 and $0 for the year
ended September 30, 2004. Due to the increase in checking accounts,  income from
ATM and debit card transactions  increased 60.6% from $954,000 in fiscal 2004 to
$1.5 million in fiscal 2005.

General and Administrative Expenses

      General and administrative  expenses were $33.5 million for the year ended
September 30, 2005  compared to $27.3  million for the year ended  September 30,
2004.  Salaries  and  employee  benefits  were $18.5  million for the year ended
September 30, 2005,  as compared to $16.1  million for the year ended  September
30, 2004,  an increase of 14.7%,  primarily  due to an increase in the number of
banking  Associates in business  banking,  Associates in the Company's  expanded
hours call center,  Associates in new branches and normal salary increases.  The
Company  has added  several  Associates  in a Banking  Group  that is focused on
growing small to medium sized business banking relationships.  Also, as a result
of new  branches,  equipment  purchased  to  improve  Customer  convenience  and
increased  checking  activity,  net  occupancy,  furniture and fixtures and data
processing  expenses  increased  $843,000  and  depreciation  expense  increased
$582,000,  when comparing the two periods.  Marketing expenses were $905,000 for
the year ended  September 30, 2004,  compared to $1.8 million for the year ended
September 30, 2005.  This is primarily  attributed to the Bank's "The Carolinas'
Best  Totally  Free  Checking  With A Gift"  initiative;  introduction  of Penny
Pavilion,  the  Bank's  free coin  counting  service;  marketing  of the  Bank's
expanded banking hours,  including  Saturday  banking at all Bank branches;  and
marketing of the Bank's new branch in Wilmington, NC. The Bank's "The Carolinas'
Best Totally Free Checking With A Gift" promotion  involves  significant  direct
mail  advertising as well as direct media  advertising.  Expenses related to ATM
and debit card  transactions  increased  $409,000 or 64.9% when comparing fiscal
2004 to 2005.  Other  expense was $3.3 million for the year ended  September 30,
2004  compared to $4.5  million for the year ended  September  30,  2005.  Other
expense  increased  due to loss on  write-off  of signage  related to the Bank's
re-branding efforts in conjunction with the initiation of "6 Day Branch Banking"
of $122,000,  increased costs incurred related to compliance with Sarbanes-Oxley
of $428,000 and increased  deposit  account losses of $370,000.  The increase in
net deposit  losses is directly  attributed to the increased  number of personal
checking accounts.

Income Taxes

      Income  taxes were $7.6  million  for the year ended  September  30,  2004
compared to $9.0 million for the year ended  September  30, 2005.  The effective
income  tax rate as a  percentage  of pretax  income was 34.0% and 34.4% for the
years ended September 30, 2004 and 2005, respectively.  The effective income tax
rate  differs  from the  statutory  rate  primarily  due to income  generated by
bank-owned life insurance, municipal securities that are exempt from federal and
certain state taxes,  and the increase in the current  fiscal year earnings over
the comparable  prior year earnings that are subject to higher  incremental  tax
rates. The Company's effective income tax rates take into consideration  certain
assumptions  and estimates  made by  management.  No assurance can be given that
either the tax returns submitted by management or the income tax reported on the
consolidated financial statements will not be adjusted by either adverse rulings
by the U.S.  Tax court,  changes  in the tax code,  or  assessments  made by the
Internal  Revenue  Service.   The  Company  is  subject  to  potential   adverse
adjustments,  including but not limited to: an increase in the statutory federal
or state income tax rates, the permanent  non-deductibility of amounts currently
considered deductible either now or in future periods, and the dependency on the
generation of future taxable  income,  in order to ultimately  realize  deferred
income tax assets.

Results of Operations
Comparison of the Years Ended September 30, 2003 and 2004

Interest Income

      Despite a reduction in the average yield,  the Company's growth in average
interest  earning assets of 17.6% resulted in an increase in interest income for
the year ended September 30, 2004, of $6.6 million to $65.8 million, or 11.1% as
compared to $59.2  million for the year ended  September  30, 2003.  The earning
asset yield for the year ended  September 30, 2004,  was 5.67% compared to 6.00%
for the year ended  September  30, 2003.  As a result of  significant  declining
interest  rates over much of the previous two years,  the Bank's yield on assets
and cost of funds has  declined.  Interest  rates  have very  recently  begun to
increase.  At September 30, 2002,  2003 and 2004, the one-year  treasury rate of
interest was approximately  1.68%, 1.22% and 2.14%,  respectively.  At September
30, 2002,  2003 and 2004,  the prime rate of interest was  approximately  4.75%,
4.00% and 4.75%, respectively.  On July 1, 2004, the prime rate was increased to
4.25% and on September  22,  2004,  the prime rate was  increased to 4.75%.  The
average yield on loans  receivable  for the year ended  September 30, 2004,  was
6.17%  compared  to 6.66%  for year  ended  September  30,  2003.  The  yield on
investments decreased to 4.73% for the year ended September 30, 2004, from 4.88%
for the year ended September 30, 2003. The yield on investments has declined due
to payoff of higher  yielding  mortgage-backed  securities  (MBS) resulting from
significant

                                                                              43
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued

prepayments  during  fiscal 2003.  These higher  yielding MBS were replaced with
lower yielding MBS. Total average  interest-earning assets were $1.2 billion for
the year ended  September  30, 2004 as  compared to $987.5  million for the year
ended  September 30, 2003.  The increase in average  interest-earning  assets is
primarily due to an increase in average loans receivable of approximately $127.8
million and investment securities of approximately $50.1 million.

Interest Expense

      Interest expense on interest-bearing liabilities was $23.5 million for the
year ended  September  30, 2004, as compared to $23.0 million for the year ended
September  30, 2003.  The average cost of deposits for the year ended  September
30, 2004, was 1.39% compared to 1.79% for the year ended September 30, 2003. The
cost of interest-bearing  liabilities was 2.03% for the year ended September 30,
2004, as compared to 2.34% for the year ended  September  30, 2003.  The cost of
FHLB advances,  other  borrowings and reverse  repurchase  agreements was 3.81%,
4.41% and 1.50%,  respectively,  for the year ended  September 30, 2004. For the
year ended September 30, 2003, the cost of FHLB advances,  other  borrowings and
reverse repurchase  agreements was 4.27%, 5.62% and 1.81%,  respectively.  Total
average interest-bearing  liabilities increased from $982.7 million at September
30,  2003 to $1.2  billion  at  September  30,  2004.  The  increase  in average
interest-bearing  liabilities  is due to an  increase  in  average  deposits  of
approximately  $50.0  million.  This was  accompanied  by an increase in average
reverse repurchase  agreements of $42.3 million,  average FHLB advances of $68.9
million and average outstanding debt associated with trust preferred  securities
of $11.2 million.

Net Interest Income

      Net interest  income was $42.3  million for the year ended  September  30,
2004, as compared to $36.2 million for the year ended  September 30, 2003.  With
the reduction in interest  rates over the last two years,  the Bank continued to
experience  a decrease in its net  interest  margin  through  December 31, 2003.
However,  as rates  stabilized  over spring 2004, the Bank's net interest margin
declined  at a much  slower  pace and  actually  increased  slightly in the most
recent two quarters.  The net interest  margin for the quarters  ended March 31,
2003, June 30, 2003, September 30, 2003, December 31, 2003, March 31, 2004, June
30, 2004 and September 30, 2004 was 3.87%, 3.61%, 3.65%, 3.48%, 3.58%, 3.63% and
3.81%  respectively.  For the year ended  September  30, 2004,  the net interest
margin was 3.64%.

      Throughout  the latter part of fiscal 2004,  intermediate  interest  rates
have  increased.  From  September 30, 2003 to September  30, 2004,  the two year
treasury  increased  116 basis  points and the five year  treasury  increased 56
basis points.  Management  believes that over time this increase in intermediate
term interest rates should slow the  refinancing of loans at lower rates.  Based
upon the most recent  information  available,  management  believes that its net
interest  margin should remain stable and could increase  slightly if short-term
rates rise  commensurately  with  long-term  rates.  Projection of the impact of
interest rates on the Bank's net interest  margin is often  imprecise due to the
fact that short-term and long-term interest rates often move very differently.

Provision for Loan Losses

      The Company's  provision for loan losses  decreased  from $2.7 million for
fiscal  2003 to $1.8  million  for  fiscal  2004 due to the  nature and the risk
profile  of the  loans  delinquent  90 days or more  at  September  30,  2004 as
compared to September 30, 2003. The allowance for loan losses as a percentage of
loans was 1.39% at September  30, 2004  compared to 1.40% at September 30, 2003.
Loans  delinquent  90 days or more were $5.9  million or 0.73% of total loans at
September 30, 2004, compared to $7.4 million or 1.06% at September 30, 2003. The
allowance  for  loan  losses  was 189% of  loans  delinquent  90 days or more at
September 30, 2004,  compared to 132% at September 30, 2003. Net charge-offs for
the year ended  September  30, 2004 were  $505,000  compared to $706,000 for the
year  ended  September  30,  2003.  Net  charge-offs  were  lower in 2004 due to
increased  loss  recoveries  of  $249,000  in  2004  versus  $136,000  in  2003.
Management  believes  that the current level of the allowance for loan losses is
adequate considering the composition of the loan portfolio, the portfolio's loss
experience,  delinquency trends,  current regional and local economic conditions
and other  factors.  Also see  "Non-performing  Assets" and  "Allowance for Loan
Losses."

Other Income

      In fiscal 2004,  total other income  decreased  from $10.9 million for the
period ended  September 30, 2003, to $9.2 million for the period ended September
30,  2004.  As a result of  increased  transaction  account  balances  of $390.4
million at September 30, 2003 compared to $457.6  million at September 30, 2004,
fees and service  charges on loan and  deposit  accounts  were $3.8  million for
fiscal 2004,  compared to $3.5  million for fiscal  2003.  As a result of rising
interest rates which decreased refinancing  activity,  gain on sale of loans was
$1.5 million for the year ended September 30, 2004, compared to $3.0 million for
the year ended  September 30, 2003.  Loss on sales of  securities,  net was $1.1
million for fiscal 2004,  compared to gains of $469,000  for fiscal 2003.  Other
income  increased  from $2.4 million for the year ended  September  30, 2003, to
$2.6 million for the year ended  September 30, 2004.  This increase is primarily
due to increased  income of $298,000 on bank-owned life insurance when comparing
the two periods.

44
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued

General and Administrative Expenses

      General and administrative  expenses were $27.3 million for fiscal 2004 as
compared to $27.2  million  for fiscal  2003.  Salaries  and  employee  benefits
increased  to $16.1  million for fiscal  2004 as  compared to $13.5  million for
fiscal 2003,  or 19.7%.  This is primarily  due to the addition of new branches,
additional   business  banking  Associates  and  increased  expense  related  to
commission from the sale of  non-depository  products.  The Company employed 354
Associates  at September  30, 2004  compared to 303  Associates at September 30,
2003.  Also as a result of new branches,  net occupancy,  furniture and fixtures
and data processing  expense increased  $259,000 for fiscal 2004, as compared to
fiscal 2003. Prepayment penalties on FHLB advances were $77,000 for fiscal 2004,
compared to $2.8 million for fiscal 2003. Other expenses decreased slightly from
$4.9  million in fiscal  2003 to $4.8  million in fiscal  2004.  Other  expenses
included $162,000 of mortgage  servicing rights  impairment  recovery for fiscal
2004 compared to $461,000 of mortgage  servicing  rights  impairment  for fiscal
2003.

Income Taxes

      Income taxes increased from $6.1 million in fiscal 2003 to $7.6 million in
fiscal 2004 as a result of increased earnings before income taxes.

      The  effective  income tax rate as a percentage of pretax income was 34.0%
in fiscal 2004 and 35.5% in fiscal 2003. The effective  income tax rate declined
in  connection  with an increase in  investment  interest  income  generated  by
bank-owned life insurance and municipal  securities that are exempt from federal
and certain state taxes.

      The Company's  effective income tax rates take into consideration  certain
assumptions  and estimates  made by  management.  No assurance can be given that
either the tax returns submitted by management or the income tax reported on the
consolidated financial statements will not be adjusted by either adverse rulings
by the U.S.  Tax court,  changes  in the tax code,  or  assessments  made by the
Internal  Revenue  Service.   The  Company  is  subject  to  potential   adverse
adjustments,  including but not limited to: an increase in the statutory federal
or state income tax rates, the permanent  nondeductibility  of amounts currently
considered deductible either now or in future periods, and the dependency on the
generation of future taxable  income,  in order to ultimately  realize  deferred
income tax assets.  Income tax returns for 2001 and subsequent years are exposed
to examination by taxing authorities.

Non-performing Assets

      Non-performing  assets were $3.5 million at September 30, 2005 compared to
$6.6 million at September  30,  2004.  Loans past due 90 days or more  decreased
from $5.9 million at September  30, 2004, to $2.6 million at September 30, 2005.
Real estate acquired  through  foreclosure  increased  slightly from $785,000 at
September 30, 2004, to $818,000 at September 30, 2005.

      At September 30, 2004,  impaired  loans  totaled $3.3 million.  There were
$2.6 million in impaired loans at September 30, 2005.  Included in the allowance
for loan losses at  September  30, 2004 was $359,000  related to impaired  loans
compared to $434,000 at September 30, 2005. The average  recorded  investment in
impaired loans for the year ended  September 30, 2004 was $3.9 million  compared
to $3.7  million  for  the  year  ended  September  30,  2005.  Interest  income
recognized  on  impaired  loans in fiscal  2004 was  $607,000.  Interest  income
recognized  on impaired  loans in fiscal  2005 was  $292,000.  This  decrease is
primarily  due to a commercial  loan that was placed in  nonaccrual  status in a
prior fiscal year.  The loan paid off in the fourth fiscal quarter of 2004. As a
result, in fiscal 2004 the Company recognized approximately $330,000 of interest
which had been previously reserved.

      Loans are reviewed on a regular basis and an allowance  for  uncollectible
interest is established  on loans where  collection is  questionable,  generally
when such loans become 90 days  delinquent.  Loan  balances  for which  interest
amounts have been reserved and all loans more than 90 days delinquent are placed
on nonaccrual  status.  Typically,  payments  received on a nonaccrual  loan are
applied to the  outstanding  principal or recognized as interest  based upon the
collectability of the loan as determined by management.

Allowance for Loan Losses

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

      The evaluation of the allowance is segregated into general allocations and
specific allocations.  For general allocations, the portfolio is segregated into
risk-similar  segments  for which  historical  loss  ratios are  calculated  and
adjusted for identified trends or

                                                                              45
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued

changes  in  current  portfolio  characteristics.  Historical  loss  ratios  are
calculated  by product  type for consumer  loans  (installment  and  revolving),
mortgage loans, and commercial loans and may be adjusted for other risk factors.
To allow for modeling error, a range of probable loss ratios is then derived for
each segment.  The resulting  percentages are then applied to the dollar amounts
of the loans in each segment to arrive at each segment's  range of probable loss
levels.

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

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

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

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

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

      The  Company  established  provisions  for loan losses for the years ended
September  30,  2003,  2004 and 2005,  of $2.7  million,  $1.8  million and $1.7
million,  respectively.  For the years ended  September 30, 2003, 2004 and 2005,
the  Company  had net  charge-offs  of  $706,000,  $505,000  and  $1.0  million,
respectively.  Net charge-offs as a percentage of average outstanding loans were
..11%,  .07%, and .12% for fiscal years ended 2003, 2004 and 2005,  respectively.
At  September  30, 2005,  the Company had an allowance  for loan losses of $11.7
million, which was 1.25% of net loans.

Off-Balance Sheet Arrangements

      In the normal course of  operations,  the Company  engages in a variety of
financial  transactions that, in accordance with generally  accepted  accounting
principles,  are not recorded in the  financial  statements,  or are recorded in
amounts that differ from the notional amounts.  These transactions  involve,  to
varying  degrees,  elements of credit,  interest rate, and liquidity  risk. Such
transactions  are used by the  Company  for  general  corporate  purposes or for
Customer needs.  Corporate purpose  transactions are used to help manage credit,
interest rate, and liquidity risk or to optimize capital.  Customer transactions
are used to manage Customers' requests for funding.

      The Company's  off-balance sheet  arrangements,  which principally include
lending commitments and derivatives are described below.

      Lending Commitments. Lending commitments include loan commitments, standby
letters of credit and unused  business  and  personal  credit card lines.  These
instruments  are  not  recorded  in the  consolidated  statements  of  financial
condition until funds are advanced under the  commitments.  The Company provides
these lending commitments to Customers in the normal course of business.

      Loan  commitments for residential  housing and land totaled $28.6 million.
For retail Customers,  loan commitments are generally lines of credit secured by
residential  property.  At September  30, 2005 retail loan  commitments  totaled
$47.9  million.  Standby  letters  of  credit  are  conditional  commitments  to
guarantee performance,  typically contract or financial integrity, of a Customer
to a third party and totaled  $5.8 million at  September  30,  2005.  Commercial
lines of credit and unused  business  and  personal  credit  card  lines,  which
totaled  $132.3  million at September 30, 2005,  are  generally  for  short-term
borrowings.

46
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued

      The Company applies  essentially the same credit policies and standards as
it does in the lending process when making these commitments.

      Derivatives.  In  accordance  with  SFAS  No.  133,  the  Company  records
derivatives at fair value, as either assets or liabilities,  on the consolidated
balance  sheet.  Derivative  transactions  are measured in terms of the notional
amount,  but this amount is not recorded on the balance  sheet and is not,  when
viewed in isolation, a meaningful measure of the risk profile of the instrument.
The notional  amount is not exchanged,  but is used only as the basis upon which
interest and other payments are calculated.

      At  September  30,  2005,  the fair  value of  derivative  assets  totaled
$108,000.   The  related  notional  amounts,  which  are  not  recorded  on  the
consolidated  balance sheet,  totaled $4.8 million for the derivative assets and
$10.0 million for the derivative liabilities. (See Note 23).

Interest Rate Risk Disclosure

      The Bank's Asset  Liability  Management  Committee  ("ALCO")  monitors and
considers  methods of managing exposure to interest rate risk. The ALCO consists
of members of the Board of Directors  and Senior  Leadership  of the Company and
meets  quarterly.  The Bank's  exposure to interest  rate risk is reviewed on at
least a quarterly  basis by 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 (NPV)  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 as computed by the OTS for the
various rate shock levels as of September 30, 2005.

<TABLE>
<CAPTION>
                                         Board Limit      Board Limit     Market Value      Market Value
                                         Minimum NPV        Maximum        Of Assets      Portfolio Equity      NPV
      Change in Interest Rates              Ratio       Decline in NPV      9/30/05            9/30/05         Ratio
      ------------------------           -----------    --------------    ------------    ----------------    ------
<S>                                         <C>             <C>            <C>               <C>              <C>
      300 basis point rise                  5.00%           400 BPS        $1,543,703        $  150,927        9.78%
      200 basis point rise                  6.00%           300 BPS        $1,566,175        $  163,446       10.44%
      100 basis point rise                  6.00%           250 BPS        $1,588,105        $  171,604       10.81%
      No Change                             6.00%                          $1,607,528        $  181,058       11.26%
      100 basis point decline               6.00%           250 BPS        $1,621,093        $  183,898       11.34%
      200 basis point decline               6.00%           300 BPS        $1,629,407        $  177,613       10.90%
      300 basis point decline               6.00%           350 BPS               N/A               N/A         N/A
</TABLE>

      The preceding  table indicates that at September 30, 2005, 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 increase
minimally.  At September  30,  2005,  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 sudden  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.
Conversely,  during a period of falling  interest  rates,  a positive  gap would
result in a decrease  in net  interest  income.  It is ALCO's  goal to  maintain
reasonable balance between exposure to interest rate fluctuations and earnings.

                                                                              47
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued

Recently Adopted Accounting Pronouncements

      In March 2004, the Financial  Accounting  Standards  Board ("FASB") issued
EITF No. 03-1 ("EITF 03-1"), "The Meaning of Other-Than-Temporary Impairment and
Its Application of Certain  Investments," which provided guidance for evaluating
whether an investment is other-than-temporarily  impaired and its application to
investments  classified as either  available for sale or held to maturity  under
FASB Statement No. 115,  "Accounting for Certain  Investments in Debt and Equity
Securities,"  and  investments  accounted for under the cost or equity method of
accounting.

      Paragraphs 10 through 20 of EITF 03-1 provide  guidance on when impairment
of debt and equity securities is considered other-than-temporary.  This guidance
generally states impairment is considered other-than-temporary unless the holder
of the security  has both the intent and ability to hold the security  until the
fair value recovers and evidence  supporting the recovery  outweighs evidence to
the contrary.

      The Company adopted the guidance of EITF 03-1,  excluding paragraphs 10-20
effective as of September  30, 2004. As a result of this  adoption,  the Company
provides  additional  disclosures,  which  are  found  in  Notes 2 and 3 of this
report. The initial adoption of this issue, which excludes  paragraphs 10-20 did
not have a material  impact on the financial  condition or results of operations
of the Company.

      In July 2005,  the FASB issued final guidance that  eliminated  paragraphs
10-18 of EITF-03-1  (paragraphs  19-20 have no material  impact on the financial
condition or results of  operations  of the Company) and have reissued the final
pronouncement  as FSP FAS 115-1 that will be effective for  other-than-temporary
impairment analysis conducted in periods beginning after December 15, 2005.

Recently Issued Accounting Pronouncements

      In  December  2004,  the FASB issued  Statement  of  Financial  Accounting
Standards ("SFAS") No. 123 (Revised 2004),  "Share-Based Payment" ("SFAS 123R").
This standard requires expensing of stock options and other share-based payments
and  supersedes  SFAS No.  123 that had  allowed  companies  to  choose  between
expensing stock options or showing  proforma  disclosure  only. This standard is
effective  for the  Company  as of  October 1, 2005 and will apply to all awards
granted, modified, cancelled or repurchased after that date. Based upon unvested
options  outstanding at September 30, 2005, the Company expects to incur expense
related to options of approximately $145,000 in fiscal 2006. See Note 1 (p).

      On March 29, 2005 the SEC Staff issued Staff  Accounting  Bulletin No. 107
("SAB  107").  SAB 107  expresses  the  views  of the SEC  staff  regarding  the
interaction of SFAS 123R and certain SEC rules and  regulations and provides the
SEC staff's view regarding the valuation of share-based payment arrangements for
public companies.

      In December 2004, the FASB issued SFAS No. 153 ("SFAS 153"), "Exchanges of
Nonmonetary  Assets-an  amendment of APB Opinion No. 29," which  eliminates  the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general  exception for exchanges of  nonmonetary  assets that do not have
commercial  substance.  A nonmonetary  exchange has commercial  substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS 153 is effective for nonmonetary transactions occurring in
fiscal  years  beginning  after June 15,  2005.  The  initial  adoption  of this
pronouncement  will not have a material  impact on the  financial  condition and
results of operations of the Company.

      In May 2005, the FASB issued Statement of Financial  Accounting  Standards
No. 154 ("SFAS 154"),  Accounting  Changes and Error Corrections - a replacement
of APB  Opinion  No.  20  and  FASB  Statement  No.  3,"  which  eliminates  the
requirement   to  reflect   changes  in  accounting   principles  as  cumulative
adjustments to net income in the period of the change and requires retrospective
application to prior  periods'  financial  statements  for voluntary  changes in
accounting  principle,  unless  it is  impracticable  to  determine  either  the
period-specific  effects  or  the  cumulative  effect  of the  change.  If it is
impracticable  to  determine  the  cumulative  effect of the change to all prior
periods,  SFAS  154  requires  that  the new  accounting  principle  be  adopted
prospectively. For new accounting pronouncements, the transition guidance in the
pronouncement  should  be  followed.  Retrospective  application  refers  to the
application of a different  accounting  principle to previously issued financial
statements as if that principle had always been used.

      SFAS 154 did not change the guidance for reporting  corrections of errors,
changes in estimates or for justification of a change in accounting principle on
the basis of preferability. SFAS 154 is effective for accounting changes made in
fiscal years  beginning  after December 15, 2005.  The initial  adoption of this
pronouncement  will not have a material  impact on the  financial  condition and
results of operations of the Company.

48
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis - Continued

Capital Standards and Regulatory Matters

      The Bank's capital standards  include:  (1) a leverage limit requiring all
OTS chartered  financial  institutions to maintain core capital in an amount not
less than 4% of the financial institution's total assets; (2) a tangible capital
requirement of not less than 1.5% of total assets;  and (3) a risk-based capital
requirement  of not  less  than  8.0%  of  risk  weighted  assets.  For  further
information  concerning  the Bank's capital  standards,  refer to Note 14 of the
Notes to the Consolidated Financial Statements.

Effects of Inflation and Changing Prices

      The  consolidated  financial  statements  have been prepared in accordance
with U.S. generally accepted accounting principles which require the measurement
of financial position and results of operations in terms of historical  dollars,
without  consideration of change in the relative  purchasing power over time due
to inflation. Unlike most industrial companies,  virtually all of the assets and
liabilities  of a financial  institution  are  monetary in nature.  As a result,
interest  rates  have a more  significant  impact on a  financial  institution's
performance  than the effect of  inflation.  Interest  rates do not  necessarily
change in the same magnitude as the price of goods and services.

                                                                              49
<PAGE>

Board of Directors

<TABLE>
<CAPTION>
Coastal Financial Corporation                Coastal Federal Bank                    Coastal Planners Holding Corporation
<S>                                              <C>                                     <C>
    E. Lawton Benton                             E. Lawton Benton                        James T. Clemmons
    President                                    President                               Chairman
    C.L. Benton & Sons, Inc.                     C.L. Benton & Sons, Inc.                Coastal Financial Corporation

    G. David Bishop                              G. David Bishop                         Michael C. Gerald
    Managing Director                            Managing Director                       President and Chief Executive Officer
    White Harvest Trading Co., LLC               White Harvest Trading Co., LLC          Coastal Financial Corporation

    J. Robert Calliham                           J. Robert Calliham                      Jerry L. Rexroad, CPA
    President and Chief Executive Officer        President and Chief Executive Officer   Chief Financial Officer
    Smith, Sapp, Bookhout, Crumpler &            Smith, Sapp, Bookhout, Crumpler &       Coastal Planners Holding Corporation
    Calliham, P.A.                               Calliham, P.A.

    James T. Clemmons                            James T. Clemmons
    Chairman                                     Chairman
    Coastal Financial Corporation                Coastal Federal Bank

    James P. Creel                               James P. Creel
    President                                    President
    Creel Corporation                            Creel Corporation

    James. H. Dusenbury                          James. H. Dusenbury
    Retired - Attorney                           Retired - Attorney
    Dusenbury and Clarkson Law Firm              Dusenbury and Clarkson Law Firm

    Michael C. Gerald                            Michael C. Gerald
    President and Chief Executive Officer        President and Chief Executive Officer
    Coastal Financial Corporation                Coastal Federal Bank

    William O. Marsh                             William O. Marsh
    President                                    President
    Palmetto Chevrolet                           Palmetto Chevrolet

    Frank A. Thompson, II                        Frank A. Thompson, II
    President                                    President
    Peoples Underwriters, Inc.                   Peoples Underwriters, Inc.

    W. Cecil Worsley, III                        W. Cecil Worsley, III
    President and Chief Executive Officer        President and Chief Executive Officer
    Worsley Companies                            Worsley Companies
</TABLE>

50
<PAGE>

COASTAL FINANCIAL CORPORATION
Leadership Group

<TABLE>
<S>                                   <C>                                       <C>
Sherri J. Adams                       Tamra T. Cannon                           Joel P. Foster
Branch Manager                        Assistant Vice President                  Senior Vice President
N. Myrtle Beach                       Senior Branch Manager                     Area Banking Leader
                                      Conway                                    Myrtle Beach Community
Ginger Allen
Assistant Vice President              Shonda C. Chestnut                        William A. Gehman III, CPA
In-house Underwriting                 Assistant Vice President                  Senior Vice President
Leader                                Senior Branch Manger                      Corporate Controller
                                      Surfside
Anthony Ambuhl                                                                  Mary L. Geist
Assistant Vice President              Susan J. Cooke                            Vice President
Commercial Banking                    Senior Vice President                     Data Services Leader
Officer                               Corporate Secretary
                                      Administrative Services                   Michael C. Gerald
Phillip G. Ammons                     Leader                                    President and Chief Executive
Vice President                                                                  Officer
Community Banking                     Benjamin D. Corley
Leader                                Senior Branch Manager                     Jimmy R. Graham
Pawleys Island & Murrells             Southport                                 Executive Vice President
Inlet                                                                           Chief Information Officer
                                      Jerry J. Cox, Jr.
Donna P. Bailey                       Vice President                            Don C. Hamilton
Assistant Vice President              Community Banking Leader                  Vice President
Delivery Systems Resource             Loris Community                           Residential Brokerage Leader
Administrator
                                      John L. Creamer                           E. Haden Hamilton, Jr.
James R. Baker, MCSE                  Vice President                            President
Assistant Vice President              Coastal Investor Services                 Coastal Investor Services
Network Services Group
Leader                                Gwendolyn Davis                           Kathy D. Hane
                                      Branch Manager                            Assistant Vice President
Jeffrey A. Benjamin                   Murrells Inlet                            Senior Branch Manager
Senior Vice President                                                           Pawleys Island
Credit Administration                 Deborah S. Dillard
Leader                                Branch Manager                            Lauren E. Henson
                                      Sunset Beach                              Vice President
April C. Benton                                                                 Dean of Coastal Federal
Staffing Leader                       Robert D. Douglas                         University
                                      Executive Vice President
Steven Brockmann                      Human Resources Leader                    J. Michael Hill
Assistant Vice President                                                        Vice President
Coastal Investor Services             Tiffany Dudley                            Coastal Investor Services
                                      Electronic Banking Leader
Cynthia L. Buffington                                                           Debra Hinson
Assistant Vice President              Trina S. Dusenbury                        Assistant Vice President
Item Processing Leader                Senior Vice President                     Operations Leader
                                      Residential Banking                       Coastal Investor Services
Nancy G. Bundy                        Operations Leader
Branch Manager                                                                  Chris Hipp
Surfside                              Michael L. Evans                          Branch Manager
                                      Vice President                            Stephen's Crossroads
Ronnie L. Burbank                     Loan Review Leader
Vice President                                                                  Glenn D. Humbert
Senior Banking Leader                 Rita E. Fecteau                           Senior Vice President
Wilmington CBD                        Vice President                            Area Banking Leader
                                      Accounting Leader                         Brunswick County
Glenn T. Butler, MCSE,
CCNA                                  Patricia A. Floyd                         Cameron Jackson
Vice President                        Vice President                            Assistant Vice President
Chief Technology Officer              Retail Banking Resource                   Consumer Loan Administrator
                                      Leader
Anne R. Caldwell                                                                Lisa B. James
Assistant Vice President              J. Daniel Fogle                           Senior Vice President
Deposit Servicing Leader              Vice President                            Operations Leader
                                      Community Banking Leader
Marie H. Canaday                      Carolina Forest /                         Wendy Johhnson
Mortgage Specialist                   Waccamaw / Conway                         Branch Manager
                                                                                Loris
</TABLE>

                                                                              51
<PAGE>

COASTAL FINANCIAL CORPORATION
Leadership Group - Continued

<TABLE>
<S>                                   <C>                                       <C>
Jennifer Julian                       Janice B. Metz                            Joseph Shumbo
Assistant Vice President              Assistant Vice President                  Assistant Vice President
Facility Services Leader              Advertising Officer                       Residential Banking Officer

Stephanie L. Karnap                   Abigail E. Mishoe                         Leeann Slack
Branch Manager                        Assistant Vice President                  Support Group Leader
Waccamaw                              Residential Banking Officer
                                                                                Lorie D. Smith
Ruth S. Kearns                        Leslie Morse                              Associate Dean of Coastal
Senior Vice President                 Commercial/Consumer Operations            Federal University
Community Relations Officer           Leader
                                                                                J. Marcus Smith, Jr.
Kara Kessinger                        Lynn T. Murray                            Senior Vice President
President                             Senior Vice President                     Internal Audit Leader
Coastal Retirement Estate &           Checking Account Product
Tax Planners                          Development & Management                  Phillip G. Stalvey
                                      Officer                                   Executive Vice President
L. Eric Keys                                                                    Banking Leader
Vice President                        Ronald A. Nolan
Community Banking Leader              Assistant Vice President                  S. Annette Stroud
South Horry Community                 Security Officer                          Branch Manager
                                                                                Carolina Forest
Linwood E. Koonce, Jr.                Deborah A. Orobello
Banking Closing Leader                Branch Manager                            Charlene P. Sullivan
                                      Little River                              Branch Manager
John L. Kosicki                                                                 Socastee
Senior Vice President                 Charles S. Page
Resource Leader                       Vice President                            Sandra J. Szarek
                                      Senior Banking Leader                     Assistant Vice President
James Louis LaBruce                   Carolina Forest                           Commercial Loan Servicing
Vice President                                                                  Leader
Senior Banking Leader                 Orit Perez
                                      Assistant Vice President                  Andrea M. Taiani
Justin M. Lee                         Senior Branch Manager                     Customer Contact Center
Assistant Vice President              Oak Street and 38th Avenue                Leader
Commercial/Residential                Bi-Lo
Officer                                                                         Gary Thompson
Socastee                              Jerry L. Rexroad, CPA                     Vice President
                                      Executive Vice President                  Financial Reporting and
Pauline M. Lewis                      Chief Financial Officer                   Compliance Leader
Branch Manager
Shallotte                             David L. Roe                              Terry B. Thornton
                                      Senior Vice President                     Vice President
Edward L. Loehr, Jr.                  Small Business Banking Leader             Senior Branch Manager
Vice President                                                                  Wilmington
Budgeting and Treasury                Eulette W. Sauls
                                      Assistant Vice President                  Matthew J. Towns
Mary M. Lundy                         Information Management Leader             Vice President
Branch Manager                                                                  Credit Administration
Southport                             Collier J. Schettig
                                      Branch Manager                            Audrey Waldron
Kathleen M. Lutes                     Dunes                                     Branch Manager
Assistant Vice President                                                        Oak Island
Secondary Marketing Leader            Sherry G. Schoolfield
                                      Vice President                            Douglas W. Walters
Patsy Madden                          Compliance Officer                        Vice President
Residential Loan                                                                Residential Banking Leader
Servicing Leader                      Douglas E. Shaffer                        North Myrtle Beach
                                      Senior Vice President
Michael C. Mauney                     Area Leader                               Theresa M. Whitley
Vice President                        North and West Communities                Closing and Construction
Collections Leader                                                              Leader
                                      Steven J. Sherry
Amy E. McLaurin                       Executive Vice President                  Sandra R. Zanfini
Assistant Vice President              Chief Marketing Officer                   Assistant Vice President
Senior Banking Leader                                                           Assistant Corporate Secretary
Sunset Beach                                                                    Corporate Support Leader
</TABLE>

52
<PAGE>

Branch Locations

<TABLE>
<S>                                   <C>                                       <C>
Coastal Federal Bank

Oak Street Branch                     Oak Island Branch                         Surfside Branch
2619 Oak Street                       8001 East Oak Island Drive                112 Highway 17 South
Myrtle Beach, SC 29577-3129           Oak Island, NC 28465                      & Glenns Bay Road
843.205.2000                          843.205.2036                              Surfside Beach, SC 29575
                                      910.201.1481                              843.205.2003
Carolina Forest Branch
3894 Renee Drive                      Pawleys Island Branch                     Waccamaw Medical Park Branch
Myrtle Beach, SC 29579                Coastal Federal Town Center               112 Waccamaw Medical Park Drive
843.205.2016                          11403 Ocean Highway                       Conway, SC 29526
                                      Pawleys Island, SC 29585                  843.205.2009
Conway Branch                         843.205.2020
310 Wright Boulevard                                                            38th Avenue Branch (BI-LO)
Conway, SC 29526                      Shallotte Branch                          1245 38th Avenue North
843.205.2005                          200 Smith Avenue                          Myrtle Beach, SC 29577
                                      Shallotte, NC 28470                       843.205.2041
Dunes Branch                          843.205.2035
7500 North Kings Highway              910.754.6186                              Wilmington Branch
Myrtle Beach, SC 29572                                                          4320 17th Street Extension
843.205.2001                          Socastee Branch                           Wilmington, NC 28412
                                      4801 Socastee Boulevard                   843.205.2034
Little River Branch                   Myrtle Beach, SC 29575                    910.392.2265
1602 Highway 17                       843.205.2007
Little River, SC 29566                                                          Wilmington Branch
843.205.2014                          Southport Branch                          5710 Oleander Drive, Suite 209
                                      4956-1 Long Beach Road SE                 Wilmington, NC 28403
Loris Branch                          Southport, NC 28461                       843.205.2031
3610 Broad Street                     843.205.2032                              910.313.1161
Loris, SC 29569                       910.454.4173
843.205.2018                                                                    Wilmington Branch
                                      Stephens Crossroads Branch                109 Market Street
Murrells Inlet Branch                 2496 Highway 9 East                       Wilmington, NC 28401
3348 Highway 17 South                 Highways 9 and 57                         843.205.2033
& Inlet Crossing                      Little River, SC 29566                    910.763.2372
Murrells Inlet, SC 29576              843.205.2013
843.205.2008                          843.390.3355

North Myrtle Beach Branch             Sunset Beach Branch
521 Main Street                       1625 Seaside Road SW
North Myrtle Beach, SC 29582          Sunset Beach, NC 28468
843.205.2002                          843.205.2012
                                      910.579.8160
</TABLE>

                                                                              53
<PAGE>

Corporate Information

Common Stock and Dividend Information

The common stock of Coastal  Financial  Corporation is quoted through the Nasdaq
Stock Market  under the symbol CFCP.  For  information  contact the  Stockholder
Relations office.

As of December 5, 2005, the  Corporation had 1,137  stockholders  and 19,479,469
shares of Common Stock outstanding.  This does not reflect the number of persons
or entities who hold stock in nominee or "street name."

The  Company's  ability to pay  dividends  depends  primarily  on the ability of
Coastal  Federal Bank to pay dividends to the Company.  See Notes 14, 15, and 19
of the Notes to Consolidated Financial Statements for further information.

Market Price of Common Stock

The table below  reflects the high and low bid stock prices  published by Nasdaq
for each quarter.  Such prices may reflect inter-dealer  prices,  without retail
mark-up,  mark-down or  commissions,  and may not necessarily  represent  actual
transactions.  The  prices  have been  adjusted  retroactive  to  reflect  stock
dividends.

                                                HIGH          LOW         CASH
                                                 BID          BID       DIVIDEND
Fiscal Year 2005:
  First Quarter                                $15.83       $11.16       $0.041
  Second Quarter                                16.40        11.20        0.041
  Third Quarter                                 12.84        11.58        0.045
  Fourth Quarter                                13.02        11.71        0.045

Fiscal Year 2004:
  First Quarter                                $12.95       $ 9.50       $0.037
  Second Quarter                                12.40         9.36        0.037
  Third Quarter                                 11.79         8.87        0.037
  Fourth Quarter                                12.55        10.55        0.041

Form 10-K

A copy of Coastal Financial  Corporation's  Annual Report on Form 10-K, as filed
with the Securities  Exchange  Commission for the year ended September 30, 2005,
may be  obtained  or viewed on  www.coastalfederal.com  by  clicking on Investor
Services.

Annual Meeting of Stockholders

The Annual Meeting of Stockholders of Coastal Financial Corporation will be held
at The  Breakers  Resort,  2006  North  Ocean  Boulevard,  Myrtle  Beach,  South
Carolina,  on Tuesday,  January 31, 2006 at 2:00 p.m.,  Eastern  Standard  Time.

Additional Information

If you are receiving  duplicate  mailing of stockholder  reports due to multiple
accounts,  we can  consolidate  the  mailings  without  affecting  your  account
registration. To do this, or for additional information, contact the Stockholder
Relations Office, at the Corporate address shown below.

Corporate Offices

Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
843.205.2000

Transfer Agent and Registrar

Registrar and Transfer Company
P.O. Box 1010
Cranford, NJ 07016
1.800.866.1340 Ext. 2514

Independent Registered Public Accounting Firm

KPMG LLP
150 Fayetteville Street Mall
Suite 1200
Raleigh, NC 27601

Special Counsel

Muldoon Murphy & Aguggia LLP
5101 Wisconsin Avenue
Washington, DC 20016

Stockholder Relations Officer

Susan J. Cooke
Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
843.205.2000

                                                                          [LOGO]

                                                                          Member
                                                                          FDIC

Coastal Financial Corporation is an equal opportunity employer and pledges equal
opportunities without regard to religion, citizenship, race, color, creed, sex,
age, national origin, disability or status as a disabled or Vietnam-Era veteran.

<TABLE>
<S>                   <C>                         <C>
  ---------
* COASTAL               RAYMOND JAMES(R)          Securities and investment  advisory services offered exclusively through
  INVESTOR            FINANCIAL SERVICES, INC.    Raymond James Financial Services, Inc., member NASD/SIPC, an independent
  SERVICES             Member NASD/SIPC           broker/dealer,  and are  not  insured  by the  FDIC  or any  other  bank
 ----------                                       insurance,  are  not  deposits  or  obligations  of the  bank,  are  not
                                                  guaranteed by the bank, and are subject to risk,  including the possible
                                                  loss of principal.

                                                      Coastal Investor Services is a division of Coastal Federal Bank.
</TABLE>

54

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