SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

      For the Fiscal Year Ended September 30, 1998

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

                         Commission File Number: 0-19684 


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

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

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

       Registrant's telephone number, including area code: (843) 448-5151

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

          Securities registered pursuant to Section 12(g) of the Act:

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

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

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

         As of December 22, 1998,  there were issued and  outstanding  6,270,348
shares of the registrant's Common Stock.

         The aggregate market value of the voting stock held by nonaffiliates of
the  registrant,  based on the closing  sales price of the  registrant's  common
stock  as  quoted  on the  National  Association  of  Securities  Dealers,  Inc.
Automated  Quotation  System under the symbol  "CFCP" on December 22, 1998,  was
$122,271,786(6,270,348  shares at $19.50 per  share,  which is the ending bid on
December 22, 1998.). It is assumed for purposes of this calculation that none of
the registrant's officers, directors and 5% stockholders are affiliates.
<PAGE>
                       DOCUMENTS INCORPORATED BY REFERENCE

         1.  Portions of the Annual Report to  Stockholders  for the Fiscal Year
Ended September 30, 1998 (Parts I and II)

         2.  Portions  of the Proxy  Statement  for the 1999  Annual  Meeting of
Stockholders. (Part III)
<PAGE>
                                     PART I

Item 1.  Business

General

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

         On  November  2,  1995,  Coastal  Financial  purchased  Granger-O'Harra
Mortgage,   Inc.("Granger-O'Harra")   and  merged  Granger-O'Harra  into  a  new
subsidiary,  Coastal  Federal  Mortgage,  Inc.  Coastal Federal  Mortgage,  Inc.
engages in the  origination  of conforming  mortgage loans which are sold in the
secondary market generally servicing released.

         On May 7, 1996, the  Corporation  formed Coastal  Technology  Services,
Inc. ("CTS").  CTS primarily develops  specialized  banking software for sale to
financial services companies. Activity for fiscal 1998 was limited for CTS.

         On  February  20,  1998,  Coastal  Real Estate  Investment  Corporation
("CREIC") was incorporated in North Carolina.  CREIC is a wholly owned operating
subsidiary of Coastal  Federal and is a real estate  investment  trust ("REIT").
All of CREIC's operating activities are consolidated into Coastal Federal. CREIC
engages  in the  investment  and  management  of  real  estate  related  assets,
primarily  mortgage  loans.  On September 1, 1998,  CREIC was  capitalized  with
approximately $131.8 million of mortgage loans from Coastal Federal.
<PAGE>
         Coastal  Federal  was  organized  in 1953 as a mutual  savings and loan
association and, since that time, its deposits have been federally  insured.  In
March 1989, Coastal Federal converted from a federally  chartered mutual savings
and loan association to a federally chartered mutual savings bank. On October 4,
1990,  Coastal Federal  converted to the stock form of ownership  ("Conversion")
through the sale and  issuance of 492,541  shares of common  stock at a price of
$10.00  per share,  which  resulted  in gross  proceeds  to  Coastal  Federal of
$4,925,410.

         Coastal  Federal  conducts its business  from its main office in Myrtle
Beach,  South  Carolina,  eight branch offices located in South Carolina and one
branch office located in Sunset Beach,  North  Carolina.  At September 30, 1998,
Coastal  Financial had total assets of $643.6 million,  total deposits of $386.3
million and stockholders'  equity of $37.9 million. The deposits of the Bank are
insured by the Federal Deposit Insurance  Corporation ("FDIC") under the Savings
Association  Insurance  Fund  ("SAIF").  The  corporate  offices of the Bank are
located at 2619 Oak Street,  Myrtle  Beach,  South  Carolina  and the  telephone
number is (843) 448-5151.

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

         Coastal Federal's  principal  business currently consists of attracting
deposits from the general public and using these funds to originate conventional
one-to-four family first mortgage loans, consumer, commercial business loans and
commercial  real estate loans.  Commercial  real estate loans as a percentage of
total loans have  increased  from 13.9% of total loans at September  30, 1995 to
21.6% of total loans at September 30, 1998.

         As  part  of  its  lending  strategy,  subject  to  market  conditions,
management  intends to continue  emphasizing  the  origination  of consumer  and
commercial  business loans in addition to first mortgage loans. At September 30,
1998, 3.4% and 10.3%, respectively, of the Bank's total loan portfolio consisted
of commercial business and consumer loans.
<PAGE>
Rate/Volume Analysis

         The following table sets forth certain information regarding changes to
interest  income  and  interest  expense  of the  Corporation  for  the  periods
indicated.  For each  category of  interest-earning  asset and  interest-bearing
liability,  information is provided on changes attributed to (i) changes in rate
(changes in rate  multiplied by old volume);  (ii) changes in volume (changes in
volume  multiplied by old rate);  (iii) changes in  rate-volume  (change in rate
multiplied  by change in volume);  and (iv) the net change (the sum of the prior
columns). Non-accrual loans are included in the average volume calculations.
<TABLE>
<CAPTION>
                                                                  Year Ended September 30,
                                   ----------------------------------------------------------------------------------------
                                             1996 Compared to 1995                          1997 Compared to 1996          
                                               Increase (Decrease)                           Increase (Decrease)           
                                                    Due to                                         Due to                  
                                   -----------------------------------------       --------------------------------------- 
                                                          Rate/                                          Rate/             
                                   Rate      Volume       Volume        Net        Rate      Volume      Volume       Net  
                                   ----      ------       ------       -----       ----      ------      ------      ----- 
                                                                    (Dollars in thousands)
<S>                                <C>       <C>          <C>         <C>       <C>         <C>         <C>       <C>      
Interest-Earning Assets:
 Loans ........................    $ 615      $ 2,361       $ 51      $3,027      $ 502     $ 1,545       $ 24    $ 2,071  
 Mortgage-backed
  securities...................       (4)       1,083         (6)      1,073       (123)        820        (56)       641  
 Investments and
  other........................      177           96         19         292        (70)        747        (44)       633  
                                   -----      -------       ----      ------      -----     -------       ----    -------  

Total net change in
 income on interest-
 earning assets................      788        3,540         64       4,392        309       3,112        (76)     3,345  
                                   -----      -------       ----      ------      -----     -------       ----    -------  

Interest-Bearing
 Liabilities:
 Deposits......................      300        1,455         44       1,799        200       1,742         19      1,961  
 FHLB advances.................     (289)          51         (2)       (240)      (361)     (1,425)        73     (1,713) 
 Repurchase
  agreements...................       16          194         50         260         50         576        181        807  
                                   -----      -------       ----      ------      -----     -------       ----    -------  
Total net change in
 expense on interest-
 bearing liabilities...........       27        1,700         92       1,819       (111)        893        273      1,055  
                                   -----      -------       ----      ------      -----     -------       ----    -------  

Net change in net
 interest income...............    $ 761       $1,840      $ (28)     $2,573    $   420      $2,219     $ (349)    $2,290  
                                   =====       ======      =====      ======    =======      ======     ======     ======  
<PAGE>
<CAPTION>
                                             Year Ended September 30,
                                   -----------------------------------------------
                                             1998 Compared to 1997
                                               Increase (Decrease)
                                                      Due to
                                    -----------------------------------------------
                                                              Rate/
                                    Rate         Volume       Volume       Net
                                    ----         ------       ------      ----
                                                  (Dollars in thousands)
<S>                                 <C>         <C>           <C>       <C>
Interest-Earning Assets:
 Loans ........................     $195        $2,240         $13      $2,448
 Mortgage-backed
  securities...................     (482)        4,992        (985)      3,525
 Investments and
  other........................       46          (281)         (7)       (242)
                                    ----        ------         ---      ------

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

Interest-Bearing
 Liabilities:
 Deposits......................     (165)        1,089         (13)        911
 FHLB advances.................     (298)        1,501         (83)      1,120
 Repurchase
  agreements...................      (47)        2,422        (100)      2,275
                                    ----        ------         ---      ------
Total net change in
 expense on interest-
 bearing liabilities...........     (510)        5,012        (196)      4,306
                                    ----        ------         ---      ------

Net change in net
 interest income...............     $269        $1,939       $(783)     $1,425
                                    ====        ======       =====      ======
</TABLE>
<PAGE>
Average Balance Sheet

          The  following  table sets forth certain  information  relating to the
Corporation's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived  by  dividing  income or  expense  by the  average  balance of assets or
liabilities,  respectively,  for the periods  presented.  Average  balances  are
derived from  month-end  balances.  Management  does not believe that the use of
month-end  balances  instead of daily  average  balances has caused any material
difference in the information presented.
<TABLE>
<CAPTION>
                                                                   Year Ended September 30,
                                        -------------------------------------------------------------------------------
                                                        1996                                        1997               
                                        -----------------------------------         -----------------------------------
                                        Average                      Yield/         Average                      Yield/
                                        Balance       Interest        Rate          Balance       Interest        Rate 
                                        -------       --------       ------         -------       --------       ------
                                                                    (Dollars in thousands)
<S>                                     <C>            <C>             <C>          <C>            <C>           <C>   
ASSETS
 Loans................................  $369,733      $ 31,698         8.57%        $389,196       $33,769       8.70% 
 Investments(1).......................    16,730         1,217         7.27           27,007         1,850       6.85  
 Mortgage-backed                                                     
  securities..........................    23,214         1,805         7.78           33,738         2,446       7.25  
                                          ------         -----         ----           ------         -----       ----  
                                                                     
Total interest-earning                                               
 assets...............................  $409,677       $34,720         8.46%        $449,941       $38,065       8.46% 
                                        ========       =======         =====         =======        ======       ===== 
                                                                     
LIABILITIES                                                          
 Transaction accounts.................   114,220         2,862         2.51          153,796         4,894       3.18  
 Passbook accounts....................    44,631         1,160         2.60           41,143         1,015       2.47  
 Certificate accounts.................   134,415         7,667         5.70          135,335         7,741       5.72  
 FHLB advances........................   112,878         7,079         6.27           90,154         5,366       5.95  
 Securities sold                                                                                                       
  under repurchase                                                                                                     
  agreements..........................     6,955           323         4.63           19,387         1,130       5.82  
                                           -----           ---         ----           ------         -----       ----  
                                                                                                                       
Total interest-bearing                                                                                                 
 liabilities..........................  $413,099       $19,091         4.70%        $439,815       $20,146       4.57% 
                                        ========       =======         =====         =======        ======       ===== 
                                                                                                                       
Net interest income/                                                                                                   
 interest rate spread.................                 $15,629         3.76%                       $17,919       3.89% 
                                                                                                                       
Net yield on earning                                                                                                   
 assets...............................                                 3.86%                                     4.03% 
                                                                                                                       
                                                                                                                       
Ratio of earning assets                                                                                                
 to interest-bearing                                                                                                   
 liabilities..........................                                 1.02x                                     1.03x 

<PAGE>
<CAPTION>
                                                Year Ended September 30,
                                        --------------------------------------
                                                          1998
                                          ------------------------------------
                                          Average                      Yield/
                                          Balance       Interest        Rate
                                          -------       --------       -----
                                                 (Dollars in thousands)
<S>                                      <C>            <C>             <C>  
ASSETS
 Loans................................   $414,938       $36,314         8.75%
 Investments(1).......................     22,912         1,608         7.02
 Mortgage-backed                        
  securities..........................    102,597         5,972         5.82
                                          -------         -----         ----
                                        
Total interest-earning                  
 assets...............................   $540,447       $43,894         8.11%
                                          =======        ======         ====
                                        
LIABILITIES                             
 Transaction accounts.................    179,398         5,756         3.21
 Passbook accounts....................     36,102           924         2.56
 Certificate accounts.................    144,569         7,879         5.45
 FHLB advances........................    115,389         6,488         5.62
 Securities sold                                                      
  under repurchase                                                    
  agreements..........................     60,998         3,404         5.58
                                           ------         -----         ----
                                                                      
Total interest-bearing                                                
 liabilities..........................   $536,456       $24,451         4.60%
                                          =======       =======         ====
                                                                      
Net interest income/                                                  
 interest rate spread.................                  $19,443         3.51%
                                                                      
Net yield on earning                                                  
 assets...............................                                  3.64%
                                                                      
                                                                      
Ratio of earning assets                                               
 to interest-bearing                                                  
 liabilities..........................                                  1.03x
</TABLE>

-------------------------                                           
(1) Includes short-term interest-bearing deposits and Federal funds sold.
<PAGE>
Lending Activities

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

         The Bank's  loan  portfolio  totaled  approximately  $424.8  million at
September 30, 1998,  representing  approximately  66.0% of its total assets.  On
that date,  approximately  65.9% of Coastal  Federal's  total loan portfolio was
secured by mortgages on one-to-four family residential properties.

         In an effort  to  ensure  that the  yields  on its loan  portfolio  and
investments are  interest-rate  sensitive,  the Bank has implemented a number of
measures, including: (i) emphasis on origination of adjustable rate mortgages on
residential and commercial  properties;  (ii) origination of construction  loans
secured by residential  properties,  generally with terms for a one-year period;
and (iii)  origination of commercial and consumer loans having either adjustable
rates or relatively  short  maturities.  At September 30, 1998,  adjustable rate
loans  constituted  approximately  $329.0 million (or 77.5%) of the Bank's total
loan portfolio.  Therefore,  at such date, fixed rate loans comprised only 22.5%
of the total loan portfolio. These lending practices were adopted to shorten the
term of the  Bank's  assets  and make  the loan  portfolio  more  responsive  to
interest rate volatility.
<PAGE>
Loan Portfolio Analysis

     The following  table set forth the  composition of the  Corporation's  loan
portfolio by type of loan as of the dates indicated.
<TABLE>
<CAPTION>
                                                                                   At September 30,
                                                                -----------------------------------------------------
                                                                       1994                          1995             
                                                                -----------------------       ----------------------- 
                                                                Amount          Percent       Amount          Percent 
                                                                ------          -------       ------          ------- 
                                                                                (Dollars in thousands)
<S>                                                             <C>             <C>         <C>             <C>       
Mortgage loans:
 Construction..............................................     $ 23,222          6.67%      $27,905          7.34%   
 On existing property......................................      225,544         64.82       228,881         60.23    
 Income property (commercial)..............................       42,207         12.13        54,401         14.31    
Commercial business loans..................................       14,052          4.04        19,610          5.16    
Consumer loans:
  Mobile home..............................................        1,497           .43         1,204           .32    
  Automobiles..............................................        6,300          1.81         5,941          1.56    
  Equity lines of credit...................................       12,763          3.67        13,210          3.48    
  Other....................................................       22,373          6.43        28,887          7.60    
                                                                  ------          ----        ------          ----    

 Total loans and loans held for sale.......................     $347,958        100.00%     $380,039        100.00%   
                                                                                ======                      ======    

 Less:
  Loans in process.........................................      (13,087)                    (17,178)                 
  Deferred loan(fees)costs.................................         (343)                        (71)                 
   Allowance for loan losses...............................       (3,353)                     (3,578)                 
                                                                  ------                     -------                  

 Total loans net...........................................     $331,175                    $359,212                  
                                                                ========                    ========                  
<PAGE>
<CAPTION>
                                                                                     At September 30,
                                                                -------------------------------------------------------
                                                                         1996                            1997          
                                                                  ----------------------         ----------------------
                                                                  Amount         Percent         Amount         Percent
                                                                  ------         -------         ------         -------
                                                                                  (Dollars in thousands)
<S>                                                             <C>           <C>              <C>            <C>      
Mortgage loans:
 Construction..............................................      $34,566        8.65%          $ 34,216         7.93%  
 On existing property......................................      231,373       57.89            240,268        55.69   
 Income property (commercial)..............................       73,295       18.34             97,680        22.64   
Commercial business loans..................................       14,831        3.71             10,939         2.54   
Consumer loans:
  Mobile home..............................................        1,103         .28              1,291          .30   
  Automobiles..............................................        7,261        1.82              6,055         1.40   
  Equity lines of credit...................................       12,441        3.11             15,294         3.54   
  Other....................................................       24,776        6.20             25,714         5.96   
                                                                  ------        ----             ------         ----   

 Total loans and loans held for sale.......................     $399,646      100.00%          $431,457       100.00%  
                                                                              ======                          ======   

 Less:
  Loans in process.........................................      (18,589)                       (15,084)               
  Deferred loan(fees)costs.................................          286                            458                
   Allowance for loan losses...............................       (4,172)                        (4,902)               
                                                                 -------                        -------                

 Total loans net...........................................     $377,171                       $411,929                
                                                                ========                       ========                

<PAGE>
<CAPTION>
                                                                
                                                                ---------------------------
                                                                             1998
                                                                ---------------------------
                                                                    Amount          Percent
                                                                    ------          -------
                                                                
<S>                                                             <C>                <C>    
Mortgage loans:
 Construction..............................................     $ 31,261             7.09%
 On existing property......................................      254,161            57.63
 Income property (commercial)..............................       95,420            21.63
Commercial business loans..................................       14,848             3.37
Consumer loans:
  Mobile home..............................................          990              .22
  Automobiles..............................................        5,106             1.16
  Equity lines of credit...................................       18,655             4.23
  Other....................................................       20,567             4.67
                                                                  ------             ----

 Total loans and loans held for sale.......................     $441,008           100.00%
                                                                                   ======

 Less:
  Loans in process.........................................      (11,292)
  Deferred loan(fees)costs.................................          702
   Allowance for loan losses...............................       (5,668)
                                                                --------

 Total loans net...........................................     $424,750
                                                                ========
</TABLE>



<PAGE>
         Single  Family   Residential   Loans.  The  Bank  actively   originates
conventional loans to enable borrowers to purchase existing homes or residential
lots,  refinance existing mortgage loans or construct new homes.  Mortgage loans
originated by the Bank are  generally  long-term  loans,  amortized on a monthly
basis, with principal and interest due each month. The initial  contractual loan
payment period for single family residential loans typically range from 15 to 30
years. The Bank's experience indicates that real estate loans remain outstanding
for significantly  shorter periods than their contractual  terms.  Borrowers may
refinance or prepay loans at their  option,  subject to any  prepayment  penalty
provisions  included in the note.  The Bank  generally  requires  mortgage title
insurance on all single family residential mortgage loans.

         The Bank offers  adjustable rate mortgage loans ("ARMs"),  the interest
rates of which  generally  adjust  based upon  either the prime rate or treasury
securities  indices.  The interest  rates on ARMs  generally may not adjust more
than  1-2% per year and 4-6%  over  the  life of the  loan.  Based  upon  market
conditions,  the Bank may originate ARMs at below the fully  phased-in  interest
rate but  generally  qualifies  borrowers  at 2% above the initial rate when the
loan to value ratio exceeds 80%. Monthly  payments could increase  significantly
at the first repricing period. Although Coastal Federal's ARMs are beneficial in
helping  Coastal  Federal  improve the interest rate  sensitivity of its assets,
such loans may pose potential additional risks to Coastal Federal. A precipitous
increase  in  interest  rates  could be  expected  to result in an  increase  in
delinquencies or defaults on such loans. Whereas a significant decrease in rates
or a flat yield curve could cause repayments to increase significantly.

         Coastal Federal also offers  one-to-four  family residential loans with
fixed rates of  interest.  These loans  generally  can be sold in the  secondary
market  or are  portfolio  loans  where  the  Bank  offers  such  loans at rates
approximately 1% above conforming loan rates. A large majority of the conforming
fixed rate loans are generally sold to correspondent  banks servicing  released.
Loans sold to correspondents amounted to $38.4 and $64.8 million,  respectively,
in fiscal  1997 and  1998.  Coastal  Federal  sold  approximately  $5.8 and $6.9
million, respectively, of mortgages in 1997 and 1998 to FHLMC.

         At September  30, 1998,  approximately  $279.7  million or 65.9% of the
Bank's loan portfolio consisted of one-to-four family residential loans.

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

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

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

         At  September  30,  1998,  approximately  $31.3  million or 7.1% of the
Bank's gross loan portfolio  consisted of construction loans on both residential
($20.3 million) and commercial properties ($11.0 million).  Undisbursed proceeds
on these loans amounted to $11.3 million at September 30, 1998.

         Commercial Real Estate Loans.  The Bank may invest,  by OTS regulation,
in non-residential real estate loans up to 400% of its capital as computed under
GAAP plus  general loan loss  reserves.  At  September  30,  1998,  this limited
Coastal Federal's aggregate  non-residential  real estate loans to approximately
$178.6  million.  At such time, the Bank had  non-residential  real estate loans
outstanding of $95.4 million. The Bank will maintain a level of these loan types
within the guidelines set forth.  The commercial real estate loans originated by
the Bank are primarily secured by shopping centers, office buildings,  warehouse
facilities, retail outlets, hotels, motels and multi-family apartment buildings.
The interest rate of the commercial real estate loans  presently  offered by the
Bank  generally  adjusts  every one,  three or five years and is indexed to U.S.
Treasury  securities.  Such loans  generally have a fifteen to twenty year term,
with the  payments  based up to a similar  amortization  schedule.  The Bank may
require  the loan to include a call  option at the Bank's  option in five to ten
years.  The Bank generally  requires that such loans have a minimum debt service
coverage of 120% of projected net operating income together with other generally
accepted underwriting criteria.

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

         Consumer  Loans.  The Bank is permitted by OTS regulations to invest up
to 35% of its assets in consumer loans. The Bank currently offers a wide variety
of consumer loans on a secured and unsecured  basis  including home  improvement
loans,  loans secured by savings accounts and automobile,  truck and boat loans.
The Bank also offers a revolving line of credit secured by  owner-occupied  real
estate.  Total consumer  loans amounted to $45.3 million,  or 10.3% of the total
loan portfolio, at September 30, 1998.

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

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

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

         Coastal Federal has been making commercial business loans since 1983 on
both a secured and unsecured  basis with terms which generally do not exceed one
year.  The majority of these loans have interest rates which adjust with changes
in the prime rate as published in the Wall Street  Journal.  The Bank's non-real
estate  commercial  loans  primarily  consist of  short-term  loans for  working
capital  purposes,  seasonal  loans and lines of  credit.  The Bank  customarily
requires a personal  guaranty  of payment  by the  principals  of any  borrowing
entity and  reviews  the  financial  statements  and  income tax  returns of the
guarantors.  At September 30, 1998,  the Bank had $14.8 million  outstanding  in
commercial  business loans,  which  represented  approximately  3.4% of its loan
portfolio.

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

         The  following  table sets forth certain  information  at September 30,
1998  regarding  the  dollar  amount of loans  maturing  in the  Company's  loan
portfolio  based on their  contractual  terms to  maturity  but does not include
scheduled  payments or potential  prepayments.  Demand  loans  (without a stated
maturity),  loans having no stated schedule of repayments and no stated maturity
and overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
                                                                  More than           More than             More than  
                                                                  One Year            Three Years           Five Years 
                                                One Year          Through             Through               Through    
                                                or Less           Three Years         Five Years            Ten Years  
                                                --------          -----------         ----------            ---------  
                                                                           (In thousands)
<S>                                             <C>               <C>                  <C>                  <C>        
First mortgage loans........................    $21,841           $ 7,040               $4,011              $14,742    
Other residential and.......................
 non-residential ...........................     20,074             8,249                2,438                9,635    
Equity lines of credit......................     18,655                --                   --                   --    
Consumer loans..............................      8,613             7,876                7,130                  942    
Commercial loans............................      6,991             4,301                1,141                  677    
                                                -------           -------              -------              -------    
     Total loans............................    $76,174           $27,466              $14,720              $25,996    
                                                =======           =======              =======              =======    

<CAPTION>
                                                More than
                                                Ten Years
                                                Through              Over
                                                Twenty Years         Twenty Years             Totals
                                                ------------         ------------             ------
                                                                    (In thousands)
<S>                                              <C>                    <C>                  <C>     
First mortgage loans........................      $60,567               $161,463             $269,664
Other residential and.......................
 non-residential ...........................       53,307                  2,117               95,820
Equity lines of credit......................           --                     --               18,655
Consumer loans..............................        1,202                     --               25,763
Commercial loans............................        1,445                    293               14,848
                                                 --------               --------             --------
     Total loans............................     $116,521               $163,873             $424,750
                                                 ========               ========             ========
</TABLE>
<PAGE>
         The following table sets forth the dollar amount of all loans due after
one year at September 30, 1998 which have fixed  interest  rates and those which
have floating or adjustable interest rates.
<TABLE>
<CAPTION>
                                                         Fixed                      Floating or
                                                         Rates                    Adjustable Rates                 Totals
                                                         -----                    ----------------                 ------
                                                                                   (In thousands)
<S>                                                     <C>                           <C>                         <C>     
First mortgage loans.........................           $46,190                       $228,068                    $274,258
Other residential and
 non-residential.............................            10,097                         50,649                      60,746
Consumer loans...............................             9,795                            365                      10,160
Commercial loans.............................             5,042                          2,815                       7,857
                                                        -------                       --------                    --------
     Total loans.............................           $71,124                       $281,897                    $353,021
                                                        =======                       ========                    ========
</TABLE>

<PAGE>

Interest Rate Sensitivity Analysis

         The following table illustrates the repricing analysis of the Company's
interest-earning  assets and  interest-bearing  liabilities  as of September 30,
1998.  For purposes of the table,  repricing  characteristics  of loans  include
estimated annual prepayment rates.
<TABLE>
<CAPTION>
                                                                       Zero to            Four Months          One Year to  
                                                                    Three Months          to One Year          Five Years   
                                                                    ------------          -----------          ----------   
                                                                                        (In thousands)
<S>                                                                    <C>                   <C>                  <C>       
Rate Sensitive Assets(1):
 Mortgage loans and
  mortgage-backed securities..........................                   $44,616             $305,428             $191,205  
 Non-mortgage loans...................................                     7,645                2,676                8,384  
 Interest-bearing deposits and
  investment securities...............................                     9,650                  126                3,753  
                                                                         -------             --------             --------  
     Total............................................                   $61,911             $308,230             $203,342  
                                                                         =======             ========             ========  

Rate Sensitive Liabilities:
 Core deposits(2).....................................                   $48,831              $83,668              $65,014  
 Time deposits........................................                    69,270               57,936               27,947  
 Borrowings...........................................                    84,061                   94              125,575  
                                                                        --------             --------             --------  
     Total............................................                  $202,162             $141,698             $218,536  
                                                                        ========             ========             ========  

Off-Balance Sheet Positions:
Commitments to originate
  mortgage loans......................................                    $6,574                $(812)             $(6,540) 

Interest rate sensitivity gap.........................                 $(145,946)            $176,069             ($18,995) 

Cumulative interest
 sensitivity gap......................................                 $(145,946)             $30,123              $11,128  

Cumulative interest sensitivity
 gap as a percent of total assets                                         (22.84%)               4.71%                1.74% 
<PAGE>
<CAPTION>
                                                                    Greater than
                                                                     Five Years        Total
                                                                     ----------        -----
                                                                          (In thousands)
<S>                                                                   <C>              <C>    
Rate Sensitive Assets(1):                                                             
 Mortgage loans and                                                                  
  mortgage-backed securities..........................                $34,977          $576,226
 Non-mortgage loans...................................                     --            18,705
 Interest-bearing deposits and                                                       
  investment securities...............................                     --            13,529
                                                                      -------          --------
     Total............................................                $34,977          $608,460
                                                                      =======          ========
                                                                                     
Rate Sensitive Liabilities:                                                          
 Core deposits(2).....................................                $33,655          $231,168
 Time deposits........................................                     --           155,153
 Borrowings...........................................                    830           210,560
                                                                      -------          --------
     Total............................................                $34,485          $596,881
                                                                      =======          ========
                                                                                     
Off-Balance Sheet Positions:                                                         
Commitments to originate                                                             
  mortgage loans......................................                   $737              (41)
                                                                                     
Interest rate sensitivity gap.........................                 $1,838          $12,966
                                                                                     
Cumulative interest                                                                  
 sensitivity gap......................................                $12,966               --
                                                                                     
Cumulative interest sensitivity                                                      
 gap as a percent of total assets                                       2.03%               --
</TABLE>

(1)      Prepayments  have been  applied to all loans.  Prepayment  speeds  vary
         according to the instrument's original maturity, coupon rate and age.

(2)      Decay rates have been applied to all core deposits as follows:

<TABLE>
<CAPTION>
                                                  NOW              MMDA              Passbook          Non-interest
                                                Accounts         Accounts            Accounts             Demand
                                                --------         --------            --------             ------
<S>                                                <C>             <C>                <C>                  <C>    
    Percent Repricing:
    1 - 12 months............................       37.00%          79.00%             17.00%               37.00%
    13 - 36 months...........................       33.87           11.00              25.82                33.87
    37 - 60 months...........................        9.06            5.24              16.83                 9.06
    Over 60 months...........................       20.07            4.76              40.35                20.07
                                                   ------          ------             ------               ------ 
    Total....................................      100.00%         100.00%            100.00%              100.00%
                                                   ======          ======             ======               ====== 
</TABLE>
<PAGE>
Interest Rate Sensitivity of Net Portfolio Value

         The table below measures interest rate risk by estimating the change in
market value of the Bank's assets, liabilities,  and off-balance sheet contracts
in response to an  instantaneous  change in the general level of interest rates.
The procedure  for  measuring  interest rate risk was developed by the Office of
Thrift Supervision ("OTS") to replace the "gap" analysis (the difference between
interest-earning assets and interest-bearing  liabilities that mature or reprice
within a specific  time  period)  used  previously  by the OTS.  The model first
estimates  the level of the Bank's  market  value of portfolio  equity  ("MVPE")
(market  value of assets,  less market value of  liabilities,  plus or minus the
market value of any off-balance sheet items) under the current rate environment.
In general,  market values are estimated by discounting the estimated cash flows
of each instrument by appropriate  discount rates.  The model then  recalculates
the Bank's MVPE under  different  interest  rate  scenarios.  The change in MVPE
under the  different  interest rate  scenarios  provides a measure of the Bank's
exposure   to  interest   rate  risk.   Due  to  OTS   reporting   requirements,
classifications  may vary from GAAP  reporting.  Further,  this  report does not
include assets owned by the Company not included in the Bank. The data presented
below is as of September 30, 1998.  This  information is an estimate and may not
be indicative  of actual  market  values or the actual  changes in market values
should rates change significantly at a future date.
<TABLE>
<CAPTION>
                               -400          -300          -200            -100                            +100           +200    
                               Basis         Basis         Basis           Basis           No              Basis          Basis   
                               Points        Points        Points          Points          Change          Points         Points  
                               ------        ------        ------          ------          ------          ------         ------  
                                                                    (In thousands)                                                
<S>                            <C>           <C>           <C>              <C>            <C>             <C>            <C>     
ASSETS                                                                                                                            
Mortgage loans and                                                                                                                
 securities...........        $616,973      $608,750      $601,400         $594,893       $588,542        $580,947       $571,005 
Non-mortgage loans....          19,863        19,664        19,471           19,281         19,097          18,919         18,744 
Cash, deposits and
 securities...........          27,367        27,329        27,298           27,272         27,245          27,220         27,193 
Repossessed assets....              43            43            43               43             43              43             43 
Premises and equipment           8,848         8,848         8,848            8,848          8,848           8,848          8,848 
Other assets..........           9,393        10,591        11,821           13,733         16,324          20,068         24,328 
                                 -----        ------        ------           ------         ------          ------         ------ 
TOTAL.................         682,487       675,225       668,881          664,070        660,099         656,045        650,161 
                               =======       =======       =======          =======        =======         =======        ======= 

LIABILITIES
Deposits..............        $392,861      $391,857      $390,872         $389,908       $388,954        $388,021       $387,102 
Borrowings............         220,623       216,796       213,109          209,554        206,127         202,820        199,629 
Other liabilities.....           6,466         6,466         6,466            6,466          6,466           6,466          6,466 
                               -------       -------       -------          -------        -------         -------        ------- 
TOTAL.................         619,950       615,119       610,446          605,928        601,547         597,307        593,197 
                               =======       =======       =======          =======        =======         =======        ======= 

OFF BALANCE SHEET
 POSITIONS............         $ 3,267        $2,459        $1,706          $ 1,001           $429             $89          $(166)

MARKET VALUE OF
 PORTFOLIO EQUITY.....         $65,804       $62,565       $60,141          $59,143        $58,981         $58,827        $56,798 
<PAGE>
<CAPTION>
                                +300           +400
                                Basis          Basis
                                Points         Points
                                ------         ------
                                   (In thousands)                                                                      
<S>                            <C>              <C>    
ASSETS                                      
Mortgage loans and                          
 securities...........        $559,059         $545,869
Non-mortgage loans....          18,575           18,409
Cash, deposits and
 securities...........          27,163           27,125
Repossessed assets....              43               43
Premises and equipment           8,848            8,848
Other assets..........          28,351           32,149
                                ------           ------
TOTAL.................         642,039          632,443
                               =======          =======

LIABILITIES
Deposits..............        $386,195         $385,308
Borrowings............         196,548          193,572
Other liabilities.....           6,466            6,466
                               -------          -------
TOTAL.................         589,209          585,347
                               =======          =======

OFF BALANCE SHEET
 POSITIONS............           $(374)           $(570)

MARKET VALUE OF
 PORTFOLIO EQUITY.....         $52,456          $46,526
</TABLE>

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

         Detailed loan  applications  are obtained to determine  the  borrower's
ability  to repay,  and the more  significant  items on these  applications  are
verified   through  the  use  of  credit  reports,   financial   statements  and
confirmations through verification forms. After analysis of the loan application
and property or collateral  involved,  including an appraisal of the property by
independent appraisers approved by the Bank's Board of Directors and reviewed by
the Bank's underwriter,  a lending decision is made by the Bank. With respect to
commercial  loans,  the Bank also reviews the capital  adequacy of the business,
the ability of the  borrower  to repay the loan and honor its other  obligations
and  general  economic  and  industry  conditions.  All loan  applications  over
$500,000  require the approval of the Bank's Internal Loan  Committee,  Director
Gerald and Executive Vice Presidents Rexroad and Stalvey.  All loan applications
greater than $1,000,000  require the approval of the Bank's Loan Committee which
consists of  Directors  Clemmons,  Gerald,  Smart,  Springs and  Executive  Vice
Presidents  Rexroad and Stalvey.  All first mortgage loan applications in excess
of 97% of the appraised value of the property, unless the borrowers have private
mortgage insurance, must be approved by the Banks' Loan Committee.

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

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

         Loan  Originations,  Purchases  and  Sales.  The Bank is  qualified  to
service loans for FHLMC and FNMA.  Depending  upon  interest  rates and economic
conditions,  the Bank has sold  loans in order to provide  additional  funds for
lending,  to generate  servicing  fee income,  and to decrease the amount of its
long-term,  fixed rate loans in order to minimize the gap between the maturities
of its  interest-earning  assets  and  interest-bearing  liabilities.  The  Bank
generally  continues to collect payments on the loans, to supervise  foreclosure
proceedings,  if necessary, and to otherwise service the loans. The Bank retains
a portion of the interest paid by the borrower on the loans as consideration for
its servicing  activities.  At September 30, 1998, the Bank was servicing  loans
sold to others with a principal balance of approximately $88.0 million. Sales of
whole loans and  participation  interests by the Bank are made without  right of
recourse  to the Bank by the buyer of the loans in the event of  default  by the
borrower.  The  majority of the loans sold during the year ended  September  30,
1998 were conforming  conventional  loans originated and sold by Coastal Federal
Mortgage.  These loans were sold on a servicing released basis. At September 30,
1998,  the  Bank's  consolidated  loan  portfolio  included  purchased  loans of
approximately $23.0 million,  which have been primarily secured by single family
residences  and  which  have been  written  as  adjustable  rate  mortgage  loan
instruments.  These loans are  generally  secured by  properties  located in the
Southeast and were  purchased  according to the Bank's  non-conforming  mortgage
loan underwriting standards.
<PAGE>
Loans Originated, Purchased and Sold

     The  following  table  shows total loans  originated,  purchased,  sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
                                                      Year Ended September 30,
                                                -----------------------------------
                                                   1996         1997         1998
                                                ---------    ---------    ---------
                                                           (In thousands)
<S>                                             <C>          <C>            <C>    
Loans receivable net, at the beginning of the
 period .....................................   $ 359,212    $ 377,171      411,929
                                                ---------    ---------    ---------

Loans originated:
 Construction ...............................      38,172       45,986       62,805
 Residential ................................      60,683       59,289       70,588
 Nonresidential .............................      11,897       13,794       23,622
 Land .......................................       8,355       10,308       20,025
 Commercial business ........................      23,062       33,730       16,076
 Consumer ...................................      18,201       15,396       12,136
                                                ---------    ---------    ---------
     Total loans originated .................     160,370      178,503      205,252
                                                ---------    ---------    ---------

Loans purchased, primarily single
family residential mortgages ................      12,448        9,948       10,442
                                                ---------    ---------    ---------

Loans sold ..................................     (40,672)     (44,160)     (71,674)
                                                ---------    ---------    ---------

Loan principal repayments and other .........    (112,926)    (109,946)    (130,286)
                                                ---------    ---------    ---------

Other .......................................      (1,261)         413         (913)
                                                ---------    ---------    ---------

Loans receivable net, at end of period ......   $ 377,171    $ 411,929    $ 424,750
                                                =========    =========    =========
</TABLE>
<PAGE>
         Loan Commitments.  The Bank, upon the submission of a loan application,
generally  provides  a  45-day  written  commitment  as  to  the  interest  rate
applicable  to such loan.  If the loan has not been closed  within 45 days,  the
rate may be adjusted to reflect current market conditions at the Bank's option.

         Loans which require  closing time in excess of 45 days from the date of
application are issued a written  commitment,  with a term ranging from three to
six months. For fixed rate loans, the Bank either charges a higher interest rate
on the loan or may  charge up to one point to lock in the rate for 180 days.  At
September 30, 1998,  the Company had loan  commitments  of  approximately  $11.5
million.

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

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

         Problem  Assets  and  Asset  Classification.  Loans are  reviewed  on a
regular basis and a reserve for  uncollectible  interest is established on loans
where collection of interest is  questionable,  generally when such loans become
90 days  delinquent.  Loan balances that relate to interest amounts reserved are
considered  to be on a  nonaccrual  basis.  Typically,  payments  received  on a
nonaccrual  loan are  applied  to the  outstanding  principal  and  interest  as
determined at the time of collection of the loan.
<PAGE>
         The following table sets forth  information  with respect to the Bank's
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
                                                                    At September 30,
                                               -------------------------------------------------------------
                                               1994          1995           1996          1997          1998
                                               ----          ----           ----          ----          ----
                                                                  (Dollars in thousands)
<S>                                            <C>          <C>            <C>            <C>         <C>   
Loans accounted for on a nonaccrual basis:
Real estate -
   Residential............................     $   79        $  999          $ 307         $  71       $  222
   Commercial...............................    1,056           134             --            --           --
   Commercial business......................       --           154             60            99        1,962
   Consumer.................................       16            36             78            87           73
                                               ------        ------           ----          ----       ------
    Total...................................    1,151         1,323            445           257        2,257
                                               ------        ------           ----          ----       ------

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

Restructured loans.........................        --            --             --            --           --
Real estate owned...........................      781           789            323           250           35
Other nonperforming
 assets.....................................       --            --             --            --           --
                                               ------        ------           ----          ----       ------
Total nonperforming
 assets.....................................   $1,932        $2,112           $768          $507       $2,292
                                               ======        ======           ====          ====       ======

Total nonaccrual loans to net
 loans......................................     .03%          .36%             .12%         .06%        .54%

Total nonaccrual loans to total
 assets.....................................     .03%          .33%             .10%         .05%        .35%

Total nonperforming assets
 to total assets............................     .56%          .53%             .17%         .10%        .36%
</TABLE>
------------

         For the year ended September 30, 1998, interest income which would have
         been recorded would have been approximately  $181,000, had non-accruing
         loans been current in accordance with their original terms.  There were
         no impaired loans at September 30, 1997. There was one impaired loan at
         September 30, 1998.
<PAGE>
         The  allowance  for  uncollectible  interest  which is  netted  against
accrued interest  receivable  totaled $36,000 and $202,000 at September 30, 1997
and 1998, respectively.

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

         Coastal  Federal had three  individual  classified  assets in excess of
$500,000 as of September 30, 1998. At that date,  classified  assets amounted to
$8.6 million  ($5.4 million  substandard;  $124,000  doubtful;  and $3.1 million
special  mention).  Substandard  assets consist primarily of two commercial real
estate loans with balances of approximately  $3.7 million at September 30, 1998.
Special mention assets consist primarily of one commercial real estate loan with
a  balance  of  approximately  $1.6  million  at  September  30,  1998.  The two
substandard loans are fully secured by real estate.

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

         The Bank's  management  evaluates the need to establish  allowances for
losses on loans and other assets each year based on estimated losses on specific
loans and on any real estate held for sale or investment  when a finding is made
that a significant  decline in value has occurred.  Such  evaluation  includes a
review of all loans for which full  collectibility may not be reasonably assured
and considers, among other matters, the estimated market value of the underlying
collateral of problem  loans,  prior loss  experience,  economic  conditions and
overall  portfolio  quality.  Additions to the  allowance for losses are charged
against  earnings  in the  year  they  are  established.  The  Bank  established
provisions for losses on loans for the years ended  September 30, 1996, 1997 and
1998 of $790,000, $760,000 and $865,000, respectively. As a result, the Bank has
a $5.7 million allowance for loan losses as of September 30, 1998. The allowance
as a percentage of loans  receivable was 1.33% at September 30, 1998 compared to
1.19%  at  September  30,  1997.  See  "Management's   Discussion  and  Analysis
--Non-Performing  Assets and  --Allowance  for Loan  Losses" in the 1998  Annual
Report to Stockholders attached hereto and incorporated by reference.

         While the Bank believes it has established  its existing  allowance for
loan losses in  accordance  with GAAP at  September  30,  1998,  there can be no
assurance  that  regulators,  when  reviewing  the Bank's loan  portfolio in the
future,  will not request the Bank to  significantly  increase its allowance for
loan losses,  thereby  adversely  affecting the Bank's  financial  condition and
earnings.
<PAGE>
Loan Loss Allowance Analysis

    The following  table sets forth an analysis of the  Company's  allowance for
loan losses for the periods  indicated.  Where  specific loan loss reserves have
been established, any difference between the loss reserve and the amount of loss
realized has been charged or credited to the loan loss allowance as a charge-off
or recovery.
<TABLE>
<CAPTION>
                                                       Year Ended September 30,
                                        -----------------------------------------------------
                                          1994        1995        1996       1997      1998
                                        -------     -------     -------    -------    -------
                                                     (Dollars in thousands)
<S>                                     <C>         <C>         <C>        <C>        <C>    
Allowance at beginning of
 period .............................   $ 2,753     $ 3,353     $ 3,578    $ 4,172    $ 4,902
Allowance recorded on
 acquired loans .....................      --          --          --          110        109
Provision for loan losses ...........       510         202         790        760        865
                                        -------     -------     -------    -------    -------
Recoveries:
 Residential real estate ............         3         232        --           20          7
 Commercial real estate .............       148          11          75         14          1
 Real estate construction ...........      --          --          --         --         --
 Consumer ...........................        79          12           7         38         56
                                        -------     -------     -------    -------    -------
   Total recoveries .................       230         255          82         72         64
                                        -------     -------     -------    -------    -------

Charge-offs:
 Residential real estate ............        38         206          24         46         28
 Commercial real estate .............        13          18         216       --           17
 Real estate construction ...........      --          --          --         --         --
 Consumer ...........................        89           8          38        166        227
                                        -------     -------     -------    -------    -------
   Total charge-offs ................       140         232         278        212        272
                                        -------     -------     -------    -------    -------
   Net charge-offs (recoveries) .....       (90)        (23)        196        140        208
                                        -------     -------     -------    -------    -------
 Allowance at end of period .........   $ 3,353     $ 3,578     $ 4,172    $ 4,902    $ 5,668
                                        =======     =======     =======    =======    =======

Ratio of allowance to net
 loans outstanding at the
 end of the period ..................      1.01%       1.00%       1.11%      1.19%      1.33%

Ratio of net charge-offs (recoveries)
 to average loans outstanding
 during the period ..................      (.03%)      (.01%)       .05%       .04%       .05%
</TABLE>
<PAGE>
Loan Loss Allowance by Category

           The  following  table sets forth the  breakdown of the  allowance for
loan losses by loan category for the periods indicated.
<TABLE>
<CAPTION>
                                                                              September 30,
                                   -------------------------------------------------------------------
                                               1994                              1995                 
                                   --------------------------------- ---------------------------------
                                             As a %      Loan Type             As a %      Loan Type  
                                             of out-     As a %                of out-     As a %     
                                             standing    of out-               standing    of out-    
                                             loans in    standing              loans in    standing   
                                   Amount    category    loans       Amount    category    loans      
                                   ------    --------    --------    ------    --------    --------   
                                             (Dollars in thousands)
<S>                                <C>       <C>        <C>         <C>          <C>        <C>       
Real Estate -- mortgage
  Residential.................      $ 742     .30%       75.05%      $ 803        .31%       72.03%   
  Commercial....................    2,296    5.58        11.94       2,371       4.36         4.17    
  Consumer......................      315     .71        13.01         404        .80         3.80    
                                    -----               ------       -----                  ------    
  Total allowance for                                                                                 
   loan losses..................   $3,353    1.01%      100.00%     $3,578       1.00%      100.00%   
                                   ======               ======      ======                  ======    
<CAPTION>
                                                                         September 30,
                              -----------------------------------------------------------------------------------------------------
                                           1996                              1997                               1998
                              ---------------------------------  ---------------------------------  -------------------------------
                                         As a %      Loan Type             As a %      Loan Type             As a %       Loan Type
                                         of out-     As a %                of out-     As a %                of out-      As a %
                                         standing    of out-               standing    of out-               standing     of out-
                                         loans in    standing              loans in    standing              loans in     standing
                               Amount    category    loans       Amount    category    loans        Amount   category     loans
                               ------    --------    --------    ------    --------    --------     ------   --------     --------
                                                                   (Dollars in thousands)
<S>                           <C>          <C>      <C>          <C>          <C>     <C>          <C>          <C>       <C>    
Real Estate -- mortgage
  Residential................ $  837        .37%     65.35%      $1,064        .41%    63.56%      $1,375        .47       68.60
  Commercial.................  2,875       3.80      22.34        3,261       2.78     28.52        3,685       3.30       26.32
  Consumer...................    460       1.01      12.31          577       1.77      7.92          608       2.82        5.08
                              ------                 -----       ------               ------       ------                 ------
  Total allowance for                                                                                                   
   loan losses............... $4,172       1.11%    100.00%      $4,902       1.19%   100.00%      $5,668       1.33%     100.00%
                              ======                ======       ======               ======       ======                 ======
</TABLE>
<PAGE>
Investment Activities

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

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

         Investment  decisions  are made by the  Investment  Officer who reports
quarterly  to  the  Asset/Liability  Committee  ("ALCO  Committee").   The  ALCO
Committee  meets  quarterly  and consists of Directors  Benton,  Creel,  Bishop,
Springs, Clemmons and Gerald, Chief Financial Officer Rexroad and Executive Vice
Presidents  Graham,  Sherry  and  Stalvey  and Vice  President  Loehr.  The ALCO
Committee  acts  within  policies  established  by the  Board of  Directors.  At
September  30,  1998,  the Bank's  investment  portfolio  had a market  value of
approximately  $180.0 million.  The investment  securities  portfolio  consisted
primarily of U.S. Government agency securities and  mortgage-backed  securities.
For further information concerning the Bank's securities portfolio,  see Notes 2
and 3 of the Notes to  Consolidated  Financial  Statements  attached  hereto and
incorporated by reference.
<PAGE>
Securities Analysis

         The following table sets forth Coastal Federal's investment  securities
portfolio at amortized cost at the dates indicated.
<TABLE>
<CAPTION>
                                                                                   September 30,
                                            ----------------------------------------------------------------------------------------
                                                       1996                             1997                          1998
                                            --------------------------      --------------------------       -----------------------
                                            Amortized       Percent of      Amortized       Percent of       Amortized    Percent of
                                             Cost(1)        Portfolio        Cost(1)        Portfolio         Cost(1)      Portfolio
                                            ---------       ----------      ---------       ----------       ---------    ----------
                                                                              (Dollars in thousands)
<S>                                          <C>             <C>             <C>             <C>             <C>             <C>    
U.S. Government agency
securities:
  FHLMC ............................        $   --             --  %         $   995           3.82%         $  --             --  %
  FHLB .............................          17,334          98.13           17,738          67.89            8,840          90.64
  FNMA .............................            --             --               --             --               --             --
  FFCB .............................            --             --              7,391          28.29              912           9.36
  Municipal ........................             330           1.87             --             --               --             --
                                             -------         ------          -------         ------          -------         ------

   Total ...........................         $17,664         100.00%         $26,124         100.00%         $ 9,752         100.00%
                                             =======         ======          =======         ======          =======         ======
</TABLE>
-------------
(1)      The market value of the Bank's investment securities portfolio amounted
         to $17.5 million, $26.2 million and $9.8 million at September 30, 1996,
         1997 and 1998, respectively.
<PAGE>

         The  following  table  sets  forth the final  maturities  and  weighted
average yields of the securities at amortized cost at September 30, 1998.
<TABLE>
<CAPTION>
                                                Less Than                       One to                           Five to
                                                 One Year                      Five Years                       Ten Years
                                            ---------------------       ------------------------        ------------------------
                                            Amount         Yield        Amount             Yield         Amount            Yield
                                            ------         -----        ------             -----         ------            -----
                                                                  (Dollars in thousands)
<S>                                          <C>            <C>         <C>                <C>            <C>              <C>  
U.S. Government agency
securities................................   $ --            --%        $   --               --%          $   --             --%
  FHLMC...................................     --            --             --               --               --             --
  FHLB...................................      --            --          2,141             6.48            6,699           8.48
  FNMA...................................      --            --             --               --               --             --
  FFCB...................................      --            --            912             7.07               --             --
  Municipal...............................     --            --             --               --               --             --
                                             ----           ---         ------             ----           ------           ----
                                                                      
     Total................................   $ --            --%        $3,053             6.74%          $6,699           8.48%
                                             ====           ===         ======             ====           ======           ====
</TABLE>
<PAGE>
         The  following  table  sets  forth  Coastal  Federal's  mortgage-backed
securities portfolio at amortized cost at the dates indicated.
<TABLE>
<CAPTION>
                                                                                     September 30,
                                                       1996                              1997                         1998
                                               -------------------------      -------------------------      -----------------------
                                               Amortized      Percent of      Amortized      Percent of      Amortized    Percent of
                                                Cost(1)       Portfolio        Cost(1)       Portfolio        Cost(1)      Portfolio
                                               ---------      ----------      ---------      ----------      ---------    ----------
                                                                               (Dollars in thousands)
<S>                                            <C>             <C>            <C>             <C>            <C>             <C>    
Mortgage-Backed Securities:
  FHLMC ...............................        $ 18,861         70.75%        $ 14,048         62.79%        $ 24,901         14.69%
  FNMA ................................           2,469          9.26            1,861          8.31           95,024         56.05
  GNMA ................................           5,330         19.99            6,471         28.90           49,586         29.26
                                               --------        ------         --------        ------         --------        ------

   Total ..............................        $ 26,660        100.00%        $ 22,380        100.00%        $169,511        100.00%
                                               ========        ======         ========        ======         ========        ======
</TABLE>
------
(1)      The market  value of the Bank's  mortgage-backed  securities  portfolio
         amounted  to  $27.0  million,  $23.0  million  and  $170.2  million  at
         September 30, 1996, 1997 and 1998, respectively.

         The  following  table sets forth the  maturities  and weighted  average
yields of the securities at September 30, 1998.
<TABLE>
<CAPTION>
                                                Less Than            One to                Five to             Ten Years       
                                                 One Year           Five Years            Ten Years          and Thereafter   
                                            ---------------     ------------------    ----------------    ------------------- 
                                            Amount    Yield     Amount       Yield    Amount     Yield    Amount        Yield 
                                            ------    -----     ------       -----    ------     -----    ------        ----- 
                       (Dollars in thousands)                                      
<S>                                          <C>      <C>       <C>          <C>       <C>       <C>      <C>           <C>
Mortgage-Backed Securities: ..............
  FHLMC...................................   $ --      --%      $  --        --%       $ --      --%       $24,901      6.64%
  FNMA....................................     --      --          --        --          --      --         95,024      5.55
  GNMA....................................     --      --          --        --          --      --         49,586      6.85
                                             ----     ---        ----        ---       ----     ---       --------      ----

Total.....................................   $ --      --%      $  --        --%       $ --      --%      $169,511      6.09%
                                             ====     ===       =====       ===        ====     ===       ========      ====

</TABLE>

<PAGE>

Service Corporation Activities

         Coastal  Federal  has one  wholly-owned  service  corporation:  Coastal
Mortgage  Bankers and Realty Co., Inc.  "Coastal  Mortgage  Bankers,"  which was
incorporated in 1970 under the laws of South Carolina.
<TABLE>
<S>                                     <C>

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

--------------

*        For a description of these  subsidiaries,  see "Real Estate Development
         Activities."

(1)      First  tier  operating  subsidiary  of  Coastal  Federal  Savings  Bank
         consolidated   with  Coastal   Federal   Savings  Bank  for  regulatory
         reporting.  On December 10, 1998 Coastal Federal exchanged its stock of
         Coastal Real Estate Investment  Corporation for 100% of the outstanding
         stock of Coastal Federal Holding Corporation.
<PAGE>
Real Estate Development Activity

         With the  exception  of one  project,  for  which a joint  venture  was
created to dispose of real estate acquired through foreclosure,  the Corporation
has not entered into any new real estate  activity  since 1984 and has, in fact,
almost eliminated its investment in these real estate activities.  These efforts
are  reflected  in the  reduction  of  Corporation's  investment  and  loans  to
subsidiaries  from $8.5 million at September  30, 1987 to zero at September  30,
1998.

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

         The  following  table  summarizes  the balances of  permanent  loans to
individual  unit  purchasers,   by  project,  at  September  30,  1998  (net  of
participation's sold to other financial institutions).
<TABLE>
<CAPTION>
                                                                                  Slow Loans(1)
                                Number of             Total                   ---------------------
Project                         Borrowers             Amount                  Number         Amount
-------                         ---------             ------                  ------         ------
<S>                              <C>               <C>                        <C>            <C>

Beach Cove                          78             $4,629,418                   1            $87,546
Condominium
North Myrtle Beach,
South Carolina

Bluewater                          100             $4,060,624                   1            $54,118
Condominium
Myrtle Beach,
South Carolina

Cobblestone Villas                  50             $1,773,774                  --              $  --
Condominium
Myrtle Beach,
South Carolina

Carolina Pines                      13             $  347,465                  --              $  --
Condominium
Conway, South Carolina
</TABLE>
----------------
(1)  Loans over 60 days delinquent
<PAGE>
         In most cases,  development  was  undertaken  through joint ventures in
which a subsidiary of Coastal Mortgage Bankers made an equity investment and, as
a partner,  participated in the profits or losses of the joint ventures. Coastal
Federal generally made loans to the joint ventures, subject to Coastal Federal's
underwriting  standards and policies and generally with the personal  guarantees
of  the  partners.   Generally,  Coastal  Federal  sold  participations  in  the
construction  loans,  which  had  interest  and fees at market  rates,  to other
financial institutions.

Deposit Activities and Other Sources of Funds

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

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

     The  following  table sets forth the  balances  of savings  deposits in the
various types of savings accounts offered by the Bank at the dates indicated.
<TABLE>
<CAPTION>
                                                                                At
                                                                           September 30,
                                    ------------------------------------------------------------------------------------------------
                                              1996                             1997                                1998
                                    ----------------------------  --------------------------------   -------------------------------
                                             Percent                          Percent                            Percent
                                               of      Increase                 of       Increase                  of      Increase
                                    Amount    Total   (Decrease)   Amount      Total    (Decrease)    Amount      Total   (Decrease)
                                    ------    -----   ----------   ------      -----    ----------    ------      -----   ----------
                                                                      (Dollars in thousands)
<S>                               <C>         <C>      <C>      <C>         <C>          <C>        <C>        <C>        <C>    
Transaction accounts:
  NOW checking.................... $35,654     11.38%   $5,802    $38,773     11.17%      $3,119      42,434      10.99      3,661
  Commercial checking.............  19,926      6.36     3,432     23,765      6.85        3,839      27,285       7.06      3,520
                                    ------    ------     -----    -------      ----        -----      ------      -----      -----

Total transaction accounts........  55,580     17.74     9,234      62,538     18.02       6,958      69,719      18.05      7,181
                                    ------    ------     -----      ------     -----       -----      ------      -----      -----

Money market demand accounts......  84,997     27.12    43,481     104,476     30.10      19,479     124,207      32.15     19,731
Savings accounts..................  42,840     13.66    (3,581)     39,445     11.36      (3,395)     37,242       9.64     (2,203)

Fixed-rate certificates
 (original maturity):
 3 months.........................   2,122       .68    (1,309)      1,826       .53        (296)      2,045        .53        219
 6 months.........................  23,479      7.49    13,957      22,185      6.39      (1,294)     25,563       6.62      3,378
 9 months.........................   9,293      2.96   (17,458)      7,342      2.12      (1,951)      5,396       1.40     (1,946)
 12 months........................  47,059     15.01   (10,256)     43,901     12.64      (3,158)     46,121      11.94      2,220
 18 months........................  20,981      6.69     8,555      32,250      9.29      11,269      35,140       9.10      2,890
 24 months........................   4,049      1.29       204       7,390      2.13       3,341      17,348       4.49      9,958
 30 months........................   2,189       .70       403       4,809      1.39       2,620       6,558       1.70      1,749
 36 months........................   8,944      2.85      (560)      9,215      2.65         271       4,740       1.23     (4,475)
 48 months........................   4,728      1.51       115       5,664      1.63         936       6,852       1.77      1,188
 96 months........................      26       .01         2          27       .01           1          29        .01          2
                                   -------    ------     -----     ------    ------      ------      -------      -----     ------
 .................................. 122,870     39.20    (6,347)    134,609     38.78      11,739     149,792      38.77     15,183
                                   -------    ------    -------    -------    ------      ------     -------      -----     ------

Variable rate certificates:
 (original maturity)
 18 months........................   4,593      1.47    (2,507)    3,678      1.06          (915)      3,137        .81      (541)
 30 months........................   2,550       .81        51     2,370       .68          (180)      2,224        .58      (146)
                                     -----    ------    ------      -----    ------      -------       -----   --------     -----
Total variable....................   7,143      2.28    (2,456)    6,048      1.74        (1,095)      5,361       1.39      (687)
                                     -----    ------    -------    -----    ------       -------       -----   --------     -----

Total certificates................ 130,013     41.48    (8,803)  140,657     40.52        11,644     155,153      40.16    14,496
                                   -------    ------    -------  -------    ------        ------     -------   --------    ------

Total deposits....................$313,430    100.00%  $40,331  $347,116    100.00%      $33,686    $386,321   100.00%    $39,205
                                  ========    ======   =======  ========    ======       =======    ========   =======    =======
</TABLE>
<PAGE>
Time Deposits by Maturity and Rate

    The following table sets forth the amount and maturities of time deposits at
September 30, 1998.
<TABLE>
<CAPTION>
                                                               Amount Due
                           ----------------------------------------------------------------------------------
                           Less Than       1-2           2-3               3-4           After
Rate                       One Year        Years         Years             Years        4 Years         Total
----                       --------        -----         -----             -----        -------        ------
                                                              (In thousands)
<S>                        <C>          <C>            <C>             <C>               <C>         <C>    
 0.00 - 5.99%...........   $105,253     $18,467        $3,640          $  1,367             --       128,727
 6.00 - 8.00%...........     21,656       2,364         1,361               636             --        26,017
 8.01 - 10.00%..........        297         112            --                --             --           409
                           --------     -------        ------            ------            ---       -------

   Total................   $127,206     $20,943        $5,001            $2,003            $--       155,153
                           ========     =======        ======            ======            ===       =======
</TABLE>

    The  following  table sets forth the amount and  maturities of time deposits
with balances of $100,000 or more at September 30, 1998.
<TABLE>
<CAPTION>
                                     Amount Due
-----------------------------------------------------------------------------------
Within       Over 3                 Over 6                    Over 12
3 months     through 6 months       through 12 months         Months        Total
-----------------------------------------------------------------------------------
                                   (In thousands)

<S>          <C>                    <C>                       <C>           <C>    
$7,745       $12,801                $10,132                   $5,765        $36,443
======       =======                =======                   ======        =======
</TABLE>

         In the unlikely event Coastal Federal is liquidated, depositors will be
entitled to full payment of their  deposit  accounts  prior to any payment being
made  to  the   Corporation  as  the  sole   stockholder  of  Coastal   Federal.
Substantially all of Coastal Federal's  depositors are residents of the State of
South Carolina.

         Borrowings.  Demand and time  deposits are the primary  source of funds
for Coastal  Federal's  lending and  investment  activities  and for its general
business purposes. The Bank has in the past, however,  relied upon advances from
the FHLB of  Atlanta to  supplement  its  supply of  lendable  funds and to meet
deposit  withdrawal  requirements.  The FHLB of Atlanta has served as one of the
Bank's  primary  borrowing  sources.  Advances  from  the  FHLB of  Atlanta  are
typically  secured by the Bank's first  mortgage  loans.  At September 30, 1998,
Coastal  Federal had advances  totaling  $144.9 million from the FHLB of Atlanta
due on various  dates  through  2008 with a weighted  average  interest  rate of
5.13%.
<PAGE>
         The FHLB of  Atlanta  functions  as a central  reserve  bank  providing
credit  for  financial   institutions   and  certain   other  member   financial
institutions.  As a member,  Coastal Federal is required to own capital stock in
the FHLB of Atlanta and is  authorized  to apply for advances on the security of
such  stock and  certain of its  mortgage  loans and other  assets  (principally
securities  which are  obligations  of, or  guaranteed  by, the  United  States)
provided certain standards related to  creditworthiness  have been met. Advances
are made pursuant to several different programs. Each credit program has its own
interest rate and range of maturities.  Depending on the program, limitations on
the  amount  of  advances  are  based  either  on  a  fixed   percentage  of  an
institution's  net  worth  or on the  FHLB's  assessment  of  the  institution's
creditworthiness.  The FHLB of Atlanta  determines  specific lines of credit for
each member institution.

         In addition to the borrowings  described  above, the Bank, from time to
time, has borrowed funds under reverse repurchase  agreements  pursuant to which
it  sells   securities   (generally   secured  by  government   securities   and
mortgage-backed  securities)  under an agreement to buy them back at a specified
price  at a  later  date.  These  agreements  to  repurchase  are  deemed  to be
borrowings  collateralized  by the  securities  sold. At September 30, 1998, the
Bank had  $55.0  million  in  broker  repurchase  agreements.  The Bank has also
offered  repurchase  agreements to its customers  which are borrowings  that are
collateralized by underlying government  securities.  At September 30, 1998, the
Bank had $4.2 million outstanding in customer repurchase agreements.

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

<PAGE>
<TABLE>
<CAPTION>
                                                       At September 30,
                                               --------------------------------
                                                 1996        1997        1998
                                               --------    --------    --------
                                                   (Dollars in thousands)
<S>                                            <C>         <C>         <C>     
Outstanding balance:
  Securities sold under agreements
    to repurchase:
    Customer ...............................   $  3,365    $  2,666    $  4,214
    Broker .................................       --          --        55,000
  Short-term FHLB advances.(1) .............     54,404      68,620     120,235

Weighted average rate paid on:
  Securities sold under agreements
    to repurchase:
    Customer ...............................       3.57%       3.16%       3.43%
    Broker .................................       --          --          5.69
  Short-term FHLB advances.(1) .............       5.68        5.60        5.10

Maximum amount of borrowings outstanding
  at any month end:
  Securities sold under agreements
    to repurchase:
    Customer ...............................   $  3,950    $  3,257    $  4,214
    Broker .................................     12,840      37,516      86,250
  Short-term FHLB advances.(1) .............     68,213      75,020     120,235
Approximate average short-term borrowings
  outstanding with respect to:
  Securities sold under agreements
    to repurchase:
    Customer ...............................   $  2,900    $  2,100    $  2,989
    Broker .................................      4,100      17,200      56,262
  Short-term FHLB advances.(1) .............     56,600      74,023      92,369


Weighted average rate paid on:
  Securities sold under agreements
    to repurchase:
    Customer ...............................       3.55%       3.36%       3.61%
    Broker .................................       5.40        5.60        5.68
  Short-term FHLB advances.(1) .............       5.68        5.60        5.10
</TABLE>

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

         As of September 30, 1998,  Coastal Federal had the largest market share
(13.8%) of any financial  institution  located in Horry County,  South  Carolina
according  to  Sheshunoff  Information  Services,  Inc.  The Bank  faces  strong
competition in the attraction of deposits (its primary source of lendable funds)
and in the  origination of loans.  Its most direct  competition for deposits and
loans has  historically  come from other financial  institutions  located in its
primary  market area. The Bank estimates that there are over 70 offices of other
financial institutions in its primary market area. Particularly in times of high
interest  rates,  the Bank has  faced  additional  significant  competition  for
investors' funds from short-term money market securities and other corporate and
government  securities.  The Bank's competition for loans comes principally from
other financial institutions, mortgage banking companies and mortgage brokers.

Personnel

         As of September 30, 1998, the Company had 205 full-time  Associates and
25 part-time  Associates.  The  Associates  are not  represented by a collective
bargaining  unit.  The Bank  believes its  relationship  with its  Associates is
excellent.


                         REGULATION OF COASTAL FINANCIAL

General

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

Holding Company Acquisitions

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

Holding Company Activities

         As  a  unitary  savings  and  loan  holding  company,  the  Corporation
generally is not subject to activity  restrictions.  If the Corporation acquires
control of another  savings  bank as a separate  subsidiary,  it would  become a
multiple savings and loan holding company, and the activities of the Corporation
and any of its  subsidiaries  (other  than  the Bank or any  other  SAIF-insured
savings association) would become subject to such restrictions unless such other
associations  each  qualify  as  a  QTL  and  were  acquired  in  a  supervisory
acquisition.

         If the Bank  fails  the QTL  test,  the  Corporation  must  obtain  the
approval of the OTS prior to continuing after such failure,  directly or through
its other  subsidiaries,  any business  activity  other than those  approved for
multiple savings and loan holding companies or their subsidiaries.  In addition,
within one year of such  failure  the  Corporation  must  register  as, and will
become subject to, the restrictions  applicable to bank holding  companies.  The
activities  authorized for a bank holding  company are more limited than are the
activities  authorized  for a  unitary  or  multiple  savings  and loan  holding
company. See "-- Qualified Thrift Lender Test."

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

Affiliate Restrictions

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

Qualified Thrift Lender Test

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


                          REGULATION OF COASTAL FEDERAL

General

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

Proposed Federal Legislation

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

Federal Regulation of Savings Associations

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

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

         The Bank's accounts are insured by the SAIF. The FDIC insures  deposits
at the Bank to the maximum  extent  permitted  by law. The Bank  currently  pays
deposit insurance  premiums to the FDIC based on a risk-based  assessment system
established  by the  FDIC for all  SAIF-member  institutions.  Under  applicable
regulations,  institutions are assigned to one of three capital groups which are
based  solely on the level of an  institution's  capital -- "well  capitalized,"
"adequately  capitalized,"  and  "undercapitalized"  -- which are defined in the
same manner as the regulations  establishing the prompt corrective action system
under  Section 38 of the FDIA, as discussed  below.  These three groups are then
divided  into  three  subgroups  which  reflect  varying  levels of  supervisory
concern,  from those  which are  considered  to be  healthy  to those  which are
considered  to be of  substantial  supervisory  concern.  The  matrix so created
results in nine assessment risk  classifications,  with rates currently  ranging
from  .23%  of  insured  deposits  for  well   capitalized,   financially  sound
institutions  with only a few minor  weaknesses to .31% of insured  deposits for
undercapitalized  institutions  that pose a substantial risk of loss to the SAIF
unless effective  corrective action is taken.  Until the first half of 1996, the
same amounts applied to BIF member institutions. The FDIC is authorized to raise
assessment rates in certain  circumstances.  The Bank's assessments expensed for
the year ended September 30,1998, equaled $213,000.

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

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

         Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
now is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the FHLBs
carry out their housing finance mission; ensure that the FHLBs remain adequately
capitalized and able to raise funds in the capital  market;  and ensure that the
FHLBs operate in a safe and sound manner.

         The Bank, as a member of the  FHLB-Atlanta,  is required to acquire and
hold  shares of  capital  stock in the  FHLB-Atlanta  in an amount  equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or (ii) 1/20 of its advances  (borrowings)  from the FHLB-Atlanta.
The  Bank  is  in  compliance  with  this  requirement  with  an  investment  in
FHLB-Atlanta stock of $7.3 million at September 30, 1998.

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

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

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

         The FDIA and the  implementing  regulations also provide that a federal
banking agency may, after notice and an opportunity for a hearing,  reclassify a
well  capitalized  institution  as  adequately  capitalized  and may  require an
adequately capitalized institution or an undercapitalized  institution to comply
with  supervisory  actions  as if it  were in the  next  lower  category  if the
institution  is in an unsafe or unsound  condition  or  engaging in an unsafe or
unsound  practice.  (The  OTS  may  not,  however,  reclassify  a  significantly
undercapitalized institution as critically undercapitalized.)

         An institution  generally must file a written capital  restoration plan
which meets specified  requirements,  as well as a performance  guaranty by each
company that controls the  institution,  with the  appropriate  federal  banking
agency  within 45 days of the date that the  institution  receives  notice or is
deemed   to   have   notice   that   it   is   undercapitalized,   significantly
undercapitalized  or  critically  undercapitalized.  Immediately  upon  becoming
undercapitalized,  an  institution  shall become  subject to the  provisions  of
Section 38 of the FDIA,  which sets forth various  mandatory  and  discretionary
restrictions on its operations.

         At September 30, 1998, the Bank was  categorized as "well  capitalized"
under the prompt corrective action regulations of the OTS.

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

Qualified Thrift Lender Test

         All savings associations are required to meet a qualified thrift lender
("QTL")  test set forth in the HOLA and  regulations  of the OTS  thereunder  to
avoid operating certain restrictions. A savings institution that fails to become
or  remain a QTL  shall  either  become a  national  bank or be  subject  to the
following  restrictions on its operations:  (i) the association may not make any
new  investment  or engage in  activities  that  would  not be  permissible  for
national  banks;  (ii) the  association  may not establish any new branch office
where a national bank located in the savings  institution's home state would not
be able to establish a branch office;  (iii) the association shall be ineligible
to obtain new advances  from any FHLB;  and (iv) the payment of dividends by the
association shall be subject to the rules regarding the statutory and regulatory
dividend restrictions  applicable to national banks. Also, beginning three years
after the date on which the savings  institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in any
activity not  permissible for a national bank and would be required to repay any
outstanding  advances to any FHLB.  In addition,  within one year of the date on
which  savings  association  controlled  by a company  ceases  to be a QTL,  the
company must register as a bank holding  company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if it
thereafter complies with the QTL test.

         Currently,  the QTL test requires that either an institution qualify as
a  domestic  building  and  loan  association  under  the Code or that 65% of an
institution's  "portfolio  assets" (as defined)  consist of certain  housing and
consumer-related  assets  on a  monthly  average  basis  in nine out of every 12
months.  Assets that  qualify  without  limit for  inclusion  as part of the 65%
requirement are loans made to purchase, refinance,  construct, improve or repair
loans;  mortgage-backed  securities (where the mortgages are secured by domestic
residential  housing or manufactured  housing);  FHLB stock;  direct or indirect
obligations  of the FDIC;  and loans for  educational  purposes,  loans to small
businesses  and loans made through  credit  cards.  In addition,  the  following
assets,  among others, may be included in meeting the test subject to an overall
limit of 20% of the savings  institution's  portfolio assets: 50% of residential
mortgage  loans  originated  and sold  within  90 days of  origination;  100% of
consumer  loans;  and stock  issued by the FHLMC or the FNMA.  Portfolio  assets
consist  of total  assets  minus the sum of (i)  goodwill  and other  intangible
assets,  (ii) property used by the savings  institution to conduct its business,
and  (iii)  liquid  assets  up to 20%  of the  institution's  total  assets.  At
September 30, 1998, the Bank's qualified thrift investments  exceeded 65% of its
portfolio assets as required by regulation.

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

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

         As required by federal law,  the OTS has  proposed a rule  revising its
minimum core capital  requirement  to be no less  stringent than that imposed on
national banks. The OTS has proposed that only those savings  associations rated
a composite  one (the highest  rating) under the CAMEL rating system for savings
associations  will be  permitted  to operate at or near the  regulatory  minimum
leverage  ratio of 3%.  All  other  savings  associations  will be  required  to
maintain  a  minimum  leverage  ratio  of 4% to 5%.  The OTS  will  assess  each
individual savings association through the supervisory process on a case-by-case
basis to determine the applicable  requirement.  No assurance can be given as to
the final  form of any such  regulation,  the date of its  effectiveness  or the
requirement applicable to the Bank.

         Savings  associations  also must maintain  "tangible  capital" not less
than 1.5% of the Bank's  adjusted total assets.  "Tangible  capital" is defined,
generally, as core capital minus any "intangible assets."

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

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

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

         At September 30, 1998,  Coastal Federal's core capital of approximately
$39.0 million, or 6.10% of adjusted total assets, was $13.4 million in excess of
the OTS requirement of $25.5 million, or 4% of adjusted total assets. As of such
date, the Bank's tangible  capital of approximately  $39.0 million,  or 6.10% of
adjusted  total assets,  was $26.2 million in excess of the OTS  requirement  of
$12.8%  million,  or 1.5% of adjusted  total assets.  Finally,  at September 30,
1998, the Bank had risk-based  capital of approximately  $43.1 million or 12.67%
of total  risk-weighted  assets,  which was $15.9  million  in excess of the OTS
risk-based capital  requirement of $27.2 million or 8% of risk-weighted  assets.
See note 11 on page 25 of the Company's  Annual Report to  Stockholders  for the
fiscal year ended September 30, 1998.

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

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

         A savings  association with either (i) capital equal to or in excess of
its  minimum  capital   requirement  but  below  its  fully  phased-in   capital
requirement (both before and after the proposed capital  distribution),  or (ii)
capital in excess of its fully phased-in  capital  requirement  (both before and
after the proposed capital  distribution) but which has been notified by the OTS
that it is in need of more than normal  supervision may be designated by the OTS
as a Tier 2  association.  Such an  association  may make (without  application)
capital  distributions up to an amount equal to 75% of its net income during the
previous four quarters  depending on how close the association is to meeting its
fully phased-in capital requirement. Capital distributions exceeding this amount
require prior OTS approval.

         Tier 3  associations  include  savings  associations  with  either  (i)
capital  below  the  minimum  capital  requirement  (either  before or after the
proposed capital distribution), or (ii) capital in excess of the fully phased-in
capital  requirement  but  which has been  notified  by the OTS that it shall be
treated  as a Tier 3  association  because  it is in need of  more  than  normal
supervision.  Tier 3 associations may not make any capital distributions without
prior approval from the OTS.

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

         Loans  to One  Borrower.  Under  the  HOLA,  savings  institutions  are
generally  subject  to the  national  bank  limit  on  loans  to  one  borrower.
Generally,  this limit is 15% of the Bank's unimpaired capital and surplus, plus
an additional 10% of unimpaired capital and surplus,  if such loan is secured by
readily-marketable  collateral,  which is defined to include  certain  financial
instruments  and  bullion.  The OTS by  regulation  has amended the loans to one
borrower  rule to permit  savings  associations  meeting  certain  requirements,
including  capital  requirements,  to extend loans to one borrower in additional
amounts under circumstances  limited essentially to loans to develop or complete
residential  housing units.  At September 30, 1998, the Bank's limit on loans to
one borrower was $6.5 million.  The Bank may apply to have this amount increased
to $13.0 million for borrowers who have loans secured by residential lending. At
September  30,  1998,  the Bank had  applied  for this limit  increase  for four
borrowers.  At September 30, 1998, the Bank's largest  aggregate amount of loans
to one  borrower was $11.4  million,  all of which was  performing  according to
their  terms.  The Bank had  received  permission  to  increase  the loan to one
borrower limit on this borrower.


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

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

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

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

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

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



                                    TAXATION

Federal Taxation

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

         Tax Bad Debt  Reserves.  For  discussion  related to the Bank's Tax Bad
Debt Reserves,  please refer to page 22 note 9 of the Company's Annual Report to
Stockholders for the fiscal year ended September 30, 1998.

         Distributions.   To  the  extent  that  the  Bank  makes   "nondividend
distributions"  to the  Corporation  that are  considered as made:  (i) from the
reserve for losses on qualifying  real property loans, to the extent the reserve
for such  losses  exceeds  the amount  that would  have been  allowed  under the
experience  method;  or (ii) from the  supplemental  reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will be
included  in  the  Bank's  taxable  income.  Nondividend  distributions  include
distributions  in excess of the Bank's  current  and  accumulated  earnings  and
profits,  distributions in redemption of stock, and  distributions in partial or
complete  liquidation.  However,  dividends  paid out of the  Bank's  current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be  considered  to result in a  distribution  from the  Bank's bad debt
reserve.  Thus,  any  dividends to the  Corporation  that would  reduce  amounts
appropriated  to the Bank's bad debt reserve and deducted for federal income tax
purposes  would create a tax  liability  for the Bank.  The amount of additional
taxable income  attributable  to an Excess  Distribution is an amount that, when
reduced by the tax  attributable  to the  income,  is equal to the amount of the
distribution.  Thus,  if,  the Bank  makes a  "nondividend  distribution,"  then
approximately  one and one-half  times the amount so used would be includable in
gross income for federal  income tax purposes,  assuming a 35% corporate  income
tax rate (exclusive of state and local taxes).  See  "Regulation"  for limits on
the payment of dividends by the Bank.  The Bank does not intend to pay dividends
that would result in a recapture of any portion of its tax bad debt reserve.

         Corporate   Alternative   Minimum  Tax.  The  Code  imposes  a  tax  on
alternative  minimum  taxable  income  ("AMTI")  at a rate  of  20%.  For  years
beginning  before  December  31,  1995,  the excess of the tax bad debt  reserve
deduction  using the percentage of taxable income method over the deduction that
would  have  been  allowable  under  the  experience  method  was  treated  as a
preference  item for purposes of computing  the AMTI.  In addition,  only 90% of
AMTI can be offset by net  operating  loss  carryovers.  AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted  current earnings
exceeds its AMTI  (determined  without  regard to this  preference  and prior to
reduction for net operating losses).  For taxable years beginning after December
31, 1986, and before January 1, 1996, an environmental tax of .12% of the excess
of  AMTI  (with   certain   modification)   over  $2.0  million  is  imposed  on
corporations,  including  the Bank,  whether or not an  Alternative  Minimum Tax
("AMT") is paid.


<PAGE>



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

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

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

         For information  regarding income taxes payable by Coastal Federal, see
Note 9 of the Notes to Consolidated Financial Statements.
<PAGE>
Item 2.  Properties

         The  following  table sets forth the location of the offices of Coastal
Financial's subsidiaries,  as well as certain additional information relating to
these offices, as of September 30, 1998.
<TABLE>
<CAPTION>
                                                  Total Investment
                                                  Including Land,             Net Book            Approximate
                                     Year         Building, Furni-           Value as of          Square         Owned/
Location                            Opened        ture and Fixtures            9/30/98            Footage        Leased
--------                            ------        -----------------            -------            -------        ------
                                                                (Dollars in thousands)

<S>                                 <C>           <C>                          <C>                <C>            <C>
Main Office
2619 Oak St.                        1980                  $7,367                 $2,922           25,000         Owned
Myrtle Beach, SC (1)

Dunes Office
7500 North Kings Hwy                1971                     551                    131            2,000         Owned
Myrtle Beach, SC

Ocean Drive Office
521 Main Street                     1973                   1,408                    905            4,100         Owned
North Myrtle Beach, SC

Surfside Office
112 Highway 17 South                1975                   1,350                    891            2,300         Owned
 & Glenns Bay Road
Surfside Beach, SC

Conway Office
310 Highway 378                     1976                     926                    284            2,882         Owned
Conway, SC

Socastee Office
1 Cimerron Drive                    1981                   1,013                    416            2,275         Owned
Myrtle Beach, SC

Murrells Inlet Office
Highway 17 South                    1986                   1,080                    602            3,450         Owned
Murrells Inlet, SC

Waccamaw Medical Pk Office
7000 Waccamaw Medical Pk Rd         1986                     636                    324            1,450         Owned
Conway, SC

Florence Office
1385 Alice Drive                    1996                     374                    285            2,500         Leased
Florence, SC

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

Coastal Investments
 Corporation
2619 Oak Street                     1987                      82                     29             N/A           N/A
Myrtle Beach, SC

Coastal Federal Mortgage, Inc.
1385 Alice Drive                    1995                     173                    121            1,038         Leased
Florence, SC
<PAGE>
<CAPTION>
                                                  Total Investment
                                                  Including Land,             Net Book            Approx.
                                     Year         Building, Furni-           Value as of          Square         Owned/
Location                            Opened        ture and Fixtures            9/30/98            Footage        Leased
--------                            ------        -----------------            -------            -------        ------
                                                    (Dollars in thousands)
<S>                                <C>                    <C>                    <C>             <C>               <C>
South Brunswick Office
1625 Seaside Road S.W.             1998                   $  994                 $  967            3,000           Owned
Sunset Beach, NC

Mall Plaza                         1997                    1,148                  1,125           17,500           Owned
504 27th Avenue North
Myrtle Beach, SC
</TABLE>

------------

(1)      The  original  main office was  located at 816 North Kings  Highway and
         opened in January  1954.  The main office was moved to its new location
         in 1980.
<PAGE>
         The net book value of the Company's  investment  in office,  properties
and equipment totaled $9.0 million at September 30, 1998. See Note 5 of Notes to
the Consolidated  Financial Statements.  Coastal Federal uses the services of an
independent  data processing  service to process  customer  records and monetary
transactions,  post deposit and general  ledger  entries and record  activity in
installment lending, loan servicing and loan originations.

Year 2000 Compliance

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

The Company's Year 2000 Committee consists of the Chief Executive Officer, three
Executive  Vice  Presidents,  two Vice  Presidents,  and one Associate  from the
Internal Audit Group. The Committee makes a monthly progress report to the Board
of Directors.  The Committee has developed and is  implementing a  comprehensive
plan to make all information  and  non-information  technology  assets year 2000
compliant. The plan is comprised of the following phases:

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

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

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

4.   Validation  - Testing  all systems  and  third-party  vendors for year 2000
     compliance.  The  Company  is  currently  in  this  phase  of its  plan.  A
     third-party  service  bureau  processes all customer  transactions  and has
     completed  upgrades to its systems to be year 2000  compliant.  The Company
     will test the third-party  systems by reviewing the results of transactions
     at six  different  test dates  before  and after the year 2000 date  change
     covering all of the applications used by the Company. Testing was completed
     as of  November  16,  1998.  In the event  that  testing  reveals  that the
     third-party  systems are not year 2000  compliant,  the  Company's  service
     bureau  intends to either  transfer  the Company to other  systems that are
     year 2000  compliant and provide  additional  resources to resolve the year
     2000  issues.  Other  parties  whose  year 2000  compliance  may affect the
     Company include the FHLB of Atlanta,  brokerage  firms, the operator of the
     Company's  ATM  network  and  the  Company's  401K   administrator.   These
     third-parties have indicated their compliance or intended compliance. Where
     it is  possible  to do so, the Company  has  scheduled  testing  with these
     third-parties.  Where  testing is not  possible,  the Company  will rely on
     certifications from vendors and service providers.

5.   Implementation - Replacement or repair of non-compliant  technology. As the
     Company  progresses  through the validation  phase,  the Company expects to
     determine necessary remedial actions and provide for their  implementation.
     The Company has already implemented a new year 2000 compliant  computerized
     teller  system and has  verified the year 2000  compliance  of its computer
     hardware  and other  equipment  containing  embedded  microprocessors.  The
     Company's plan provides for year 2000 readiness to be completed by December
     31, 1998.
<PAGE>
The Company  estimates its total cost to replace  computer  equipment,  software
programs or other equipment  containing embedded  microprocessors  that were not
year 2000  compliant to be $118,000,  of which  $41,156 has been  incurred as of
September 30, 1998.  System  maintenance  or  modification  costs are charged to
expense as incurred, while the cost of new hardware, software or other equipment
is capitalized and amortized over their estimated useful lives. The Company does
not separately track the internal costs and time that its own employees spend on
year 2000 issues, which are principally payroll costs.

Because the Company depends  substantially  on its computer systems and those of
third-parties,  the  failure of these  systems to be year 2000  compliant  could
cause substantial disruption of the Company's business and could have a material
adverse  financial  impact on the  Company.  Failure to resolve year 2000 issues
presents  the  following  risks  to the  Company;  (1) the  Company  could  lose
customers to other financial  institutions,  resulting in a loss of revenue,  if
the Company's  third-party service bureau is unable to properly process customer
transactions;  (2) governmental agencies, such as the Federal Home Loan Company,
and correspondent institutions could fail to provide funds to the Company, which
could materially impair the Company's liquidity and affect the Company's ability
to fund loans and deposit  withdrawals;  (3)  concern on the part of  depositors
that year 2000 issues  could impair  access to their  deposit  account  balances
could result in the Company  experiencing deposit outflows prior to December 31,
1999; and (4) the Company could incur  increased  personnel  costs if additional
staff is required  to perform  functions  that  inoperative  systems  would have
otherwise performed. Management believes that it is not possible to estimate the
potential  lost revenue due to the year 2000 issue,  as the extent and longevity
of any potential problem cannot be predicted.

There can be no assurances  that the Company's  year 2000 plan will  effectively
address the year 2000  issues,  that the  Company's  estimates of the timing and
costs of completing  the plan will  ultimately be accurate or that the impact of
any failure of the Company or its third-party  vendors and service  providers to
be year 2000 compliant will not have a material  adverse effect on the Company's
business, financial condition or results of operations.
<PAGE>
Item 3.  Legal Proceedings

         The Company is not a defendant in any lawsuits.

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

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

         Not applicable.
                                     PART II

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

         The information  contained under the section  captioned "Market for the
Corporation's Common Stock and Related Stockholder Matters" in the Corporation's
Annual  Report to  Stockholders  for the Fiscal  Year Ended  September  30, 1998
("Annual Report") is incorporated herein by reference.

Item 6.  Selected Financial Data

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

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

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


Item 7A.  Quantitative and Qualitative Disclosures about
          Market Risk

         The information  contained in the section captioned "Interest Rate Risk
Disclosure" in the Annual Report is incorporated herein by reference.
<PAGE>
Item 8.  Financial Statements and Supplementary Data

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

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

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

Item 10.  Directors and Executive Officers of the Registrant

         The information  contained under the section  captioned  "Proposal I --
Election of Directors" in the Bank's  definitive  proxy statement for the Bank's
1999 Annual Meeting of  Stockholders  (the "Proxy  Statement")  is  incorporated
herein by reference.

         Certain executive officers of the Bank also serve as executive officers
of the Corporation.  The day-to-day  management duties of the executive officers
of the Corporation and the Bank relate primarily to their duties
as to the Bank.
<PAGE>
<TABLE>
EXECUTIVE OFFICERS OF THE REGISTRANT

<CAPTION>
Name, Age and Position             Business Experience
----------------------             -------------------
<S>                                <C>
Michael C. Gerald, 49,             Mr.  Gerald has been  associated  with Coastal  Federal since 1974 and serves as
President, Chief Executive         Director, President and Chief Executive Officer of the Corporation and Bank. Mr.
Officer and a Director             Gerald also serves as  Director  and  President  of Coastal  Mortgage  Bankers &
                                   Realty  Company,  Inc.,  and as Director  and  President  of Coastal Real Estate
                                   Investment Corporation.  He currently serves on the Board of Visitors of Coastal
                                   Carolina  University's  Wall  School of  Business  Administration  and  Computer
                                   Science,  the Governmental Affairs Committee of America's Community Bankers, the
                                   Board of Directors of the Waccamaw  Community  Foundation and is a member of the
                                   Board of Directors of the Coastal Education Foundation.

Jimmy R. Graham, 50,               Mr. Graham serves as Executive  Vice  President  and  Information  Systems Group
Executive Vice President and       Leader of Coastal  Federal.  Mr.  Graham serves as Executive  Vice  President of
Information Systems Group          Coastal Financial Corporation. He has been associated with the Bank since 1977. 
Leader

Jerry L. Rexroad, CPA, 38,         Mr. Rexroad joined the Company in April 1995 and is Executive Vice President and
Executive Vice President and       Chief Financial  Officer of Coastal Federal and Coastal  Financial  Corporation.
Chief Financial Officer            Mr.  Rexroad  also  serves as the Chief  Financial  Officer  and a Director  for
                                   Coastal Federal Mortgage  Bankers & Realty Company,  Inc.,  Coastal  Investments
                                   Corporation,  and Coastal  Federal  Mortgage,  Coastal  Real  Estate  Investment
                                   Corporation and President of Coastal Federal Holdings Corporation.  He currently
                                   serves as Vice  Chairman  of the Junior  Achievement  Board of  Directors  Horry
                                   County.  He is a Past Chairman of the Board of Directors for Junior  Achievement
                                   of  Horry  County  as  well  as Past  Chairman  of the  Board  of  Directors for
                                   Junior Achievement of Greenville.  Mr. Rexroad is the President of the Financial  
                                   Manager's Society of South Carolina.  
                                   
                                   He is a certified  public  accountant,  and is a member of the AICPA and SCACPA.
                                   Prior to joining the Company,  Mr.  Rexroad was a partner with KPMG Peat Marwick
                                   LLP where he was  partner in charge of the  Financial  Institutions  practice in
                                   South Carolina.

Phillip G. Stalvey, 42,            Mr.  Stalvey is Executive Vice President and Sales Group Leader for the Bank. He 
Executive Vice President           also serves as an Executive Vice President of the  Corporation and is a director 
and Sales Group Leader.            of Coastal  Federal  Mortgage and Coastal  Investment  Corporation.  He has been 
                                   associated with Coastal Federal for the past 17 years. In addition,  Mr. Stalvey 
                                   is a member of the Florence Stake Presidency with his Church, a committee member 
                                   of a local  Scout Troop and a Board of Director  for the Myrtle  Beach  Airforce 
                                   Base Redevelopment Authority.
<PAGE>
<CAPTION>
Name, Age and Position             Business Experience
----------------------             -------------------
<S>                                <C>
Steven J. Sherry, 47               Mr. Sherry is Executive  Vice  President and Director of Marketing for the Bank.
Executive Vice President and       He also serves as Executive Vice  President/Chief  Marketing Officer for Coastal
Director of Marketing.             Financial  Corporation.  He has  been  associated  with  Coastal  Federal,  in a
                                   consultative fashion for over five years, and formally with the organization for
                                   seven months.  Mr. Sherry is a Director on the Board for the Horry Cultural Arts
                                   Council, member of the Bank Marketing Association, and holds various achievement
                                   awards for marketing and advertising.                                           
                                   
Susan J. Cooke, 48,                Ms. Cooke is Vice President and Corporate  Secretary for Coastal Federal and for
Vice President and                 Coastal Financial Corporation,  Corporate Secretary for Coastal Mortgage Bankers
Corporate Secretary                & Realty  Company,  Inc.,  and Coastal  Investor  Services.  Ms.  Cooke has been
                                   employed with Coastal Federal for eleven years.  She is a member of the American
                                   Society of Corporate  Secretaries,  Inc. and the National Association for Female
                                   Executives.                                                                     
</TABLE>
<PAGE>
Item 11.  Executive Compensation

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

Item 12.  Security Ownership of Certain Beneficial Owners and
          Management

         (a)      Security Ownership of Certain Beneficial Owners

                  Information  required by this item is  incorporated  herein by
                  reference  to the section  captioned  "Voting  Securities  and
                  Principal Holders Thereof" of the Proxy Statement.

         (b)      Security Ownership of Management

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

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

Item 13.  Certain Relationships and Related Transactions

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

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

         1.       Independent Auditors' Report*

         2.       All Financial Statements*

                  (a) Consolidated Statements of Financial Condition as of
September 30, 1997 and 1998.

                  (b) Consolidated  Statements of Operations for the Years Ended
September 30, 1996, 1997 and 1998.

                  (c) Consolidated  Statements of  Stockholders'  Equity for the
Years Ended September 30, 1996, 1997 and 1998.

                  (d) Consolidated  Statements of Cash Flows for the Years Ended
September 30, 1996, 1997 and 1998.

                  (e) Notes to Consolidated Financial Statements.

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

         4.       Exhibits

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

                   3 (b)   Bylaws of Coastal Financial Corporation**

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

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

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

                     (d)   Employment Agreement with Allen W. Griffin***

                     (e)   Employment Agreement with Jimmy R. Graham***

                     (f)   Employment Agreement with Richard L. Granger***

                     (g)   Employment Agreement with Robert S. O'Harra***

                     (h)   Employment Agreement with Steven J. Sherry

                     (i)   1990 Stock Option Plan***

                     (j)   Directors Performance Plan****


<PAGE>
                  13             Annual Report to Stockholders for the Fiscal
                                 Year Ended September 30, 1998*

                  21             Subsidiaries of the Registrant

                  23             Consent of Independent Auditors

                  27             Financial Data Schedule

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

-----------------

*        Incorporated  by reference from the Annual Report to  Stockholders  for
         the fiscal  year  ended  September  30,  1998,  attached  as an exhibit
         hereto.

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

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

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

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

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

                                       COASTAL FINANCIAL CORPORATION

Date:  December 29, 1998               By: /s/Michael C. Gerald
                                           -----------------------------------
                                             Michael C. Gerald
                                             President/Chief Executive Officer
                                            (Duly Authorized Representative)

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

By: /s/ James T. Clemmons              By: /s/Michael C. Gerald
    --------------------------            ---------------------------------
 James T. Clemmons                        Michael C. Gerald
 Chairman of the Board                    President/Chief Executive Officer
                                          and a Director
                                          (Principal Executive Officer)

Date: December 29, 1998                Date: December 29, 1998

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

Date: December 29, 1998                Date: December 29, 1998

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

Date: December 29, 1998                Date: December 29, 1998

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

Date: December 29, 1998                Date: December 29, 1998

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

Date: December 29, 1998                Date:  December 29, 1998