EXHIBIT 13

                      ANNUAL REPORT TO STOCKHOLDERS FOR THE

                      FISCAL YEAR ENDED SEPTEMBER 30, 1997





<PAGE>

--------------------------------------------------------------------------------
                         COASTAL FINANCIAL CORPORATION
--------------------------------------------------------------------------------
                               1997 ANNUAL REPORT


<PAGE>



<PAGE>

                                  DEDICATION 

--------------------------------------------------------------------------------
                         COASTAL FINANCIAL CORPORATION
--------------------------------------------------------------------------------
                             A QUEST FOR EXCELLENCE


                                  GREAT PEOPLE

                           COASTAL FEDERAL UNIVERSITY
                      -----------------------------------


[GRAPHIC OMITTED]

Great people are the  cornerstone of Coastal  Financial  Corporation and nothing
could better evidence our commitment to attract, develop and retain the very
         best people than the creation of Coastal Federal University.

With this  initiative,  we are  committing  the  resources  necessary  to better
prepare our Great People for the future. Coastal Federal University is dedicated
to providing a learning environment for all Associates by creating opportunities
to continuously develop skills and knowledge, both personally and
                                professionally.

As the financial  services  industry  continues to change at an ever  increasing
pace,  we believe  this  approach  will  assure a  continued  focus on our Basic
Corporate Objective of Maximizing The Value Of Our Shareholders'  Investment and
our Long-Term Goal Of Being The Best Financial Services Company In Our
                                 Marketplace.

Thanks to our Great People,  initiatives such as the founding of Coastal Federal
University to provide a pillar of quality professional  development for them and
our overriding commitment to our QUEST FOR EXCELLENCE operating  philosophy,  we
have again produced outstanding results for our Shareholders.  We are absolutely
convinced that this approach will help to insure that our best years are yet to
                                     come.

[GRAPHIC OMITTED]



The  value  of one  share  of  Coastal  Financial  Corporation's  Capital  Stock
purchased  at $10.00 in the  initial  public  offering,  and  affected  by stock
dividends,  stock splits, and reinvested cash dividends,  was $217.16 based upon
NASDAQ  Quotations at September  30, 1997.  The  foregoing  reflects  historical
results and may not be indicative of future stock prices.
<PAGE>

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


<TABLE>
<CAPTION>
                                                                                     At September 30,
                                                                                  -----------------------
                                                                                    1993         1994
                                                                                  ------------ ----------
                                                                                  (dollars in thousands,
<S>                                                                               <C>          <C>
   FINANCIAL CONDITION DATA:
   Total assets   ...............................................................  $335,284     $374,980
   Loans receivable, net   ......................................................   280,425      331,175
   Mortgage-backed securities ...................................................     3,525          794
   Cash, interest-bearing deposits and investment securities   ..................    27,580       29,316
   Deposits .....................................................................   266,855      247,385
   Borrowings  ..................................................................    41,906       98,446
   Stockholders' equity .........................................................    21,829       23,104
   OPERATING DATA:
   Interest income   ............................................................  $ 25,967     $ 24,562
   Interest expense  ............................................................    12,876       11,548
                                                                                   --------     --------
   Net interest income  .........................................................    13,091       13,014
   Provision for loan losses  ...................................................     1,389          510
                                                                                   --------     --------
   Net interest income after provision for loan losses   ........................    11,702       12,504
                                                                                   --------     --------
   OTHER INCOME:
   Fees and service charges on loans and deposit accounts   .....................       811        1,001
   Gain on sales of loans held for sale   .......................................     1,125          411
   Gain (loss) on sales of investment securities   ..............................       (29)          --
   Gain on sales of mortgage-backed securities, net   ...........................       238           54
   Real estate operations  ......................................................      (176)         341
   Other income   ...............................................................     1,209        1,022
                                                                                   --------     --------
   Total other income   .........................................................     3,178        2,829
   Total general and administrative expense  ....................................     9,272       10,279
                                                                                   --------     --------
   Earnings before income taxes  ................................................     5,608        5,054
   Income taxes   ...............................................................     2,270        1,906
                                                                                   --------     --------
   Net earnings before cumulative effect of adopting FASB 109  ..................     3,338        3,148
                                                                                   --------     --------
   Cumulative effect of adopting FASB 109 .......................................        --          664
                                                                                   --------     --------
   Net income  ..................................................................  $  3,338     $  3,812
                                                                                   ========     ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                               <C>          <C>
   Net earnings per common share before cumulative effect of adopting FASB 109     $    .68     $    .65
   Cumulative effect of adopting FASB 109 .......................................        --          .14
                                                                                   --------     --------
   Net earnings per common share ................................................  $    .68     $    .79
                                                                                   ========     ========
   Cash dividends per common share  .............................................        --     $    .14
                                                                                   ========     ========
   Weighted average shares outstanding ..........................................     4,904        4,881
                                                                                   ========     ========


</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                    1995       1996           1997
                                                                                  ---------- -------------- ---------
                                                                                  (dollars in thousands, except per
                                                                                              share data)
<S>                                                                               <C>        <C>            <C>
   FINANCIAL CONDITION DATA:
   Total assets   ...............................................................  $401,201    $459,712      $494,003
   Loans receivable, net   ......................................................   356,819    370,368        403,570
   Mortgage-backed securities ...................................................    12,776     27,029         23,023
   Cash, interest-bearing deposits and investment securities   ..................    13,530     38,332         39,582
   Deposits .....................................................................   273,099    313,430        347,116
   Borrowings  ..................................................................    95,997    109,886        106,337
   Stockholders' equity .........................................................    24,820     27,681         32,391
   OPERATING DATA:
   Interest income   ............................................................  $ 30,328    $34,720       $ 38,065
   Interest expense  ............................................................    17,272     19,091         20,146
                                                                                   --------    --------      --------
   Net interest income  .........................................................    13,056     15,629         17,919
   Provision for loan losses  ...................................................       202        790            760
                                                                                   --------    --------      --------
   Net interest income after provision for loan losses   ........................    12,854     14,839         17,159
                                                                                   --------    --------      --------
   OTHER INCOME:
   Fees and service charges on loans and deposit accounts   .....................     1,051      1,415          1,593
   Gain on sales of loans held for sale   .......................................        39        990            931
   Gain (loss) on sales of investment securities   ..............................        --         (6)             7
   Gain on sales of mortgage-backed securities, net   ...........................        --        189            235
   Real estate operations  ......................................................       876        345            141
   Other income   ...............................................................     1,284      1,699          1,792
                                                                                   --------    ---------     --------
   Total other income   .........................................................     3,250      4,632          4,699
   Total general and administrative expense  ....................................    10,152     13,586         12,716
                                                                                   --------    ---------     --------
   Earnings before income taxes  ................................................     5,952      5,885          9,142
   Income taxes   ...............................................................     2,232      2,164          3,351
                                                                                   --------    ---------     --------
   Net earnings before cumulative effect of adopting FASB 109  ..................     3,720      3,721          5,791
                                                                                   --------    ---------     --------
   Cumulative effect of adopting FASB 109 .......................................        --         --             --
                                                                                   --------    ---------     --------
   Net income  ..................................................................  $  3,720    $ 3,721       $  5,791
                                                                                   ========    =========     ========
   Net earnings per common share before cumulative effect of adopting FASB 109     $    .78    $   .78       $   1.19
   Cumulative effect of adopting FASB 109 .......................................        --         --             --
                                                                                   --------    ---------     --------
   Net earnings per common share ................................................  $    .78    $   .78       $   1.19
                                                                                   ========    =========     ========
   Cash dividends per common share  .............................................  $    .28    $   .31       $    .35
                                                                                   ========    =========     ========
   Weighted average shares outstanding ..........................................     4,740      4,793          4,877
                                                                                   ========    =========     ========
</TABLE> 
     All share and per share data have been  restated to reflect  10%,  15%, 5%,
and 35% common stock  dividends  declared on November 29, 1991,  August 28, 1992
and May 30, 1995, respectively, three 3 for 2 common stock dividends declared on
January 27, 1993, August 18, 1993 and January 7, 1994, respectively, two 5 for 4
stock dividends declared on January 9, 1996 and June 20, 1996, respectively, and
one four for three stock dividend declared on April 30, 1997.
<PAGE>
KEY OPERATING RATIOS:

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


<TABLE>
<CAPTION>
                                                                                             At or for Years
                                                                                            Ended September 30,
                                                                                           ---------------------
                                                                                            1993       1994
                                                                                           ---------- ----------
<S>                                                                                        <C>        <C>
  Other Data:
  Return on assets (net income divided by average assets)   ..............................    1.00%      0.92%
  Return on average equity (net income divided by average equity) ........................   16.59%     13.88%
  Average equity to average assets  ......................................................    6.08%      6.66%
  Tangible book value per share  ......................................................... $  4.70    $  5.12
  Dividend payout ratio ..................................................................    N/A       16.19%
  Interest rate spread (difference between average yield on interest-earning assets and
   average cost of interest-bearing liabilities) .........................................    4.15%      4.09%
  Net interest margin (net interest income as a percentage of average interest-earning        4.20%      4.12%
  assets)
  Allowance for loan losses to total loans at end of period ..............................    0.98%      1.01%
  Ratio of non-performing assets to total assets (1)  ....................................    0.75%      0.56%
  Tangible capital ratio   ...............................................................    6.27%      5.94%
  Core capital ratio .....................................................................    6.27%      5.94%
  Risk-based capital ratio ...............................................................   10.57%     10.11%
  Number of:
   Real estate loans outstanding .........................................................   5,647      6,614
   Deposit accounts  .....................................................................  32,960     33,618
   Number of full service offices   ......................................................       8          8


<PAGE>
<CAPTION>
                                                                                                At or for Years Ended
                                                                                                     September 30,
                                                                                           --------------------------------
                                                                                            1995       1996       1997
                                                                                           ---------- ---------- ----------
<S>                                                                                        <C>        <C>        <C>
  Other Data:
  Return on assets (net income divided by average assets)   ..............................    0.94%      0.85%      1.21%
  Return on average equity (net income divided by average equity) ........................   15.54%     13.97%     19.36%
  Average equity to average assets  ......................................................    6.08%      6.10%      6.24%
  Tangible book value per share  ......................................................... $  5.55    $  6.03    $  6.97
  Dividend payout ratio ..................................................................   34.46%     38.51%     27.63%
  Interest rate spread (difference between average yield on interest-earning assets and
   average cost of interest-bearing liabilities) .........................................    3.52%      3.76%      3.89%
  Net interest margin (net interest income as a percentage of average interest-earning        3.62%      3.86%      4.03%
  assets)
  Allowance for loan losses to total loans at end of period ..............................    1.00%      1.11%      1.19%
  Ratio of non-performing assets to total assets (1)  ....................................    0.53%      0.17%      0.10%
  Tangible capital ratio   ...............................................................    6.13%      5.93%      6.31%
  Core capital ratio .....................................................................    6.13%      5.93%      6.31%
  Risk-based capital ratio ...............................................................   10.45%     10.41%     11.05%
  Number of:
   Real estate loans outstanding .........................................................   6,688      5,741      6,752
   Deposit accounts  .....................................................................  39,881     41,755     43,544
   Number of full service offices   ......................................................       8          9          9
</TABLE>

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


                                       2


<PAGE>

                                --------------
                                  DEAR FRIENDS
                                --------------

     This year's Annual  Report  spotlights  Coastal  Federal  University.  This
investment in the future of our Associates will help to assure the attainment of
our Basic  Corporate  Objective  Of  Maximizing  The Value Of Our  Shareholders'
Investment and our Long-Term Goal Of Being The Best Financial  Services  Company
In Our Marketplace by focusing on the personal and  professional  development of
the real source of our success, our Great People.

     What a  remarkable  year  1997  was.  It was a truly  successful  year  and
reflects well on our QUEST FOR  EXCELLENCE  operating  philosophy  and our Great
People.

     Our Basic Corporate Objective is To Maximize The Value Of Our Shareholders'
Investment.  And, in that regard, 1997 was a remarkably rewarding year, with our
stock price up 60%, following an increase of 56% for fiscal 1996. Since becoming
a publicly  owned company in 1990,  Coastal  Financial  Corporation's  stock has
grown at a compound  annual rate of over 54%,  taking our market  capitalization
from $4.6 million in October 1990, the date of our initial public  offering,  to
$106.3  million at the close of this fiscal  year.  Put another  way, an initial
investment of $1,000 in October of 1990 would have grown to $21,700 at September
30, 1997.

     The attainment of our Basic Corporate  Objective is correlated closely with
our  Long-Term  Goal  of  Being  The  Best  Financial  Services  Company  In Our
Marketplace.  Evidence of our success in this measure is reflected in our record
earnings  and Coastal  Federal's  continued #1 ranking,  by the 1997  SHESHUNOFF
MARKET SHARE REPORT,  in deposit market share for Horry County,  South Carolina,
the second fastest growing Metropolitan Statistical Area in the nation.

     1997 marked the  continuation of increased  dividends for each  consecutive
year since 1992,  the year we began paying cash  dividends.  Net income for 1997
totaled  $5.8  million,  an increase of 23% over our record  operating  earnings
performance  of 1996.  Since 1990,  our operating  earnings have  increased at a
compound annualized rate in excess of 16%.


[GRAPHIC OMITTED]



Noteworthy Financial Results for Fiscal 1997:
o The market price of Coastal Financial Corporation's
 stock  increased  60%. This compares with an 37.2%  increase in the NASDAQ Bank
 Index during the same period.
oThe  value of  Coastal  Financial  Corporation's  common  stock  has grown at a
 compound annual rate of over 51% during the past five years.
o An increase of 9.1% in cash dividends paid per common share.
o The payment of a 4 for 3 stock split in the form of a 33% stock dividend.
 

                                       3
<PAGE>
[GRAPHIC OMITTED]




oNet earnings of $5.8  million or $1.19 per share.  Net  operating  earnings for
 fiscal 1997 increased 23% over the prior year.
o Shareholders' equity advanced 17.0% to $32.4 million.

[GRAPHIC OMITTED]


o Book value per share grew 15.6% to $6.97
[GRAPHIC OMITTED]


o A 7.5% growth in total assets to $494.0 million.
o Loans receivable increased 9.0% to $403.6 million.
o Deposits were up 10.7% to the highest level in the Com-
 pany's history.
o Transaction deposits grew by 18.8% in fiscal 1997.
[GRAPHIC OMITTED]


o Non-performing Assets to Total Assets decreased 41.2%
 to 0.10%.
[GRAPHIC OMITTED]

o Allowance for Loan Losses to Net Loans increased to
 1.19%.
o The Company had Loan Charge Offs of .04% in 1997.


                                       4
<PAGE>
     One of the best  indicators of  performance is Return On Average Equity and
this  ratio for 1997 was,  again,  outstanding.  Our  Return On  Average  Equity
measure of 19.4% ranks us among the top performing  financial services companies
in the nation.

     We are extremely  proud of the  performance  evidenced by these results and
are especially proud of the Great People who worked so hard to achieve them.

1997. . . OUR BEST YEAR YET


                                                               [GRAPHIC OMITTED]


     This year was remarkable in terms of the dramatic gains we achieved in both
Shareholder  value and operating  earnings.  The  restructuring of our operating
environment  to create a stronger  focus on the sales and marketing of financial
services in fiscal 1996 has continued to pay significant dividends, particularly
in the areas of loan, deposit and investment product sales.

     Our   financial   performance   during  fiscal  1997  again  met  our  high
expectations and well positions us to aggressively pursue future opportunities.


     Since becoming a publicly owned company in 1990, we have achieved  dramatic
gains  in  virtually  all  measures  of  our  performance.  But,  despite  these
historical  results,  it's the  future  that we are most  interested  in. As our
performance  continues to accelerate,  the question we continually ask ourselves
is, "Can we keep it up?"

     The future looks good. That is not to say the future is without  challenge.
But with Great People,  excellent  products,  great  markets,  strong  financial
resources  and our  philosophy  of viewing  change and constant  improvement  as
essential to the achievement of our long-term objectives,  we are confident that
the answer is an unequivocal  "Yes." Those  attributes  really set us apart from
the competition, and enabled another record performance during 1997.

A LOOK AT 1997

                                While 1997  really was quite a  remarkable  year
                              for Coastal Financial from a financial performance
                              perspective,   the  financial   results  are  only
                              partially   indicative   of  the  real  growth  we
                              experienced this past year.

                                Some of the initiatives and  achievements  aimed
                              at  increasing   the  value  of  the  Company  and
                              maximizing    our   ability   to   capitalize   on
                              opportunities in the years ahead were:
<PAGE>
oThe creation of Coastal  Federal  University to
 assure  that we remain on the  cutting  edge of
 professional development education programs. In
 support  of that  initiative  and  our  overall
 growth  needs,  we have  recently  acquired the
 Mall Plaza property just across Oak Street from
 our  Corporate  Offices.  The  addition of this
 17,500 square foot  facility,  which  currently
 houses  our  Coastal  Federal  University  Main
 Campus,  Human Resources,  Marketing and Public
 Relations  Groups,  will provide  space for our
 corporate  facilities expansion needs well into
 the future.

o The  introduction  of our "FLY FREE ON  US...and  more" line of Credit  Cards.
  Through this recent  offering,  we have  rounded out our core banking  product
  offerings  and have  been  extremely  pleased  with  the  degree  of  Customer
  enthusiasm for this valuable travel and gift awards program.


                                       5


<PAGE>
 o The introduction of our internet web site at:
   http://www.coastalfederal.com.  This addition allows us to offer  information
   about our full array of  financial  services to  technology  users across the
   country  and  around  the  world,  as well as  providing  a  vehicle  for the
   solicitation  of  on-line   applications  for  financial  services,   general
   information about Coastal Federal and relocation packages.

   Our On-Line PC Banking  program is  currently  in the final phases of testing
   and will be released in fiscal 1998.

   These  initiatives are designed to allow technology users to benefit from our
   programs while  encouraging all of our Customers to come into our lobbies and
   experience our commitment to providing  exceptional  banking services through
   the efforts of our warm, friendly and well trained professionals.

  oThe construction of a full service banking office in Brunswick County,  North
   Carolina.  This Sales Center,  which is scheduled to open in early  December,
   will better  position us to expand our  financial  services  offerings to the
   individuals  and  businesses  of the rapidly  growing  and dynamic  Brunswick
   County area.

  oThe expansion of our array of residential  mortgage  lending products coupled
   with a well conceived and executed  advertising and marketing  campaign,  has
   increased our loan origination volume and further supported our commitment to
   being the  leading  provider  of  residential  mortgage  loans in each of the
   markets we serve.

  oOur leadership role in serving as the Major  Corporate  Sponsor for the Horry
   County March of Dimes WalkAmerica  Campaign For Healthier Babies continued to
   evidence  our  support  for the  communities  we serve.  In  addition to this
   initiative,  we encourage  our  Associates  to be involved in other civic and
   charitable events to further support the needs of the communities
   we serve.

    Each  year,  Coastal  Financial  Corporation  and  its  Great  People,  give
    generously  of their time,  talents and  financial  resources  in support of
    hundreds of community  organizations  which contribute  significantly to the
    quality of life, health and welfare of our neighborhoods.

     Our QUEST FOR  EXCELLENCE  operating  philosophy,  which is embodied in our
culture  of  viewing  change  and  constant  improvement  as  essential  to  the
achievement of our long-term objectives, is well reflected in these initiatives.

GREAT PEOPLE

     Coastal  Financial has more than 200 Great People,  and they are the reason
for our success.  Their dedication and ever increasing  ability to work together
as a team  toward  Exceeding  The  Expectations  Of Our  Customers  gives us the
confidence that, together, we can do anything.

                                Several  years ago, we  recognized  the valuable
[GRAPHIC OMITTED]             role that each of our Career  Associates  plays in
                              our   organization  by  offering  a  401-k  profit
                              sharing  plan to our  Associates.  Many have taken
                              advantage of this opportunity and today, thanks to
                              the  results  that we, as a team,  have  achieved,
                              this plan is one of the most appreciated  parts of
                              our excellent benefits package.
<PAGE>
                                The  introduction of Coastal Federal  University
                              further recognizes the significant capabilities of
                              each  of  our  Great  People  and,   through  this
                              initiative,  we will  challenge  them  to  achieve
                              their  full   potential.   By   teaching   Coastal
                              Financial   Corporation's  core  philosophies  and
                              successful  business strategies to our Associates,
                              we will, as an organization,  be well prepared for
                              the 21st century.  This  initiative will reinforce
                              our commitment to the philosophies which


                                       6
<PAGE>
have made us unique and  successful,  allow our  Associates  the  opportunity to
become much more  valuable  to the  organization,  position  us to deliver  even
greater service to our Customers and,  ultimately,  create enhanced value to our
Shareholders, many of whom are our Associates.

                                                               [GRAPHIC OMITTED]

COASTAL FEDERAL UNIVERSITY

     Sir Francis Bacon once said, "A wise man will make more  opportunities than
he finds."

     For our  Associates,  taking  advantage  of the  educational  opportunities
afforded by Coastal  Federal  University is one very good way of assuring  that.
Coastal Federal University, with its focus on our QUEST FOR EXCELLENCE operating
philosophy,  will  continue  our  journey  toward  building  a culture  which is
"Totally  Committed To Exceeding The  Expectations  Of Our Customer" by offering
unique,  innovative and powerful professional development  opportunities.  Here,
our Great  People can  experience a  stimulating  community of people and ideas,
offering a rich variety of professional  development and enrichment experiences.
Through  enrolling in the programs  offered through Coastal Federal  University,
they will learn about Service, Teamwork, Operations, Leadership, Management, our
Corporate  Philosophy  and  innovative  ways  to make  our  business  even  more
successful.

     Our  curriculums  will stress  development of the skills required for their
success  over a career in  business  and will,  in  addition  to  preparing  our
Associates to be Career Associates, prepare them to continue to learn over those
careers.

     We are  extremely  excited  about  this  initiative  and  believe  that  it
demonstrates  that we are not complacent  about,  nor satisfied with our current
success,  but,  rather,  are  dedicating  ourselves to building an even stronger
foundation for the future.

COASTAL FINANCIAL'S FUTURE

     Looking ahead, we see a future filled with even more  opportunity  than the
past and firmly  believe that we can achieve our Corporate  goals if we maintain
our values and continually renew ourselves and our business.

     Our pledge to our Shareholders is to do exactly  that...to do everything in
our power to remain youthful in our approach and  spirit...and  continue to view
change and  constant  improvement  as the  catalyst  for  reaching  our  fullest
potential.

     I just  can't  thank  our Great  People  enough.  Our  Board Of  Directors,
Leadership  Group and Associates are simply the best  imaginable.  They go above
and beyond the call of duty in serving our  Customers  every day and are totally
committed to Exceeding their Expectations on every occasion.

     Our QUEST FOR  EXCELLENCE  operating  philosophy,  our Great People and our
commitment to helping each of them achieve their full potential  through Coastal
Federal University...we believe it's the best formula possible to assure a great
future.
<PAGE>

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



 



                                                   /S/Michael C. Gerald
                                                   --------------------
                                                   Michael C. Gerald
                                                   President

                                       7
<PAGE>
                     MANAGEMENT'S DISCUSSION AND ANALYSIS

General

     Coastal Financial Corporation (the "Company"), reported $5.8 million in net
income for the year ended  September 30, 1997,  compared to $3.7 million for the
year ended  September  30, 1996.  Net earnings for the year ended  September 30,
1996 included a special assessment from the FDIC for the recapitalization of the
Savings  Association  Insurance  Fund  ("SAIF") of $1.6  million,  and a related
reduction in income taxes of $615,000. Excluding the one-time SAIF assessment in
fiscal 1996,  operating  earnings in fiscal 1997 increased 23% over fiscal 1996.
Net interest  income  increased  $2.3 million as a result of increased  interest
income of $3.3  million  offset  by an  increase  of $1.1  million  in  interest
expense. Provision for loan losses decreased slightly from $790,000 for the year
ended  September  30, 1996,  to $760,000 for the year ended  September 30, 1997.
Other  income  increased  slightly  from $4.6  million in fiscal  1996,  to $4.7
million in 1997.  General and  administrative  expenses  decreased  $870,000 for
fiscal 1997, as compared to fiscal 1996.  Included in general and administrative
expenses in fiscal 1996, is a $1.6 million special  assessment from the FDIC for
the recapitalization of the SAIF Insurance Fund.

     Total assets  increased from $459.7 million at September 30, 1996 to $494.0
million at September  30, 1997,  or 7.5%.  Liquid  assets,  consisting  of cash,
interest-bearing  deposits,  and  securities,  decreased  from $65.3  million at
September  30, 1996 to $62.6  million at September  30, 1997.  Loans  receivable
increased  9.0% from $370.4  million at September 30, 1996, to $403.6 million at
September 30, 1997. Total loan  originations for fiscal 1997 were $178.5 million
as  compared  to $160.4  million  for fiscal  1996.  Mortgage-backed  securities
decreased  from  $27.0  million  at  September  30,  1996,  to $23.0  million at
September 30, 1997.

     The growth in loans was funded by increased  deposits of $33.7  million and
loan  repayments.  The  Company's  strategy is to increase  its reliance on core
transaction deposits as opposed to certificates of deposit and advances from the
Federal Home Loan Bank  ("FHLB").  During fiscal 1997,  deposits  increased from
$313.4  million at September 30, 1996, to $347.1  million at September 30, 1997.
During  this same  period,  transaction  deposits  increased  $26.4  million and
certificate accounts increased $10.6 million.

     As a result of $5.8 million in net earnings,  less the cash  dividends paid
to shareholders of approximately  $1.6 million,  stockholders'  equity increased
from $27.7 million at September 30, 1996 to $32.4 million at September 30, 1997.


Liquidity and Capital Resources

     In  accordance  with OTS  regulations,  the Company is required to maintain
specific  levels of cash and liquid  investments  in qualifying  types of United
States treasury and Federal agency  securities and other  investments  generally
having  maturities of five years or less. The required level of such investments
is calculated on a liquidity base,  consisting of net withdrawable  accounts and
short-term  borrowings,  and is equal to 5.0% of such  base  amount.  Short-term
liquid assets may not be less than 1.0% of the liquidity base.

     Historically,  the Company has maintained its liquidity at levels  believed
by  management  to be  adequate  to  meet  requirements  of  normal  operations,
potential  deposit  outflows  and strong loan demand and still allow for optimal
investment of funds and return on assets. The liquidity ratio, as calculated for
regulatory purposes,  was 7.3%, 8.0%, and 6.1% for the years ended September 30,
1995, 1996 and 1997,  respectively.  The Company expects to continue to maintain
liquidity at approximately the same level as 1997.

     The  principal  sources  of  funds  for the  Company  are cash  flows  from
operations,   consisting  mainly  of  mortgage,  consumer  and  commercial  loan
payments,  retail customer deposits and advances from the Federal Home Loan Bank
("FHLB") of Atlanta.

     The principal use of cash flows is the origination of loans receivable. The
Company originated loans receivable of $141.0 million, $160.4 million and $178.5
million for the years ended September 30, 1995, 1996 and 1997,  respectively.  A
large portion of these loan  originations  were financed  through loan principal
repayments  which amounted to $104.2  million,  $93.6 million and $109.9 million
for the  years  ended  September  30,  1995,  1996 and  1997,  respectively.  In
addition,  the Company has sold certain loans in the secondary market to finance
future loan  originations.  The increase in  originations  and sales of mortgage
loans can be primarily  attributed to the purchase of Coastal  Federal  Mortgage
("CFM"),  in November 1995. CFM specializes in originating  conforming  mortgage
loans which are then sold to correspondent financial institutions.  For the year
ended  September 30, 1997, CFM originated  $40.6 million of loans and sold $38.4
million of loans.  For the years ended  September 30, 1995,  1996 and 1997,  the
Company sold loans  amounting to $2.8 million,  $40.7 million and $44.2 million,
respectively.

     During 1997,  the Company  used deposit  growth to fund the majority of its
loan growth. In fiscal 1997, deposits increased from $313.4 million at September
30, 1996, to $347.1  million at September 30, 1997.  The increase was attributed
to  transaction  accounts  which  increased  approximately  $26.4  million,  and
certificate  accounts  which  increased  $10.6  million.  This was  offset  by a
decrease in passbook accounts of $3.4 million.

     At  September  30, 1997,  the Company had  commitments  to  originate  $3.2
million in loans and $31.4 million in unused lines of credit,  which the Company
expects to fund from normal operations.

     At September 30, 1997,  the Company had $111.9 million of  certificates  of
deposit  which  were  due  to  mature  within  one  year.  Based  upon  previous
experience, the Company believes that a major portion of these certificates will
be  redeposited.  Additionally,  at September  30, 1997,  the Company had excess
collateral  pledged to the FHLB which  would  support  additional  FHLB  advance
borrowings of $59.0 million.


                                       8
<PAGE>
     As a condition of deposit insurance,  current FDIC regulations require that
Coastal  Federal  Savings  Bank (the  "Bank")  calculate  and maintain a minimum
regulatory capital requirement on a quarterly basis and satisfy such requirement
at the calculation date and throughout the ensuing quarter.  The Bank's tangible
and core capital approximated $31.2 million at September 30, 1997, exceeding the
Bank's  tangible  and core  requirements  by $23.8  million  and $16.5  million,
respectively.  At September 30, 1997,  the Bank's  capital  exceeded its current
risk-based minimum capital  requirement by $9.6 million.  The risk-based capital
requirement may increase in the future.


Results of Operations

     Comparison of the Years Ended September 30, 1996 and 1997


General

     Net  earnings  were $5.8  million  for the year ended  September  30,  1997
compared to $3.7 million for the year ended September 30, 1996.  Included in net
earnings   for   1996,   is  a  special   assessment   from  the  FDIC  for  the
recapitalization of the SAIF of $1.6 million,  and a related reduction in income
taxes of $615,000.  Excluding this special assessment,  net income increased 23%
in 1997. Net interest income increased $2.3 million  primarily as a result of an
increase in interest  income of $3.3 million  which was offset by an increase in
interest expense of $1.1 million.


Interest Income

     Interest  income for the year ended  September 30, 1997,  increased 9.6% to
$38.1 million as compared to $34.7 million for the year ended September 30, 1996
primarily  due to the  constant  yield on assets and a 8.9%  increase in average
interest-earning  assets. The net yield on interest-earning  assets for the year
ended  September  30,  1996 and  1997  was  8.46%.  The  average  yield on loans
receivable  for  fiscal  year  1997 was  8.70%  compared  to 8.57% in 1996.  The
increase in yield on loans  receivables  resulted  from the  repricing of teaser
rate  ARMs  originated  in  previous  years  and  the  continued  growth  of the
commercial real estate loan portfolio which has a higher yield than the mortgage
loan portfolio.  The yield on investments which includes Investments,  Overnight
Funds and Federal Funds,  increased to 6.70% for the fiscal year 1997 from 6.55%
for  fiscal  year 1996.  Total  interest-earning  assets  for  fiscal  year 1997
averaged $452.5 million  compared to $415.5 million for the year ended September
30, 1996.


Interest Expense

     Interest expense on interest-bearing  liabilities was $20.1 million for the
year ended  September 30, 1997, as compared to $19.1 million in fiscal 1996. The
cost of interest-bearing  liabilities was 4.57% for the year ended September 30,
1997, compared to 4.70% in fiscal year 1996. The increase in interest expense of
5.5%  primarily  resulted  from a growth in  deposits  and a slight  increase in
overall market rates paid on deposits. The average cost of deposits for the year
ended  September  30,  1997,  was 4.15%  compared  to 4.08%  for the year  ended
September 30, 1996. The cost of FHLB advances for fiscal 1997 was 5.95% compared
to 6.27% for fiscal 1996. Total average  interest-bearing  liabilities increased
8.0% from $406.2  million at September 30, 1996, to $438.6  million at September
30, 1997.


Net Interest Income

     Net  interest  income was $17.9  million for the year ended  September  30,
1997,  compared to $15.6 million for the year ended  September 30, 1996. The net
interest margin  increased to 3.89% for fiscal 1997 compared to 3.76% for fiscal
1996.  Average  interest-earning  assets  increased  $37.0 million while average
interest-bearing liabilities increased $32.4 million. At September 30, 1997, the
yield on the one year  treasury  security was  approximately  5.5%,  compared to
approximately 6.1% which was the yield on the 10 year treasury security.  Should
the yield curve continue to remain  relatively flat, the Company may continue to
experience a high amount of mortgage loan  repayments and  refinancings  and may
experience a declining net interest margin in fiscal 1998.


Provision for Loan Losses

     The Company's  provision for loan losses  decreased  slightly from $790,000
for fiscal 1996 to $760,000 for fiscal 1997.  The allowance for loan losses as a
percentage  of loans was  1.19% at  September  30,  1997,  compared  to 1.11% at
September 30, 1996. Loans delinquent 90 days or more were .06% of total loans at
September 30, 1997,  compared to .12% at September  30, 1996.  The allowance for
loan losses was 1,906% of loans  delinquent  more than 90 days at September  30,
1997,  compared to 938% at September  30,  1996.  Management  believes  that the
current  level of the  allowance  for loan  losses is adequate  considering  the
composition of the loan portfolio, the portfolio's loss experience,  delinquency
trends,  current regional and local economic conditions and other factors.  Also
see "Nonperforming Assets" and "Allowance for Loan Losses".


Other Income

     In fiscal 1997, total other income increased slightly from $4.6 million for
the period  ended  September  30,  1996,  to $4.7  million for the period  ended
September  30,  1997.  Fees and service  charges on loans and  deposit  accounts
increased $178,000, or 12.6%, for the year ended September 30, 1997, as a result
of growth in core  deposits  and  loans.  Income  from  real  estate  operations
decreased  $204,000 from the prior fiscal year due to expenses related to a real
estate owned commercial property.  This was partially offset by a gain on a land
sale that occurred


                                       9
<PAGE>
in the first  quarter of fiscal  1997 by one of the Bank's  subsidiaries.  Other
income  increased  from $1.7 million for the year ended  September  30, 1996, to
$1.8  million for the year ended  September  30, 1997  primarily  as a result of
increased fees related to ATM and debit card transactions.


Other Expense

     General and  administrative  expenses were $12.7 million for fiscal 1997 as
compared   to  $13.6   million  for  fiscal   1996.   Included  in  general  and
administrative expense in 1996 is the $1.6 million assessment for capitalization
of the SAIF. Salaries and employee benefits were $6.8 million for fiscal 1997 as
compared to $6.2 million for fiscal 1996, or a 10.8%  increase.  Approximately a
third of this increase is attributable to increased group insurance costs,  401K
benefits, and increased bonuses and incentives due to increased return on equity
and increased loan  production.  Normal salary  increases and increased  lending
personnel  accounted for a significant  portion of the remaining  increase.  Net
occupancy,  furniture and fixtures and data processing expense increased $60,000
for fiscal 1997, as compared to fiscal 1996. FDIC insurance  premiums  decreased
from  $622,000  for the year ended  September  30, 1996 to $283,000 for the year
ended September 30, 1997 as a result of the SAIF assessment paid in fiscal 1996.
Other expenses increased from $2.3 million in 1996 to $2.7 million in 1997. This
increase  is  primarily  related to  increased  marketing  expense,  legal fees,
employment  services,  expenses  related to debit cards and expenses  related to
transaction accounts.


Income Taxes

     Income taxes  increased from $2.2 million in fiscal 1996 to $3.4 million in
fiscal 1997 as a result of increased earnings before income taxes.


Results of Operations

     Comparison of the Years Ended September 30, 1995 and 1996


General

     Net earnings  were $3.7 million for the years ended  September 30, 1995 and
1996.  Included in net earnings for 1996, is a special  assessment from the FDIC
for the  recapitalization of the SAIF of $1,620,000,  and a related reduction in
income  taxes  of  $615,000.  Excluding  this  special  assessment,  net  income
increased 27.0% in 1996. Net interest income increased $2.6 million primarily as
a result of an increase in interest  income of $4.4 million  which was offset by
an increase  in  interest  expense of $1.8  million.  Provision  for loan losses
increased $588,000.  Other income increased from $3.3 million for the year ended
September  30,  1995,  to $4.6  million for the year ended  September  30, 1996.
General and  administrative  expenses  increased  $3.4 million when  compared to
fiscal 1995. Included in general and administrative  expenses in fiscal 1996, is
a $1.6 million special assessment from the FDIC for the  recapitalization of the
SAIF Insurance Fund.


Interest Income

     Interest income for the year ended  September 30, 1996,  increased 14.5% to
$34.7 million as compared to $30.3 million for the year ended September 30, 1995
primarily due to the increased  yield on assets and a 11.7%  increase in average
interest-earning  assets. The net yield on interest-earning  assets for the year
ended  September  30,  1996,  was 8.46%  compared to a net yield of 8.27% in the
prior year. The increase in net yield  primarily  resulted from the repricing of
adjustable-rate  mortgage loans and growth in commercial real estate loans which
have a higher yield.  The average yield on loans receivable for fiscal year 1996
was 8.57%  compared to 8.39% in 1995.  The yield on  investments  which includes
Investments,  Overnight  Funds and  Federal  Funds,  increased  to 6.55% for the
fiscal year 1996 from 5.14% for fiscal year 1995. Total interest-earning  assets
for fiscal year 1996 averaged $406.2 million  compared to $371.9 million for the
year ended September 30, 1995.


Interest Expense

     Interest expense on interest-bearing  liabilities was $19.1 million for the
year ended  September 30, 1996, as compared to $17.3 million in fiscal 1995. The
cost of interest-bearing  liabilities was 4.70% for the year ended September 30,
1996, compared to 4.75% in fiscal year 1995. The increase in interest expense of
10.5%  primarily  resulted  from a growth in deposits  and a slight  increase in
overall market rates paid on deposits. The average cost of deposits for the year
ended  September  30,  1996,  was 4.08%  compared  to 3.96%  for the year  ended
September 30, 1995. The cost of FHLB advances for fiscal 1996 was 6.27% compared
to 6.53% for fiscal 1995. Total average  interest-bearing  liabilities increased
11.7% from $363.7  million at September 30, 1995, to $406.2 million at September
30, 1996.


Net Interest Income

     Net  interest  income was $15.6  million for the year ended  September  30,
1996,  compared to $13.1 million for the year ended  September 30, 1995. The net
interest margin  increased to 3.76% for fiscal 1996 compared to 3.52% for fiscal
1995.  Average  interest-earning  assets  increased  $43.5 million while average
interest-bearing liabilities increased $42.4 million. At September 30, 1996, the
cost of one month advances was  approximately  5.5%,  compared to  approximately
6.7%  which was the yield on the 10 year  treasury  security.  Should  the yield
curve continue to remain relatively flat, the Company may continue to experience
a high  amount  of  loan  prepayments  and  refinancings  and may  experience  a
declining net interest margin in fiscal 1997.


                                       10
<PAGE>
Provision for Loan Losses

     The Company's  provision for loan losses increased from $202,000 for fiscal
1995 to $790,000 for fiscal 1996.  The allowance for loan losses as a percentage
of loans was 1.11% at  September  30, 1996,  compared to 1.00% at September  30,
1995.  During  fiscal  1996,  commercial  real  estate  and  construction  loans
increased 16.3%. As a result of the increase in loans which may possess a higher
degree  of risk,  the  Company  increased  its  allowance  for loan  losses as a
percentage of loans.  Loans  delinquent 90 days or more were .12% of total loans
at September 30, 1996, compared to .37% at September 30, 1995. The allowance for
loan  losses was 937% of loans  delinquent  more than 90 days at  September  30,
1996,  compared to 270% at September  30,  1995.  Management  believes  that the
current  level of the  allowance  for loan  losses is adequate  considering  the
composition of the loan portfolio, the portfolio's loss experience,  delinquency
trends,  current regional and local economic conditions and other factors.  Also
see "Nonperforming Assets" and "Allowance for Loan Losses."


Other Income

     In fiscal 1996, total other income increased to $4.6 million as compared to
$3.3 million for the period ended  September 30, 1995.  Fees and service charges
on loans and deposit  accounts  increased  $364,000 for the year ended September
30, 1996,  as a result of growth in core  deposits  and loans.  Income from real
estate operations  decreased  $531,000 from the prior fiscal year due to reduced
sales of real estate at the Bank's  subsidiaries.  This was offset by  increased
gains on sales of loans  receivable and  mortgage-backed  securities of $951,000
and  $189,000,  respectively,   primarily  due  to  increased  mortgage  banking
activities of CFM which was acquired in November  1995.  Other income  increased
from $1.3 million for the year ended September 30, 1995, to $1.7 million for the
year ended  September 30, 1996. The increase is attributed to an increase of fee
income  from ATMs of $85,000,  fee income from debit cards of $53,000,  gains on
the sale of assets  of  $44,000,  miscellaneous  income of  $44,000  and  higher
revenues  from  sales  of  alternative  investment  products  at  the  Company's
subsidiary, Coastal Investments Corporation, of $154,000.


Other Expense

     General and  administrative  expenses were $13.6 million for fiscal 1996 as
compared to $10.2 million for fiscal 1995.  Salaries and employee  benefits were
$6.2 million for fiscal 1996 as compared to $5.3  million for fiscal 1995,  or a
16.3%  increase.  Approximately  a third of this  increase  is  attributable  to
increased  group  insurance  costs,  401K  benefits,  and increased  bonuses and
incentives. In addition, personnel at CFM accounted for approximately a third of
the increase.  Normal salary increases and increased lending personnel accounted
for a significant  portion of the remaining increase.  Net occupancy,  furniture
and fixtures and data processing  expense increased $498,000 for fiscal 1996, as
compared to fiscal 1995 primarily as a result of  enhancements to technology and
the  addition of CFM.  FDIC  insurance  premiums,  excluding  the  special  SAIF
assessment, increased from $566,000 for fiscal 1995, to $622,000 for fiscal 1996
as a result of the 14.8% growth in deposits.  Other expenses increased from $1.9
million  in 1995 to $2.3  million  in 1996.  In  addition,  in 1996 the  Company
recorded a special assessment from the FDIC for the recapitalization of the SAIF
of $1,620,000.


Income Taxes

     Although  fiscal 1996 net income was  slightly  higher  than  fiscal  1995,
income taxes were slightly lower due to increased tax exempt interest.


Non-performing Assets

     Non-performing  assets were  $507,000  at  September  30, 1997  compared to
$768,000 at September 30, 1996.  Loans past due 90 days or more  decreased  from
$445,000 at September 30, 1996,  to $257,000 at September 30, 1997.  Real estate
acquired through  foreclosure  decreased from $323,000 at September 30, 1996, to
$250,000 at September 30, 1997. At September 30, 1997,  approximately 40% of the
loans 90 days past due are  secured by  residential  mortgage  loans.  Loans are
reviewed  on a regular  basis and an  allowance  for  uncollectable  interest is
established on loans where collection is questionable, generally when such loans
become 90 days  delinquent.  Loan balances for which interest  amounts have been
reserved and all loans more than 90 days  delinquent  are  considered to be on a
non-accrual  basis.  Typically,  payments  received  on a  non-accrual  loan are
applied to the  outstanding  principal or recognized as interest  based upon the
collectability of the loan as determined by management.


Allowance for Loan Losses

     The  Company's  management  evaluates  the  need  to  establish  additional
allowances  against  losses on loans  quarterly.  Such an evaluation  includes a
review of all loans for which full  collectability may not be reasonably assured
and considers, among other matters, the estimated market value of the underlying
collateral  of problem  loans,  composition  of the loan  portfolio,  prior loss
experience,  economic  conditions,  etc. The Company established  provisions for
loan losses for the years ended  September 30, 1995, 1996 and 1997, of $202,000,
$790,000 and  $760,000,  respectively.  For the years ended  September 30, 1995,
1996 and 1997,  the  Company  had net  charge-offs  (recoveries)  of  ($23,000),
$196,000 and $140,000,  respectively.  At September 30, 1997, the Company had an
allowance for loan losses of $4.9 million, which was 1.19% of net loans compared
to 1.11% at September  30, 1996.  Management  believes that the current level of
the allowance for loan losses is presently adequate  considering the composition
of the loan portfolio,  the portfolio's  loss  experience,  delinquency  trends,
current  regional  and  local  economic  conditions  and  other  factors.  While
management  uses the best  information  available  to make  evaluations,  future
adjustments


                                       11
<PAGE>
to the allowance may be necessary if economic  conditions  differ  substantially
from the assumptions  used in making the evaluation.  The allowance for possible
loan losses are subject to periodic evaluation by various regulatory authorities
and may be subject to adjustment upon their examination.


Impact of New Accounting Pronouncements

     In February 1997, the Financial  Accounting  Standards  Board (FASB) issued
Statement of Financial  Accounting  Standards (SFAS) No. 128, Earnings per Share
(EPS),  which is  effective  for both  interim and annual  periods  ending after
December 15, 1997. This statement supersedes Accounting Principles Board Opinion
No. 15, Earnings per Share. The purpose of this statement is to simplify current
reporting and make U.S.  reporting  comparable to international  standards.  The
statement  requires dual  presentation of basic and diluted EPS by entities with
complex  capital   structures  (as  defined  by  the  statement).   The  Company
anticipates  that adoption of this  standard will not have a material  effect on
EPS.

     Also,  in  February  1997,  the FASB issued  SFAS No.  129,  Disclosure  of
information about Capital Structure, which is effective for financial statements
for periods  ending  after  December 15, l997.  This  statement  applies to both
public and nonpublic entities. The new statement requires no change for entities
subject to the existing  requirements.  The Company anticipates that adoption of
the standard will not have a material affect on the Company.

     In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130  establishes  standards for reporting and display of  comprehensive
income and its components in a full set of general purpose financial statements.
Enterprises  are required to classify items of "other  comprehensive  income" by
their  nature in the  financial  statement  and  display  the  balance  of other
comprehensive  income  separately  in  the  equity  section  of a  statement  of
financial  position.  SFAS No.  130 is  effective  for both  interim  and annual
periods  beginning  after December 15, 1997.  Earlier  application is permitted.
Comparative financial statements provided for earlier periods are required to be
reclassified to reflect the provisions of this statement.

     In June 1997, the FASB issued SFAS No. 131,  Disclosures  about Segments of
an Enterprise and Related  Information.  SFAS No. 131 establishes  standards for
the way public business  enterprises are to report  information  about operating
segments in annual financial statements and requires those enterprises to report
selected  information  about  operating  segments in interim  financial  reports
issued to shareholders.  SFAS No. 131 is effective for financial  statements for
periods beginning after December 15, 1997. Earlier application is encouraged. In
the initial year of application, comparative information for earlier years is to
be restated, unless it is impractical to do so. SFAS No. 131 need not be applied
to interim  financial  statements  in the initial year of its  application,  but
comparative  information  for interim periods in the initial year of application
shall be reported in financial statements for interim periods in the second year
of application.  It is not anticipated that this standard will materially effect
the Company.


Effects of Inflation and Changing Prices

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


Forward Looking Statements

     This report may contain  certain  "forward-looking  statements"  within the
meaning of Section 27A of the Securities Exchange Act of 1934, as amended,  that
represent the Company's  expectations or beliefs concerning future events.  Such
forward-looking  statements  are about  matters that are  inherently  subject to
risks and  uncertainties.  Factors that could influence the matters discussed in
certain  forward-looking  statements  include  the timing and amount of revenues
that may be  recognized  by the  Company,  continuation  of current  revenue and
expense trends (including trends affecting  charge-offs),  absence of unforeseen
changes in the Company's  markets,  legal and  regulatory  changes,  and general
changes in economy (particularly in the markets served by the Company).


                                       12
<PAGE>
                          INDEPENDENT AUDITORS' REPORT



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

     We have  audited the  consolidated  statements  of  financial  condition of
Coastal  Financial  Corporation and subsidiaries (the "Company") as of September
30,  1996 and 1997,  and the  related  consolidated  statements  of  operations,
stockholders'  equity,  and cash  flows for each of the years in the  three-year
period  ended   September  30,  1997.   These   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects,  the financial position of the Company
at September 30, 1996 and 1997,  and the results of their  operations  and their
cash flows for each of the years in the  three-year  period ended  September 30,
1997, in conformity with generally accepted accounting principles.



                                                        /s/KPMG Peat Marwick LLP
                                                        ------------------------
                                                           KPMG Peat Marwick LLP




Greenville, South Carolina
October 17, 1997
<PAGE>

                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


                          September 30, 1996 and 1997




<TABLE>
<CAPTION>
                                                                                           1996         1997
                                         ASSETS                                          ------------ ------------
<S>                                                                                      <C>          <C>
                                                                                           (Dollars in thousands)
 Cash and amounts due from banks  ......................................................  $  15,639    $ 12,852
 Short-term interest-bearing deposits   ................................................      5,222         559
 Investment securities held to maturity (market value of $332 at September 30, 1996) ...        330          --
 Investment securities available for sale  .............................................     17,141      26,171
 Mortgage-backed securities available for sale   .......................................     27,029      23,023
 Loans receivable (net of allowance for loan losses of $4,172 at September 30, 1996 and
  $4,902 at September 30, 1997) ........................................................    370,368     403,570
 Loans receivable held for sale   ......................................................      6,803       8,359
 Real estate acquired through foreclosure, net   .......................................        323         250
 Office property and equipment, net  ...................................................      5,736       7,561
 Federal Home Loan Bank (FHLB) stock, at cost ..........................................      5,228       5,618
 Accrued interest receivable on loans   ................................................      2,444       2,814
 Accrued interest receivable on investment securities  .................................        526         452
 Other assets   ........................................................................      2,923       2,774
                                                                                         ----------    --------
                                                                                          $ 459,712    $494,003
                                                                                         ==========    ========
                                    LIABILITIES AND STOCKHOLDERS' EQUITY
 Liabilities:
  Deposits   ...........................................................................    313,430     347,116
  Securities sold under agreements to repurchase .......................................      3,365       2,666
  Advances from FHLB  ..................................................................    104,553     101,478
  Other borrowings .....................................................................      1,968       2,193
  Drafts outstanding  ..................................................................      1,922       1,018
  Advances by borrowers for property taxes and insurance  ..............................      1,435       1,409
  Accrued interest payable  ............................................................        798         952
  Other liabilities   ..................................................................      4,560       4,780
                                                                                         ----------    --------
    Total liabilities ..................................................................    432,031     461,612
                                                                                         ----------    --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                                      <C>          <C>  
 Stockholders' equity:
  Serial preferred stock, 1,000,000 shares authorized and unissued .....................         --          --
  Common stock $.01 par value, 5,000,000 shares authorized;
   4,590,155 shares at September 30, 1996 and 4,646,534
   shares at September 30, 1997 issued and outstanding .................................         46          46
  Additional paid-in capital   .........................................................      8,698       8,698
  Retained earnings, restricted   ......................................................     20,015      23,402
  Treasury stock, at cost (54,161 and 9,760 shares, respectively)  .....................     (1,185)       (182)
  Unrealized gain on securities available for sale, net of
   income taxes ........................................................................        107         427
                                                                                         ----------    --------
    Total stockholders' equity .........................................................     27,681      32,391
                                                                                         ----------    --------
                                                                                          $ 459,712    $494,003
                                                                                         ==========    ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       14


<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES


                     CONSOLIDATED STATEMENTS OF OPERATIONS


                 Years ended September 30, 1995, 1996 and 1997




<TABLE>
<CAPTION>
                                                                        1995          1996        1997
                                                                      ------------ ------------ ----------
<S>                                                                   <C>          <C>          <C>
                                                                        (In thousands, except share data)
Interest income:
 Loans receivable ...................................................  $   28,671     31,698      33,769
 Investment securities  .............................................         381        721       1,574
 Mortgage-backed securities   .......................................         732      1,805       2,446
 Other   ............................................................         544        496         276
                                                                      -----------     -------     -------
   Total interest income   ..........................................      30,328     34,720      38,065
                                                                      -----------     -------     -------
Interest expense:
 Deposits   .........................................................       9,890     11,689      13,650
 Securities sold under agreements to repurchase .....................          63        323       1,130
 Advances from FHLB  ................................................       7,319      7,079       5,366
                                                                      -----------     -------     -------
   Total interest expense  ..........................................      17,272     19,091      20,146
                                                                      -----------     -------     -------
   Net interest income  .............................................      13,056     15,629      17,919
Provision for loan losses  ..........................................         202        790         760
                                                                      -----------     -------     -------
   Net interest income after provision for loan losses   ............      12,854     14,839      17,159
                                                                      -----------     -------     -------
Other income:
 Fees and service charges on loans and deposit accounts  ............       1,051      1,415       1,593
 Gain on sales of loans held for sale  ..............................          39        990         931
 Gain (loss) on sales of investment securities, net   ...............          --         (6)          7
 Gain on sales of mortgage-backed securities, net  ..................          --        189         235
 Income (loss) from real estate acquired through foreclosure   ......         224        202        (137)
 Income from real estate operations .................................         652        143         278
 Other income  ......................................................       1,284      1,699       1,792
                                                                      -----------     --------    -------
   Total other income   .............................................       3,250      4,632       4,699
                                                                      -----------     --------    -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                   <C>          <C>          <C>
General and administrative expenses:
 Salaries and employee benefits  ....................................       5,307      6,174       6,841
 Net occupancy, furniture and fixtures and data processing expense          2,333      2,831       2,891
 FDIC insurance premium .............................................         566        622         283
 FDIC insurance premium to recapaitalize the SAIF  ..................          --      1,620          --
 Other expense ......................................................       1,946      2,339       2,701
                                                                      -----------     --------    -------
   Total general and administrative expense  ........................      10,152     13,586      12,716
                                                                      -----------     --------    -------
   Earnings before income taxes  ....................................       5,952      5,885       9,142
Income taxes   ......................................................       2,232      2,164       3,351
                                                                      -----------     --------    -------
Net income  .........................................................  $    3,720      3,721       5,791
                                                                      ===========     ========    =======
Earnings per common share  ..........................................  $     0.78       0.78        1.19
                                                                      ===========     ========    =======
Weighted average common shares outstanding   ........................   4,740,000   4,793,000   4,877,000
                                                                      ===========   ==========  =========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       15
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES


                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


                 Years ended September 30, 1995, 1996 and 1997
<TABLE>
<CAPTION>
                                                                    Additional
                                                           Common    Paid-In      Retained
                                                            Stock    Capital      Earnings
                                                           -------- ------------ -------------
<S>                                                        <C>      <C>          <C>
                                                                   (In thousands)
 Balance at September 30, 1994 ........................... $ 45        $6,614      $18,446
 Exercise of stock options  ..............................   --            96         (215)
 Treasury stock repurchases ..............................   --            --           --
 Cash paid for fractional shares  ........................   --            --           (6)
 Cash dividends ..........................................   --            --       (1,282)
 Common stock dividend   .................................    1         1,988       (1,989)
 Net income  .............................................   --            --        3,720
                                                           ----        ------      ------- 
 Balance at September 30, 1995 ...........................   46         8,698       18,674
 Exercise of stock options  ..............................   --            --         (863)
 Issuance of shares in acquisition   .....................   --            --          (67)
 Cash paid for fractional shares  ........................   --            --          (17)
 Cash dividends ..........................................   --            --       (1,433)
 Unrealized gain on securities available for sale, net of
  income taxes  ..........................................   --            --           --
 Net income  .............................................   --            --        3,721
                                                           ----        ------      ------- 
 Balance at September 30, 1996 ...........................   46         8,698       20,015
 Exercise of stock options  ..............................   --            --         (786)
 Cash paid for fractional shares  ........................   --            --          (18)
 Cash dividends ..........................................   --            --       (1,600)
 Unrealized gain on securities available for sale, net of
  income taxes  ..........................................   --            --           --
 Net income  .............................................  --             --        5,791
                                                           ----        ------      ------- 
 Balance at September 30, 1997 ........................... $ 46        $8,698      $23,402
                                                           ====        ======      ======= 
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                     Total
                                                            Treasury             Stockholders'
                                                             Stock       Other      Equity
                                                           ------------- ------- --------------
<S>                                                        <C>           <C>     <C>
 Balance at September 30, 1994 ...........................  $  (2,001)     $ --    $23,104
 Exercise of stock options  ..............................        241        --        122
 Treasury stock repurchases ..............................       (838)       --       (838)
 Cash paid for fractional shares  ........................         --        --         (6)
 Cash dividends ..........................................         --        --     (1,282)
 Common stock dividend   .................................         --        --         --
 Net income  .............................................         --        --      3,720
                                                            ---------     ---      ---------
 Balance at September 30, 1995 ...........................     (2,598)       --     24,820
 Exercise of stock options  ..............................        970        --        107
 Issuance of shares in acquisition   .....................        443        --        376
 Cash paid for fractional shares  ........................         --        --        (17)
 Cash dividends ..........................................         --        --     (1,433)
 Unrealized gain on securities available for sale, net of
  income taxes  ..........................................         --       107        107
 Net income  .............................................         --        --      3,721
                                                            ---------     -----    ---------
 Balance at September 30, 1996 ...........................     (1,185)      107     27,681
 Exercise of stock options  ..............................      1,003        --        217
 Cash paid for fractional shares  ........................         --        --        (18)
 Cash dividends ..........................................         --        --     (1,600)
 Unrealized gain on securities available for sale, net of
  income taxes  ..........................................         --       320        320
 Net income  .............................................         --        --      5,791
                                                            ---------     -----    ---------
 Balance at September 30, 1997 ...........................  $    (182)     $427    $32,391
                                                            =========     =====    =========
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       16
<PAGE>

                COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES


                     CONSOLIDATED STATEMENTS OF CASH FLOWS


                 Years ended September 30, 1995, 1996 and 1997



<TABLE>
<CAPTION>
                                                                                            1995          1996         1997
                                                                                          ------------- ------------ ------------
<S>                                                                                       <C>           <C>          <C>
                                                                                                       (In thousands)
Cash flows from operating activities:
 Net earnings ...........................................................................  $    3,720        3,721        5,791
 Adjustments to reconcile net earnings to net cash provided (used) by operating
activities:
   Income from real estate partnerships  ................................................        (652)        (143)        (278)
   Depreciation  ........................................................................         552          740          865
   Provision for loan losses ............................................................         202          790          760
   Origination of loans receivable held for sale  .......................................      (5,199)     (45,082)     (45,717)
   Proceeds from sales of loans receivable held for sale   ..............................       2,806       40,672       44,160
   (Increase) decrease in:
    Other assets ........................................................................      (1,266)        (587)         149
    Accrued interest receivable .........................................................        (434)        (553)        (296)
   Increase (decrease) in:
    Accrued interest payable ............................................................         284           31          154
    Other liabilities  ..................................................................         531        1,960          220
                                                                                          -----------      -------      -------
     Net cash provided (used) by operating activities   .................................         544        1,549        5,808
                                                                                          -----------      -------      -------
Cash flows from investing activities:
 Proceeds from maturities of investment securities held to maturity .....................       5,675           --           --
 Purchases of investment securities held to maturity ....................................        (324)          --           --
 Proceeds from sale of investment securities available for sale  ........................          --        7,000        5,693
 Proceeds from maturities of investment securities available for sale  ..................          --        1,999       17,839
 Purchases of investment securities available for sale  .................................          --      (24,331)     (32,022)
 Purchases of loans receivable  .........................................................      (6,337)     (12,448)      (9,948)
 Proceeds from sale of mortgage-backed securities available for sale   ..................          --       13,220       25,678
 Purchases of mortgage-backed securities available for sale   ...........................      (1,000)     (11,867)     (26,636)
 Principal collected on mortgage-backed securities   ....................................         811        4,129        4,850
 Origination of loans receivable, net ...................................................    (135,830)    (115,288)    (132,786)
 Principal collected on loans receivable ................................................     104,215       93,560      109,946
 Proceeds from sales of real estate acquired through foreclosure ........................         305          937          456
 Proceeds from sales of office properties and equipment .................................          --          192           --
 Purchases of office properties and equipment  ..........................................      (1,166)      (1,253)      (2,690)
 Redemptions (purchases) of FHLB stock   ................................................         101         (502)        (390)
 Other investing activities, net   ......................................................         884          447          914
                                                                                          -----------     --------     --------
     Net cash used by investing activities  .............................................     (32,666)     (44,205)     (39,096)
                                                                                          -----------     --------     --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                                       <C>           <C>          <C>
Cash flows from financing activities:
 Increase in deposits  ..................................................................      25,714       40,331       33,686
 Increase (decrease) in securities sold under agreements to repurchase ..................         771          688       (2,666)
 Proceeds from FHLB advances ............................................................     365,120       75,850      198,170
 Repayment of FHLB advances  ............................................................    (368,340)     (64,617)    (201,245)
 Proceeds from other borrowings, net  ...................................................          --        1,968          224
 Increase (decrease) in advance payments by borrowers for property taxes and insurance             79         (194)         (26)
 Increase (decrease) in drafts outstanding, net   .......................................         411         (367)        (904)
 Repurchase of treasury stock, at cost   ................................................        (838)          --           --
 Cash dividends to stockholders and cash for fractional shares   ........................      (1,288)      (1,450)      (1,618)
 Exercise of stock options   ............................................................          57          107          217
                                                                                          -----------     --------     --------
     Net cash provided by financing activities ..........................................      21,686       52,316       25,838
                                                                                          -----------     --------     --------
Net increase (decrease) in cash and cash equivalents ....................................     (10,436)       9,660       (7,450)
                                                                                          -----------     --------     --------
Cash and cash equivalents at beginning of year ..........................................      21,637       11,201       20,861
                                                                                          -----------     --------     --------
Cash and cash equivalents at end of year ................................................  $   11,201       20,861       13,411
                                                                                          ===========     ========     ========
Supplemental information:
 Interest paid   ........................................................................  $   16,988       19,060       19,992
                                                                                          ===========     ========     ========
 Income taxes paid  .....................................................................  $    2,377        3,030        2,687
                                                                                          ===========     ========     ========
Supplemental schedule of non-cash investing and financing transactions:
 Securitization of mortgage loans into mortgage-backed securities   .....................  $   11,793       19,366           --
                                                                                          ===========     ========     ========
 Transfer of mortgage loans to real estate acquired through foreclosure   ...............  $      313          471          383
                                                                                          ===========     ========     ========
 Common stock dividend declared .........................................................  $    1,989           --           --
                                                                                          ===========     ========     ========
 Transfer of investment securities held to maturity to available for sale ...............  $       --       14,775           --
                                                                                          ===========     ========     ========
</TABLE>

          See accompanying notes to consolidated financial statements

                                       17
<PAGE>

                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The following is a summary of the more significant accounting policies used
in the preparation and presentation of the accompanying  consolidated  financial
statements. The preparation of financial statements in conformity with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions.  These  estimates  and  assumptions  affect the reported  amount of
assets and liabilities  and the disclosure of contingent  assets and liabilities
at the date of the financial statements.  In addition,  they affect the reported
amounts of income and expenses during the reporting period. Actual results could
differ from these estimates and assumptions.


     (a) Principles of Consolidation

     The accompanying  consolidated financial statements include the accounts of
Coastal   Financial   Corporation   (the   "Company"),   and  its   wholly-owned
subsidiaries,  Coastal Federal Mortgage,  Inc., Coastal Investments  Corporation
and Coastal Federal Savings Bank (the "Bank") and its  wholly-owned  subsidiary,
Coastal   Mortgage   Bankers  and  Realty  Co.,  Inc.   (and  its   wholly-owned
subsidiaries,   Shady  Forest  Development  Corporation,   Sherwood  Development
Corporation,  Ridge Development Corporation, 501 Development Corporation,  North
Beach  Investments,  Inc.  and  North  Strand  Property  Management,  Inc.).  In
consolidation,  all significant intercompany balances and transactions have been
eliminated.  Coastal  Financial  Corporation is a unitary thrift holding company
organized  under the laws of the state of Delaware.  The Company's  subsidiaries
operations consist primarily of the sales of financial products.


     (b) Cash and Cash Equivalents

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


     (c) Investment and Mortgage-backed Securities

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

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

     In November 1995, the FASB issued a guide to implementation of SFAS No. 115
on accounting for certain investments in debt and equity securities which allows
for the one time transfer of certain investments  classified as held to maturity
to available for sale. The Company  reclassified  its investments  classified as
held to maturity to the available for sale  classification  in the first quarter
of fiscal 1996.

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

     The Bank  maintained  liquid  assets in excess of the  amount  required  by
regulations  during  all  periods  included  in  these  consolidated   financial
statements.  The required amount is 5% of the average daily balances of deposits
and short-term borrowings.  Liquid assets consist principally of cash, including
time deposits and investment securities.


     (d) Allowance for Loan Losses

     The Company provides for loan losses on the allowance method.  Accordingly,
all loan losses are charged to the allowance and all  recoveries are credited to
the  allowance.  Additions  to the  allowance  for loan  losses are  provided by
charges to operations based on various factors which, in management's  judgment,
deserve current  recognition in estimating  losses.  Such factors  considered by
management  include the market value of the  underlying  collateral,  growth and
composition of the loan  portfolios,  the relationship of the allowance for loan
losses to outstanding loans, loss experience,  delinquency trends, and local and
regional economic conditions. Management evaluates the carrying


                                       18
<PAGE>

                COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued

value of loans  periodically  and the allowance is adjusted  accordingly.  While
management  uses the best  information  available  to make  evaluations,  future
adjustments  to the  allowance  may be necessary if economic  conditions  differ
substantially from the assumptions used in making the evaluation.  The allowance
for possible loan losses is subject to periodic evaluation by various regulatory
authorities and may be subject to adjustment upon their examination.


     The Company  follows SFAS No. 114,  "Accounting by Creditors for Impairment
of a Loan," for  determining  impairment  on loans.  SFAS No. 114 requires  that
nonhomogenous  impaired loans and certain  restructured loans be measured at the
present value of expected future cash flows  discounted at the loan's  effective
interest rate, at the loan's observable market price or at the fair value of the
collateral if the loan is collateral dependent. A specific reserve is set up for
each impaired loan.

     Also on October 1, 1995, the Company adopted SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures." SFAS
No. 118 amends SFAS No. 114 in the areas of disclosure requirements and methods
for recognizing interest income on an impaired loan.

     Under  SFAS No.  114,  as  amended  by SFAS  No.  118,  when  the  ultimate
collectibility of an impaired loan's principal is in doubt, wholly or partially,
all cash receipts are applied to principal. When this doubt does not exist, cash
receipts are applied under the contractual  terms of the loan agreement first to
principal then to interest income.  Once the recorded principal balance has been
reduced to zero,  future cash  receipts are applied to interest  income,  to the
extent that any interest has been  foregone.  Further cash receipts are recorded
as recoveries of any amounts previously charged off.



     (e) Loans Receivable Held for Sale

     Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or  estimated  market value in the  aggregate.  Net
unrealized  losses  are  provided  for in a  valuation  allowance  by charges to
operations.  At September 30, 1996 and 1997, the Company had approximately  $6.8
million and $8.4 million,  respectively,  in mortgage  loans held for sale.  The
aggregate  market value of loans receivable held for sale exceeded the aggregate
carrying value at September 30, 1996 and 1997.


     (f) Real Estate Owned and Investments in Real Estate Partnerships

     Real estate acquired through foreclosure is initially recorded at the lower
of cost or estimated fair value.  Subsequent to the date of  acquisition,  it is
carried at the lower of cost or fair value, less selling costs. Market values of
real  estate  owned  are  reviewed  regularly  and  allowances  for  losses  are
established when it is determined that the carrying value of real estate exceeds
the fair value  less  selling  costs.  Costs  relating  to the  development  and
improvement  of such property are  capitalized,  whereas those costs relating to
holding the property are charged to expense.

     Real estate  purchased for  development  and sale and  investments  in real
estate  partnerships are stated at the lower of cost or estimated net realizable
value.  Costs  directly  related  to such  real  estate  are  capitalized  until
construction  required  to bring  these  properties  to a salable  condition  is
completed.  Capitalized  costs  include real estate taxes,  interest,  and other
direct costs incurred during the improvement period.

     Gains on the sale of real estate  purchased  for  development  and sale are
recorded  at the time of sale  provided  certain  criteria  relating to property
type,  cash down  payment,  loan  terms,  and other  factors  are met.  If these
criteria are not met at the date of sale,  the gain is deferred  and  recognized
using the installment or cost recovery method until they are satisfied, at which
time the remaining deferred gain is recorded as income.

     Market  values  of real  estate  purchased  for  development  and  sale are
reviewed  regularly and allowances for losses are established  when the carrying
value exceeds the estimated net realizable  value.  In determining the estimated
net realizable  value, the Company deducts from the estimated  selling price the
projected  cost to complete and dispose of the property and the  estimated  cost
(i.e.  interest,  property taxes, etc.) to hold the property to an expected date
of sale.


     (g) Office Properties and Equipment

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


                                       19


<PAGE>
                COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued


     (h) Uncollected Interest

     The Company  maintains an allowance  for the loss of  uncollected  interest
primarily  on loans which are ninety days or more past due.  This  allowance  is
reviewed  periodically  and necessary  adjustments,  if any, are included in the
determination of current interest income.


     (i) Loan Fees and Discounts

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


     (j) Income Taxes

     Deferred  taxes are provided for  differences  in the  financial  reporting
bases for assets and  liabilities  as compared to their tax bases. A current tax
liability or asset is established for taxes presently  payable or refundable and
a deferred tax liability or asset is  established  for future  taxable  items. A
valuation allowance, if applicable,  is established for deferred tax assets that
may not be realized.


     (k) Loan Sales

     Gains or losses  on sales of loans are  recognized  when  control  has been
surrendered  over these assets in accordance  with SFAS No. 125  "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
The resulting  servicing  rights are  amortized in  proportion  to, and over the
period of, estimated net servicing  revenues.  Impairment of mortgage  servicing
rights is  assessed  based on the fair value of those  rights.  Fair  values are
estimated  using  discounted cash flows based on a current market interest rate.
The  amount of  impairment  recognized  is the  amount by which the  capitalized
mortgage servicing rights exceed their fair value.


     (l) Drafts Outstanding

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


     (m) Securities Sold Under Agreement to Repurchase

     The Company  maintains  collateral to certain customers who wish to deposit
amounts  greater  than  $100,000.  These  agreements  function  similarly  to  a
certificate  of deposit in that the agreement is for a fixed length of time at a
fixed interest rate. However, these deposits are not insured by the FDIC but are
insured by a security interest in the security. The Company has classified these
amounts separately from deposits.


     (n) Stock Based Compensation

     In 1996,  the Company  adopted the  disclosure  provisions  of SFAS No. 123
"Accounting for Stock Based Compensation".  The statement permits the Company to
continue accounting for stock based compensation as set forth in APB Opinion 25,
"Accounting for Stock Issued to Employees",  provided the Company  discloses the
proforma  effect on net  income  and  earnings  per share of  adopting  the full
provisions of SFAS No. 123.  Accordingly,  the Company  continues to account for
stock based  compensation  under APB Opinion 25 and has  provided  the  required
proforma disclosures.


     (o) Reclassifications

     Certain amounts in the 1995 and 1996 consolidated financial statements have
been reclassified to conform with the 1997 presentation.  Such reclassifications
had no impact on net income or retained earnings as previously reported.


                                       20
<PAGE>

                COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued


(2) INVESTMENT SECURITIES

     The amortized cost and market value of investment  securities available for
sale at September 30, 1996 is summarized as follows:



<TABLE>
<CAPTION>
                                                                    1996
                                                ---------------------------------------------
                                                              Gross        Gross
                                                Amortized   Unrealized   Unrealized   Market
                                                  Gross       Gains        Losses      Value
                                                ----------- ------------ ------------ -------
<S>                                             <C>         <C>          <C>          <C>
                                                                (In thousands)
        U.S. Government and agency obligations:
         Due within one year ..................   $     --      --             --          --
         Due after one but within five years        13,037      --           (150)     12,887
         Due after five years   ...............      4,297      --            (43)      4,254
                                                ----------  ------------     ----      ------
                                                  $ 17,334      --           (193)     17,141
                                                ==========  ============     ====      ======
</TABLE>

     The amortized cost and market value of investment  securities available for
sale at September 30, 1997 is summarized as follows:



<TABLE>
<CAPTION>
                                                                    1997
                                                ---------------------------------------------
                                                              Gross        Gross
                                                Amortized   Unrealized   Unrealized   Market
                                                  Cost        Gains        Losses      Value
                                                ----------- ------------ ------------ -------
<S>                                             <C>         <C>          <C>          <C>
                                                                (In thousands)
        U.S. Government and agency obligations:
         Due within one year ..................   $    --       --           --            --
         Due after one but within five years        9,996       17           --        10,013
         Due after five years   ...............    16,128       30           --        16,158
                                                ---------       --       ------------  ------
                                                  $26,124       47           --        26,171
                                                =========       ==       ============  ======
</TABLE>
     There were no realized gains or losses during the year ended  September 30,
1995. The Company had gross realized  losses of $18,000 and gross realized gains
of $12,000 for the year ended  September 30, 1996. For the year ended  September
30,  1997,  gross  realized  losses were $58,000 and gross  realized  gains were
$65,000.
<PAGE>
 
     Certain  investment  and  mortgage-backed  securities are pledged to secure
other borrowed money and customer deposits in excess of FDIC insurance coverage.
The  carrying  value  of the  securities  pledged  at  September  30,  1997  was
$5,269,000 with a market value of $5,302,000.


(3) MORTGAGE-BACKED SECURITIES

     Mortgage-backed  securities  available  for  sale  at  September  30,  1996
consisted of the following:



<TABLE>
<CAPTION>
                                          1996
                      ---------------------------------------------
                                    Gross        Gross
                      Amortized   Unrealized   Unrealized   Market
                        Cost        Gains        Losses      Value
                      ----------- ------------ ------------ -------
<S>                   <C>         <C>          <C>          <C>
                                      (In thousands)
FNMA  ...............   $ 2,469        12           --        2,481
GNMA  ...............     5,330        --          (98)       5,232
FHLMC ...............    18,861       455           --       19,316
                      ---------       ---          ---       ------
                        $26,660       467          (98)      27,029
                      =========       ===          ===       ======
</TABLE>

                                       21
<PAGE>

                COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(3) MORTGAGE-BACKED SECURITIES -- Continued

     Mortgage-backed  securities  available  for  sale  at  September  30,  1997
consisted of the following:

<TABLE>
<CAPTION>
                                          1997
                      ---------------------------------------------
                                    Gross        Gross
                      Amortized   Unrealized   Unrealized   Market
                        Cost        Gains        Losses      Value
                      ----------- ------------ ------------ -------
<S>                   <C>         <C>          <C>          <C>
                                      (In thousands)
FNMA  ...............   $  1,861        2          --         1,863
GNMA  ...............      6,471       26          --         6,497
FHLMC ...............     14,048      615          --        14,663
                      ----------      ---      ------------  ------
                        $ 22,380      643          --        23,023
                      ==========      ===      ============  ======
</TABLE>
     The  Company had no  realized  gains or losses on sales of  mortgage-backed
securities  1995.  For the year  ended  September  30,  1996,  there  were gross
realized  gains of  $189,000  and no  realized  losses.  The  Company  had gross
realized  gains of $258,000  and  realized  losses of $23,000 for the year ended
September 30, 1997.

(4) LOANS RECEIVABLE, NET

     Loans receivable, net at September 30 consisted of the following:
<TABLE>
<CAPTION>
                                                       1996        1997
                                                     ------------ -----------
<S>                                                  <C>          <C>
                                 (In thousands)
       First mortgage loans:
        Single family to 4 family units ............  $ 224,570    237,964
        Other, primarily commercial real estate  ...     73,295     97,680
        Construction loans  ........................     34,566     34,216
       Consumer and commercial loans:
        Installment consumer loans   ...............     31,601     24,378
        Mobile home loans   ........................      1,103      1,291
        Savings account loans  .....................        436      1,336
        Equity lines of credit .....................     12,441     15,294
        Commercial and other loans   ...............     14,831     10,939
                                                     ----------    -------
                                                        392,843    423,098
       Less:
        Allowance for loan losses ..................      4,172      4,902
        Deferred loan fees (costs)   ...............       (286)      (458)
        Undisbursed portion of loans in process  ...     18,589     15,084
                                                     ----------    -------
                                                      $ 370,368    403,570
                                                     ==========    =======
</TABLE>
<PAGE>
     The changes in the allowance for loan losses for the years ended  September
30 consisted of the following:



<TABLE>
<CAPTION>
                                                    1995       1996      1997
                                                   ---------- --------- ---------
<S>                                                <C>        <C>       <C>
                                 (In thousands)
       Beginning allowance   .....................  $3,353     3,578     4,172
       Provision for loan losses   ...............     202       790       760
       Allowance recorded on acquired loans ......      --        --       110
       Loan recoveries ...........................     255        82        72
       Loan charge-offs   ........................    (232)     (278)     (212)
                                                   -------     -----     -----
                                                    $3,578     4,172     4,902
                                                   =======     =====     =====
</TABLE>

     Non-accrual   loans  which  were  over  ninety  days   delinquent   totaled
approximately   $445,000  and   $257,000  at   September   30,  1996  and  1997,
respectively. There were no impaired loans at September 30, 1996 or 1997.


                                       22
<PAGE>

                COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(4) LOANS RECEIVABLE, NET -- Continued

     The carrying  amounts and fair values of loans  receivable at September 30,
1996 and 1997 are as follows (In thousands):



<TABLE>
<CAPTION>
                                                 1996                     1997
                                       ------------------------- ----------------------
                                       Carrying     Calculated   Carrying   Calculated
                                        Amount      Fair Value    Amount    Fair Value
                                       ------------ ------------ ---------- -----------
<S>                                    <C>          <C>          <C>        <C>
        Mortgage loans ...............  $321,951      330,025     369,662    378,964
        Consumer loans ...............    24,098       23,520      12,622     12,310
        Equity lines of credit  ......    12,441       12,715      17,902     18,260
        Commercial loans  ............    16,050       16,082       8,286      8,208
        Allowance for loan losses  ...    (4,172)      (4,172)     (4,902)    (4,902)
                                        --------      -------     -------    -------
                                        $370,368      378,170     403,570    412,840
                                        ========      =======     =======    =======
</TABLE>

     Management  has made  estimates of fair value  discount rates and estimated
prepayment  rates that it believes to be  reasonable  based upon present  market
conditions.  However,  because  there is no active  market for many of the above
financial instruments,  management believes such information is of limited value
and has no basis to determine  whether the fair value  presented  above would be
indicative  of the value  which  could be  negotiated  during  an  actual  sale.
Furthermore,  this information is as of September 30, 1996 and 1997.  Changes in
market  interest and  prepayment  rates since  September 30, 1996 and 1997 would
have  significant  impact on the fair value  presented  and should be considered
when analyzing this financial data.

     A portion of the credit  lines and  commercial  loans  have  interest  rate
floors which may  increase the value of these loans.  No increase in fair market
value was assigned for these interest rate floors.

     At September 30, 1997, excluding single family home loans and the fact that
the majority of the loan portfolio is located in the Company's  immediate market
area,  there were no  concentrations  of loans in any type of industry,  type of
property,  or to one  borrower  that  exceeded 10% of the  Company's  total loan
portfolio.  The  Company  does have 190  loans  aggregating  approximately  $9.7
million which were originated on individual  income producing  condominium units
in two projects in which the Bank's  subsidiaries  were a partner.  At September
30, 1997, one loan in the amount of $56,000 was over sixty days delinquent.  The
majority  of these  loans  have been  outstanding  greater  than four  years and
management  does not believe that they represent a significant  risk in the loan
portfolio.  Approximately  $1.7  million of these  loans have been sold to other
financial institutions.

     At September 30, 1996 and 1997, the Company had commitments  outstanding to
originate   loans  totaling   approximately   $9.0  million  and  $3.2  million,
respectively,  (excluding undisbursed portion of loans in process).  Commitments
on loan  originations  are made at prevailing  market  interest  rates,  and are
generally  limited  to 60  days  from  date  of  application.  Additionally,  at
September  30, 1996 and 1997,  the Company  had  undisbursed  lines of credit of
approximately $32.0 million and $31.4 million, respectively.

     Loans serviced for the benefit of others amounted to  approximately  $110.7
million, $115.1 million and $104.5 million at September 30, 1995, 1996 and 1997,
respectively.

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

<PAGE>
(5) INVESTMENT IN REAL ESTATE PARTNERSHIPS

     The Bank's  subsidiaries are general partners in real estate  partnerships,
with  ownership  interests  ranging up to 50%,  organized  for the  purposes  of
constructing and marketing residential real estate. Condensed combined financial
information  for the  partnerships  at or for the year ended at  September 30 is
summarized as follows:



<TABLE>
<CAPTION>
                                                  1996   1997
                                                  ------ -----
<S>                                               <C>    <C>
                                                  (In
                                                  thousands)
       Assets, net ..............................  $113    25
                                                  =====    ==
       Liabilities ..............................     5     1
                                                  -----    --
       Partners' equity:
        Bank's subsidiaries .....................    46     8
        Others  .................................    62    16
                                                  -----    --
                                                    108    24
                                                  -----    --
         Liabilities and partners' equity  ......  $113    25
                                                  =====    ==
</TABLE>

                                       23


<PAGE>
                COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(5) INVESTMENT IN REAL ESTATE PARTNERSHIPS -- Continued



<TABLE>
<CAPTION>
                                                      1995     1996     1997
                                                     -------- --------- --------
<S>                                                  <C>      <C>       <C>
                                                            (In thousands)
       Sales .......................................  $2,016     523       --
       Cost of sales  ..............................     885     140       --
                                                     -------     ---       --
        Gross profit on sales  .....................   1,131     383       --
       Other (expense) income, net   ...............      78    (223)     (36)
                                                     -------    ----      ---
        Net income .................................  $1,209     160      (36)
                                                     =======    ====      ===
       Bank's equity in partnership's income  ......  $  611     115      (12)
                                                     =======    ====      ===
</TABLE>

(6) OFFICE PROPERTY AND EQUIPMENT, NET

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



<TABLE>
<CAPTION>
                                                  1996      1997
                                                 --------- -------
<S>                                              <C>       <C>
                                                   (In thousands)
       Land ....................................  $ 1,132    1,981
       Building and improvements ...............    4,990    5,647
       Furniture, fixtures and equipment  ......    5,964    7,105
                                                 --------    -----
                                                   12,086   14,733
       Less accumulated depreciation   .........    6,350    7,172
                                                 --------   ------
                                                  $ 5,736    7,561
                                                 ========   ======
</TABLE>

     The Company leases office space and various equipment. Total rental expense
for the  years  ended  September  30,  1995,  1996 and  1997  was  approximately
$121,000, $138,000, and $112,000 respectively.

     Future  minimum  rental  payments for  operating  leases  having  remaining
noncancelable  lease  terms in excess of one year at  September  30, 1997 are as
follows (In thousands):


<TABLE>
<S>                    <C>
1998   ...............  $112
1999   ...............   111
2000   ...............    92
2001   ...............    91
2002   ...............    56
                        ----
                        $462
                        ====
</TABLE>

(7) INVESTMENT REQUIRED BY LAW

     Investment   in   stock  of  the   FHLB  is   required   by  law  of  every
Federally-insured savings institution. No ready market exists for this stock and
it has no quoted market value. However, redemption of this stock has been at par
value.

     The Bank,  as a member of the FHLB of  Atlanta,  is required to acquire and
hold  shares of capital  stock in the FHLB of Atlanta in an amount  equal to the
greater of (i) 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 of
Atlanta.  The Bank is in compliance with this  requirement with an investment in
FHLB of Atlanta stock of $5.6 million at September 30, 1997.


                                       24


<PAGE>
                COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued


(8) DEPOSITS

     Deposits at September 30, consisted of the following:



<TABLE>
<CAPTION>
                                               1996                  1997
                                       --------------------- --------------------
                                                  Weighted              Weighted
                                        Amount      Rate      Amount      Rate
                                       ---------- ---------- ---------- ---------
<S>                                    <C>        <C>        <C>        <C>
                                                 (Dollars in thousands)
  Transaction accounts:
   Noninterest bearing ...............  $ 19,926       --%    $ 23,765      --%
   NOW  ..............................    35,654     1.23       38,773    1.27
   Money market checking  ............    84,997     4.85      104,476    4.48
                                       ---------     ----     --------    ----
    Total transaction accounts  ......   140,577     3.24      167,014    3.10
                                       ---------     ----     --------    ----
  Passbook accounts:
   Regular passbooks   ...............    39,287     2.67       36,652    2.63
   Money market  .....................     3,553     2.44        2,793    2.38
                                       ---------     ----     --------    ----
    Total passbook accounts  .........    42,840     2.66       39,445    2.62
                                       ---------     ----     --------    ----
  Certificate accounts:
    0.00 -  5.99%   ..................   113,871               110,606
    6.00 -  8.00%   ..................    15,623                29,683
    8.01 - 10.00%   ..................       130                   368
   10.01 - 12.00%   ..................       389                    --
                                       ---------              --------
    Total certificate accounts  ......   130,013     5.64      140,657    5.58
                                       ---------     ----     --------    ----
                                        $313,430     4.12%    $347,116    4.02%
                                       =========     ====     ========    ====
</TABLE>
<PAGE>
     The aggregate  amount of deposit  accounts with a minimum  denomination  of
$100,000 or more was $60,406,000 and $80,691,000 at September 30, 1996 and 1997,
respectively.

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



<TABLE>
<CAPTION>
                                            1996      1997
                                          ---------- --------
<S>                                       <C>        <C>
                                             (In thousands)
       Within 1 year   ..................  $ 94,651   111,942
       After 1 but within 2 years  ......    28,241    23,704
       After 2 but within 3 years  ......     5,484     3,630
       Thereafter   .....................     1,637     1,381
                                          ---------   -------
                                           $130,013   140,657
                                          =========   =======
</TABLE>

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



<TABLE>
<CAPTION>
                                     1995     1996     1997
                                    -------- -------- -------
<S>                                 <C>      <C>      <C>
                                          (In thousands)
       Transaction accounts  ......  $1,925    3,162    4,894
       Passbook accounts  .........   1,581    1,599    1,015
       Certificate accounts  ......   6,384    6,928    7,741
                                    -------    -----    -----
                                     $9,890   11,689   13,650
                                    =======   ======   ======
</TABLE>

     The fair value of transaction  and passbook  accounts is $183.4 million and
$206.5 million which was the amount currently  payable at September 30, 1996 and
1997,  respectively.  The fair value of certificate  accounts was $130.3 million
and $142.6 million compared to a book value of $130.0 million and $140.7 million
and was estimated by discounting the amounts  payable at the  certificate  rates
currently  offered for deposits of similar remaining  maturities.The  fair value
estimates  above did not include the  substantial  benefit that results from the
low cost  funding  provided by the deposit  liabilities  compared to the cost of
borrowing funds in the market.


                                       25
<PAGE>

                COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued


(9) ADVANCES FROM FHLB

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



<TABLE>
<CAPTION>
                                        1996                  1997
                                --------------------- --------------------
                                           Weighted              Weighted
                                 Amount      Rate      Amount      Rate
                                ---------- ---------- ---------- ---------
<S>                             <C>        <C>        <C>        <C>
                                              (In thousands)
        Fiscal Year Maturity
        1997 ..................  $ 54,404   5.68%      $     --      --%
        1998 ..................    20,120    5.90        68,620    5.60
        1999 ..................    13,105    6.35        13,435    6.06
        2000 ..................     6,861    6.46         6,761    6.45
        2001 ..................     2,846    6.46         2,646    6.49
        2002 or greater  ......     7,217    7.07        10,016    6.79
                                ---------    ----      --------    ----
                                 $104,553   5.97%      $101,478    5.86%
                                =========    ====      ========    ====
</TABLE>

     Stock  in the  FHLB  of  Atlanta  and  specific  first  mortgage  loans  of
approximately  $223.4 million and $213.9 million at September 30, 1996 and 1997,
respectively, are pledged as collateral for these advances. The Bank has adopted
the policy of pledging  excess  collateral to  facilitate  future  advances.  At
September 30, 1997,  the excess first  mortgage loan  collateral  pledged to the
FHLB will support additional borrowings of approximately $59.0 million.

     The  estimated  fair value of the FHLB  advances at September  30, 1996 and
1997 is $104.2 million and $101.0 million. This estimate is based on discounting
amounts  payable at  contractual  rates using current  market rates for advances
with similar maturities.

<PAGE>
(10) INCOME TAXES

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



<TABLE>
<CAPTION>
                        Current   Deferred   Total
                        --------- ---------- ------
<S>                     <C>       <C>        <C>
                               (In thousands)
       1995:
Federal ...............   $1,697      229     1,926
State   ...............      268       38       306
                        --------      ---     -----
                           1,965      267     2,232
                        ========      ===     =====
       1996:
Federal ...............   $2,528     (646)    1,882
State   ...............      403     (121)      282
                        --------     ----     -----
                           2,931     (767)    2,164
                        ========     ====     =====
       1997:
Federal ...............   $2,646      331     2,977
State   ...............      311       63       374
                        --------     ----     -----
                           2,957      394     3,351
                        ========     ====     =====
</TABLE>

                                       26
<PAGE>

                COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(10) INCOME TAXES -- Continued

     The tax effect of the Company's temporary differences between the financial
statement  carrying  amounts and tax basis of assets and  liabilities  that give
rise to the net deferred tax asset at September 30, 1996 and 1997 related to the
following:



<TABLE>
<CAPTION>
                                                                                1996       1997
                                                                               ---------- ---------
<S>                                                                            <C>        <C>
                                                                                  (In thousands)
       Deferred tax assets:
        Allowance for loan losses   ..........................................  $1,600     1,858
        Accrued medical reserves .............................................      79       123
        Other real estate reserves and deferred gains on other real estate ...      75        81
        Accrued FDIC premiums ................................................     615        --
        Net operating loss carryforwards  ....................................     138       135
        Other  ...............................................................      99       122
                                                                               -------     -----
       Total deferred tax assets .............................................   2,606     2,319
       Less valuation allowance  .............................................    (138)     (135)
                                                                               -------     -----
       Net deferred tax assets   .............................................   2,468     2,184
                                                                               =======     =====
       Deferred tax liabilities:
        Tax bad debt reserve in excess of base year amount  ..................     552       484
        Property and equipment principally due to differences in depreciation      190       237
        FHLB stock, due to stock dividends not recognized for tax purposes ...     356       356
        Unrealized gain on securities available for sale .....................      69       263
        Deferred loan fees ...................................................     204       318
        Other  ...............................................................     220       237
                                                                               -------     -----
       Total deferred tax liabilities  .......................................   1,591     1,895
                                                                               -------     -----
       Net deferred tax asset ................................................  $  877       289
                                                                               =======     =====
</TABLE>

     The net deferred tax asset is included in other assets in the  consolidated
financial  statements.  The  valuation  allowance  relates  to  the  state  loss
carryforwards  which  may not be  ultimately  realized  to  reduce  taxes of the
Company.  A portion  of the  change in the net  deferred  tax asset  relates  to
unrealized  gains and losses on securities  available for sale. A current period
deferred  tax  expense  of  $194,000  for the  unrealized  gains  on  securities
available  for sale has been  recorded  directly to  stockholders'  equity.  The
balance of the change in the deferred tax asset results from the current  period
deferred tax expense of $394,000.
<PAGE>
     Income  taxes of the Company  differ from the amounts  computed by applying
the Federal income tax rate of 34% for the years ended  September 30 to earnings
before income taxes as follows:



<TABLE>
<CAPTION>
                                                   1995      1996      1997
                                                  ------    -----      -------
<S>                                               <C>       <C>        <C>
                                                        (In thousands)
       Computed federal income taxes   .........  $2,024    2,001      3,108
       State tax, net of federal benefit  ......     201      173        247
       Other, net ..............................       7      (10)        (4)
                                                  ------    -----      -----  
       Total income tax expense  ...............  $2,232    2,164      3,351
                                                  ======    =====      ===== 
</TABLE>

     The Bank has been  permitted  under the Internal  Revenue Code to deduct an
annual addition to the tax reserve for bad debts in determining  taxable income,
subject to certain limitations.  This addition may differ significantly from the
bad debt expense for financial  reporting purposes and was based on either 8% of
taxable income (the  "Percentage of Taxable Income  Method") or actual loan loss
experience  (the  "Experience  Method") for the years ended  September 30, 1995,
1996 and 1997. As a result of recent tax legislation,  the Bank will be required
to recapture tax bad debt reserves in excess of pre-1988 based year amounts over
a period of approximately six to eight years. In addition, for the period ending
September  30,  1997,  the Bank was required to change its overall tax method of
accounting for bad debts to the experience method.

     Retained  earnings at September  30, 1996 and 1997  includes  approximately
$5,200,000  representing  pre-1988  tax bad debt base year  reserve  amounts for
which no deferred  income tax liability has been provided  since these  reserves
are not  expected  to reverse  until  indefinite  future  periods  and may never
reverse. Circumstances that would require an accrual of a portion or all of this
unrecorded tax liability are


                                       27
<PAGE>
                COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(10) INCOME TAXES -- Continued

a reduction in qualifying  loan levels  relative to the end of 1987,  failure to
meet the tax definition of a bank,  dividend  payments in excess of current year
or accumulated tax earnings and profits,  or other distributions in dissolution,
liquidation or redemption of the Bank's stock.


(11) BENEFIT PLANS

     The Company  participates  in a  multiple-employer  defined benefit pension
plan covering substantially all employees. Separate actuarial valuations are not
available  for each  participating  employer,  nor are plan  assets  segregated.
Pension expense for the years ended September 30, 1995, 1996 and 1997 was minor.
Plan assets exceeded the present value of accumulated  plan benefits at June 30,
1997, the latest actuarial valuation date.

     The Company has a defined  contribution  plan  covering  substantially  all
employees.  The Company matches  employee  contributions  based upon the Company
meeting certain return on equity operating results.  Matching contributions made
by the Company  were  approximately  $28,000,  $149,000  and $245,000 for fiscal
years 1995, 1996 and 1997, respectively.


(12) REGULATORY MATTERS

     At  September  30,  1997,  the  Bank's  loans-to-one   borrower  limit  was
approximately  $5.2 million.  At September  30, 1997,  the Bank is in compliance
with the core,  tangible and risk-based  capital  requirements  and loans-to-one
borrower limits.

     On September 30, 1996, the Bank recorded a $1,620,000 special assessment to
the FDIC for the  recapitalization  of the SAIF.  Beginning January 1, 1997, the
Bank began paying 6.4 cents per $100 of deposits  insured.  Previously  the Bank
had been  paying  approximately  23 cents per $100 of  deposits  insured.  It is
expected  that the Bank  Insurance  Fund  ("BIF")  members and SAIF members will
begin paying the same amount to the insurance fund in fiscal year 2000.

     The  ability  of the  Company to pay  dividends  depends  primarily  on the
ability  of the Bank to pay  dividends  to the  Company.  The Bank is subject to
various  regulatory  capital  requirements  administered  by the federal banking
agencies.  Failure to meet minimum  capital  requirements  can initiate  certain
mandatory  -- and possibly  additional  discretionary  -- actions by  regulators
that, if undertaken, could have a direct material effect on the Bank's financial
statements.  Under capital adequacy guidelines and the regulatory  framework for
prompt corrective  action,  the Bank must meet specific capital  guidelines that
involve  quantitative  measures of the Bank's  assets,  liabilities  and certain
off-balance-sheet items as calculated under regulatory accounting practices.
<PAGE>
     The regulatory  requirements  for the Bank and the Bank's  compliance  with
such requirements at September 30, 1996 and 1997 is as follows.



<TABLE>
<CAPTION>
                                                               Percent
                                                     Amount   of Assets
                                                    --------- ----------
<S>                                                 <C>       <C>
                                                       (In thousands)
    1996:
     Tangible capital (1)  ........................  $27,271     5.93%
     Tangible capital requirement   ...............    6,859     1.50
                                                    --------    -----
     Excess .......................................  $20,412     4.43%
                                                    ========    =====
     Core capital .................................   27,271     5.93%
     Core capital requirement .....................   13,719     3.00
                                                    --------    -----
     Excess .......................................  $13,552     2.93%
                                                    ========    =====
     Risk-based capital ...........................   30,777    10.41%
     Minimum risk-based capital requirements ......   23,641     8.00
                                                    --------    -----
     Excess .......................................  $ 7,136     2.41%
                                                    ========    =====
</TABLE>

                                       28
<PAGE>
                COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(12) REGULATORY MATTERS -- Continued

<TABLE>
<CAPTION>
                                                              Percent
                                                    Amount   of Assets
                                                   --------- ----------
<S>                                                <C>       <C>
    1996:
     Tier I leverage ratio   .....................  $27,271    5.93%
     Tier I leverage ratio requirement   .........   18,388    4.00
                                                     ------    ----
     Excess   ....................................  $ 8,883    1.93%
                                                    =======    ====
     Tier I risk-based capital  ..................   27,271    9.23%
     Tier I risk-based capital requirement  ......   11,821    4.00
                                                    -------    ----
     Excess   ....................................  $15,450    5.23%
                                                    =======    ====
</TABLE>
<TABLE>
<CAPTION>
                                                               Percent
                                                     Amount   of Assets
                                                    --------- ----------
<S>                                                 <C>       <C>
                                                       (In thousands)
    1997:
     Tangible capital (1)  ........................  $31,193     6.31%
     Tangible capital requirement   ...............    7,365     1.50
                                                    --------    -----
     Excess .......................................  $23,828     4.81%
                                                    ========    =====
     Core capital .................................   31,193     6.31%
     Core capital requirement .....................   14,730     3.00
                                                    --------    -----
     Excess .......................................  $16,463     3.31%
                                                    ========    =====
     Risk-based capital ...........................   34,749    11.05%
     Minimum risk-based capital requirements ......   25,147     8.00
                                                    --------    -----
     Excess .......................................  $ 9,602     3.05%
                                                    ========    =====
     Tier I leverage ratio ........................   31,193     6.31%
     Tier I leverage ratio requirement ............   19,760     4.00
                                                    --------    -----
     Excess .......................................  $11,433     2.31%
                                                    ========    =====
     Tier I risk-based capital   ..................   31,193     9.92%
     Tier I risk-based capital requirement   ......   12,574     4.00
                                                    --------    -----
     Excess .......................................  $18,619     5.92%
                                                    ========    =====
</TABLE>

(1) Equals the Bank's stockholder's equity
<PAGE>
(13) LIQUIDATION ACCOUNT

     In  conjunction  with the Bank's  conversion  and sale of common stock,  as
required  by Office of Thrift  Supervision  regulations,  on October 6, 1990 the
Bank  established a  liquidation  account and will maintain this account for the
benefit of the remaining  eligible account  holders.The  initial balance of this
liquidation account was equal to the Bank's net worth defined by OTS regulations
as of the date of the latest statement of financial  condition  contained in the
final offering circular. In the event of a complete liquidation of the Bank (and
only in such  event)  each  eligible  holder  shall be  entitled  to  receive  a
liquidation  distribution  from this  account in the amount of the then  current
adjusted balance for deposits then held, before any liquidation distribution may
be  made to the  stockholders.  The  Bank  is  prohibited  from  declaring  cash
dividends or repurchasing its capital stock if it would cause a reduction in the
Bank's net worth below either the liquidation account or the statutory net worth
requirements set by the OTS.


(14) EARNINGS PER SHARE

     Earnings per share for the years ended  September  30, 1995,  1996 and 1997
are computed by dividing net earnings by the weighted  average  number of common
share equivalents outstanding during the year. Common share equivalents include,
if applicable,  dilutive stock option share equivalents  determined by using the
treasury  stock  method.  All share and per share  data have been  retroactively
restated for all common stock dividends.


                                       29
<PAGE>
                COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued


(15) STOCK OPTION PLAN

     The  Company's  stock option plan  provides for stock options to be granted
primarily to directors, officers and other key Associates. Options granted under
the stock  option plan may be incentive  stock  options or  non-incentive  stock
options.  The  remaining  shares of stock  reserved for the stock option plan at
September 30, 1997 amounted to  approximately  253,000  shares.  All outstanding
options  have been  retroactively  restated to reflect the effects of the common
stock dividends.  The stock option plan is administered by three  non-management
directors of the Company.  At September 30, 1997,  the Company had the following
options outstanding:



<TABLE>
<CAPTION>
                                            Options      Average
                             Options     Available for    Option
Grant Date (Calendar Year)   Granted      Exercise        Price  Expiration Date
---------------------------- --------- --------------- -------- ----------------
<S>                          <C>       <C>             <C>      <C>
        1990 ...............  159,921        100%       $ 1.07        2000
        1991 ...............    6,651        100          1.47        2001
        1992 ...............   23,872        100          2.83        2002
        1994 ...............   23,985         60          9.17        2004
        1995 ...............  162,493         40          9.07        2005
        1996 ...............   66,642         20         15.19        2006
        1997 ...............   41,245         --         15.09        2007
</TABLE>

     During the years  ended  September  30,  1995,  1996 and 1997,  options for
45,369,  76,863, and 60,473 shares, at an average of $1.07, $1.46, and $3.61 per
share, respectively, were exercised.

     The Company  applies APB  Opinion  No. 25 and  related  Interpretations  in
accounting for its plan.  Accordingly,  no compensation cost has been recognized
for its fixed  stock  option  plans.  Had  compensation  cost for the  Company's
stock-based  compensation  plans been determined  consistent with FASB Statement
No. 123, the Company's net income and earnings per share would have been reduced
to the proforma amounts indicated below (in thousands except per share date):



<TABLE>
<CAPTION>
                                                       1996       1997
                                                      --------   -------
<S>                                   <C>             <C>        <C>
                 Net income             As reported    $3,721     $5,791
                                      Proforma          3,704      5,693
                 Earnings per share     As reported    $ 0.78       1.19
                                      Proforma           0.77       1.17
</TABLE>
<PAGE>
     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  option-pricing  model  with the  following  weighted-average
assumptions  used for grants in 1996, and 1997,  dividend yield of approximately
1.6%,  expected  volatility  of  approximately  27% in  1996  and  35% in  1997,
risk-free  interest  rate of  6.08%,  expected  lives of 10 years  and a vesting
period of 5 years.


(16) COMMON STOCK DIVIDENDS

     On  May  30,  1995,  the  Company  declared  a  5%  common  stock  dividend
aggregating  102,003  shares.  On January 9, 1996 and June 20, 1996, the Company
declared  a five for four  stock  split  in the  form of a 25%  stock  dividend,
aggregating approximately 542,000 and 687,000 shares, respectively. On April 30,
1997,  the  Company  declared a four for three  stock split in the form of a 33%
stock dividend,  aggregating  approximately 1,160,000 shares. All share data has
been retroactively restated to give effect to the common stock dividends.


(17) CASH DIVIDENDS

     On June 21, 1995, September 27, 1995, December 27, 1995 and March 27, 1996,
the Company  declared a quarterly cash dividend of $.075 per share.  On June 27,
1996,  September  25, 1996,  December  18, 1996,  and March 26, 1997 the Company
declared quarterly cash dividends of $.0825, respectively.  On June 25, 1997 and
September  24, 1997,  the Company  declared  quarterly  cash  dividends of $.09,
respectively.


(18) LEGAL MATTERS

     The legal proceedings  against the Company are generally  incidental to its
business.  At  September  30,  1997,  there were no material  legal  proceedings
pending against the Company.


                                       30
<PAGE>
                COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued


(19) QUARTERLY FINANCIAL DATA (UNAUDITED)

     Quarterly  operating data for the years ended September 30 is summarized as
follows (In thousands, except share data):
<TABLE>
<CAPTION>
                                                                  First       Second       Third      Fourth
                                                                 Quarter      Quarter     Quarter     Quarter
                                                              ------------ ----------- ----------- ----------
<S>                                                           <C>          <C>         <C>         <C>
      1996:
       Total interest income   ..............................  $    8,408       8,577       8,748       8,987
       Total interest expense  ..............................       4,757       4,685       4,661       4,988
                                                               ----------       -----       -----       -----
       Net interest income  .................................       3,651       3,892       4,087       3,999
       Provision for loan losses  ...........................         115         225         300         150
                                                               ----------       -----       -----       -----
       Net interest income after provision for loan losses          3,536       3,667       3,787       3,849
       Other income   .......................................         935       1,132       1,291       1,273
       General and administrative expenses*   ...............       2,792       2,955       3,115       4,723
                                                               ----------       -----       -----       -----
       Earnings before income taxes  ........................       1,679       1,844       1,963         399
       Income taxes*  .......................................         621         676         729         137
                                                               ----------       -----       -----       -----
       Net earnings   .......................................  $    1,058       1,168       1,234         262
                                                               ==========       =====       =====       =====
       Earnings per common share  ...........................  $      .22         .24         .26         .05
                                                               ==========       =====       =====       =====
       Weighted average shares outstanding ..................   4,744,000   4,793,000   4,797,000   4,837,000
                                                               ==========   =========   =========   =========
<CAPTION>
                                                                First       Second       Third      Fourth
                                                               Quarter      Quarter     Quarter     Quarter
                                                              ------------ ----------- ----------- ----------
<S>                                                           <C>          <C>         <C>         <C>
      1997:
       Total interest income   ..............................  $    8,997       9,229       9,806      10,033
       Total interest expense  ..............................       4,810       4,852       5,213       5,271
                                                               ----------       -----       -----      ------
       Net interest income  .................................       4,187       4,377       4,593       4,762
       Provision for loan losses  ...........................         230         120         190         220
                                                               ----------       -----       -----      ------
       Net interest income after provision for loan losses          3,957       4,257       4,403       4,542
       Other income   .......................................       1,363         971         994       1,370
       General and administrative expenses ..................       3,308       3,062       2,999       3,346
                                                               ----------       -----       -----      ------
       Earnings before income taxes  ........................       2,012       2,166       2,398       2,566
       Income taxes   .......................................         734         790         882         945
                                                               ----------       -----       -----      ------
       Net earnings   .......................................  $    1,278       1,376       1,516       1,621
                                                               ==========       =====       =====      ======
       Earnings per common share  ...........................  $      .26         .28         .31         .33
                                                               ==========       =====       =====      ======
       Weighted average shares outstanding ..................   4,841,000   4,855,000   4,898,000   4,915,000
                                                               ==========   =========   =========   =========
</TABLE>
<PAGE>
---------
* The three month period ended September 30, 1996 includes a special  assessment
  from the  FDIC  for the  recapitalization  of the  SAIF of  $1,620,000,  and a
  related  reduction  in  income  taxes  of  $615,000.  Excluding  this  special
  assessment,  net income for the three months ended would have been $1,267,000,
  or $0.26 per share.


                                       31
<PAGE>
                COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued


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

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

                         Coastal Financial Corporation
                            Condensed Balance Sheets
                          September 30, 1996 and 1997

<TABLE>
<CAPTION>
                                                             1996         1997
Assets                                                     -------      -------
<S>                                                        <C>          <C>
         Cash .........................................    $    145       1,208
         Investment in subsidiaries ...................      27,855      32,644
         Deferred tax asset ...........................          36          49
         Other assets .................................          34          18
                                                            -------     -------
             Total assets .............................     $28,070      33,919
                                                            =======     =======
         Liabilities and Stockholders' Equity
         Accounts payable .............................         389       1,528
         Total stockholders' equity ...................      27,681      32,391
                                                            -------     -------
             Total liabilities and stockholders'equity.     $28,070      33,919
                                                            =======     =======
</TABLE>
                         Coastal Financial Corporation
                       Condensed Statement of Operations
             For the years ended September 30, 1995, 1996 and 1997

<TABLE>
<CAPTION>
                                                             1995          1996        1997
                                                            -------      -------      -------
<S>                                                          <C>         <C>         <C>
Income:
 Interest income                                            $  --           --              1
 Management fees                                                230          108          108
 Dividends from subsidiary ......................             1,725        1,090        1,850
 Equity in undistributed earnings of subsidiaries             2,013        2,616        3,969
                                                            -------      -------      -------
     Total income ...............................             3,968        3,814        5,928
                                                            -------      -------      -------
Expenses:
 Amortization of organization cost                                8           14           16
 Professional fees ..............................               177           38           40
 Supplies and printing                                           40            7           29
 Other expenses .................................                25           32           66
 Income tax (benefit) expense ...................                (2)           2          (14)
                                                            -------      -------      -------
     Total expenses                                             248           93          137
                                                            -------      -------      -------
Net income                                                  $ 3,720        3,721        5,791
                                                            =======      =======      =======
</TABLE>

                                       32
<PAGE>
                COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(20) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
                    -- Continued


                         Coastal Financial Corporation
                       Condensed Statement of Cash Flows
             For the years ended September 30, 1995, 1996 and 1997



<TABLE>
<CAPTION>
                                                                1995        1996        1997
                                                               ----------- ----------- -----------
<S>                                                            <C>         <C>         <C>
         Operating activities:
          Net income   .......................................  $  3,720      3,721       5,791
          Adjustments to reconcile net income
           to net cash (used) provided by:
           Equity in undistributed net income of subsidiary       (2,013)    (2,616)     (3,969)
           Increase (decrease) in other assets ...............       (46)        27           3
           Increase (decrease) in other liabilities  .........        82        (79)        639
                                                                --------     ------      ------
            Total cash provided by operating activities ......     1,743      1,053       2,464
                                                                --------     ------      ------
         Financing activities:
          Purchase of Treasury Stock  ........................      (838)        --          --
          Capital contributions to subsidiary  ...............      (150)        --        (500)
          Cash dividend to shareholders  .....................    (1,282)    (1,433)     (1,600)
          Proceeds from stock options ........................        56        107         217
          Proceeds from line of credit advance ...............        --         --         500
          Other financing activities, net   ..................        59        (24)        (18)
                                                                --------     ------      ------
           Total cash used by financing activities   .........    (2,155)    (1,350)     (1,401)
                                                                --------     ------      ------
         Net increase (decrease) in cash and cash equivalents       (412)      (297)      1,063
         Cash and cash equivalents at beginning of the year          854        442         145
                                                                --------     ------      ------
         Cash and cash equivalents at end of the year   ......  $    442        145       1,208
                                                                ========     ======      ======
</TABLE>


                                       33
<PAGE>

                COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued


(21) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

     The  carrying  amounts  and  fair  value  of  financial  instruments  as of
September 30, 1996 and 1997 are summarized below:



<TABLE>
<CAPTION>
                                                                 1996                    1997
                                                        ----------------------- ----------------------
                                                        Carrying    Estimated   Carrying    Estimated
                                                         Amount    Fair Value    Amount    Fair Value
                                                        ---------- ------------ ---------- -----------
<S>                                                     <C>        <C>          <C>        <C>
                                                        (In thousands)              (In thousands)
     Financial Assets
      Cash and cash equivalents   .....................  $ 20,861     20,861       13,411     13,411
      Investment securities ...........................    17,471     17,473       26,171     26,171
      Mortgage-backed securities  .....................    27,029     27,029       23,023     23,023
      Loans receivable held for sale ..................     6,803      6,905        8,359      8,359
      Loans receivable, net ...........................   370,368    378,170      403,570    412,840
      FHLB stock   ....................................     5,228      5,228        5,618      5,618
                                                        ---------    -------    ---------    -------
                                                         $447,760    455,666     $480,152    489,422
                                                        =========    =======    =========    =======
     Financial Liabilities
      Deposits:
       Demand accounts   ..............................   183,417    183,417      206,459    206,459
       Certificate accounts ...........................   130,013    130,303      140,657    142,615
      Advances from Federal Home Loan Bank ............   104,553    104,241      101,478    100,971
      Securities sold under agreements to repurchase..     3,365      3,365        2,666      2,666
      Other borrowings   ..............................     1,922      1,922        2,193      2,193
                                                        ---------    -------    ---------    -------
                                                         $423,270    423,248     $453,453    454,904
                                                        =========    =======    =========    =======
</TABLE>

     The Company had $53.4 million of off-balance sheet financial commitments as
of September 30, 1997, which are commitments to originate loans, unused consumer
lines of  credit  and  undisbursed  portion  of loans in  process.  Since  these
obligations are based on current market rates, the carrying amount is considered
to be a reasonable estimate of fair value.

     Fair  value  estimates  are made at a  specific  point  in  time,  based on
relevant  market  information and  information  about the financial  instrument.
These  estimates  do not reflect any premium or discount  that could result from
offering  for sale the  Company's  entire  holdings  of a  particular  financial
instrument.  Because no active market  exists for a  significant  portion of the
Company's  financial  instruments,  fair value  estimates are based on judgments
regarding future expected loss experience,  current economic conditions, current
<PAGE>
interest rates and prepayment trends, risk  characteristics of various financial
instruments,  and other  factors.  These  estimates are subjective in nature and
involve  uncertainties and matters of significant  judgment and therefore cannot
be  determined  with  precision.  Changes  in any of these  assumptions  used in
calculating fair value would also significantly  affect the estimates.  Further,
the fair value  estimates were  calculated as of September 30, 1997.  Changes in
market interest rates and prepayment  assumptions could significantly change the
fair value.

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


(22) COMMITMENTS AND CONTINGENCIES

     The Company has a $8 million  outstanding  line of credit with a commercial
bank.  The  line of  credit  is  secured  by 51% of the  stock of the  Bank.  At
September 30, 1997, the outstanding balance was $500,000.


                                       34
<PAGE>
--------------------------------------------------------------------------------
                               BOARD OF DIRECTORS
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

COASTAL FINANCIAL
CORPORATION
                                   DIRECTORS

James C. Benton
President, C.L. Benton &
Sons, Inc.

G. David Bishop
Chairman, WCI
Management Group Inc.

Harold D. Clardy
President, Chapin Company

James T. Clemmons
Chairman
Coastal Financial
Corporation

James P. Creel
President, Creel Corporation

James H. Dusenbury
Dusenbury, Hendrix &
Little, Attorneys at Law

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

Samuel A. Smart
Retired, United States
Department of Defense

Wilson B. Springs
Owner, H.B. Springs
Company
                               ADVISORY DIRECTOR

William J. Sigmon, Sr.
Former President and Chief
Executive Officer
Burroughs & Chapin
Company

COASTAL FEDERAL
SAVINGS BANK
                                   DIRECTORS

James C. Benton
President, C.L. Benton &
Sons, Inc.

G. David Bishop
Chairman, WCI
Management Group Inc.

Harold D. Clardy
President, Chapin Company

James T. Clemmons
Chairman
Coastal Federal Savings
Bank

James P. Creel
President, Creel Corporation

James H. Dusenbury
Dusenbury, Hendrix &
Little, Attorneys at Law

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

Samuel A. Smart
Retired, United States
Department of Defense

Wilson B. Springs
Owner, H.B. Springs
Company
                               DIRECTOR EMERITUS

William J. Sigmon, Sr.
Former President and Chief
Executive Officer
Burroughs & Chapin
Company

COASTAL INVESTMENTS
CORPORATION
                                   DIRECTORS

G. David Bishop
Chairman, WCI
Management Group Inc.

James P. Creel
President, Creel Corporation

James H. Dusenbury
Attorney
Dusenbury, Hendrix &
Little, Attorneys at Law

Michael C. Gerald
President and Chief
Executive Officer
Coastal Investments
Corporation

Jerry L. Rexroad, CPA
Chief Financial Officer
Coastal Investments
Corporation

Phillip G. Stalvey
Executive Vice President
Coastal Financial
Corporation

COASTAL FEDERAL
MORTGAGE
                                   DIRECTORS

James T. Clemmons
Chairman
Coastal Financial
Corporation

Michael C. Gerald
President and Chief
Executive Officer
Coastal Federal Mortgage

Jerry L. Rexroad, CPA
Chief Financial Officer
Coastal Federal Mortgage

Wilson B. Springs
Owner, H.B. Springs
Company

Phillip G. Stalvey
Executive Vice President
Coastal Financial
Corporation

                                       35
<PAGE>

--------------------------------------------------------------------------------
                                LEADERSHIP GROUP
                          COASTAL FEDERAL SAVINGS BANK
--------------------------------------------------------------------------------

Denise F. Brown
Deposit Sales Group Leader
Surfside

Cynthia L. Buffington
Item Processing Group Leader

Glenn T. Butler
Vice President
Management Information Systems
Group Leader

Edward F. Cagle
Senior Vice President
Marketing Group Leader

Susan R. Cammons
Loan Sales Group Leader
Surfside

Pamela D. Collins
Office Sales Group Leader
Dunes

Susan J. Cooke
Vice President
Corporate Support Group Leader
Corporate Secretary

Patricia A. Coveno
Deposit Sales Group Leader
Oak Street

Robert D. Douglas
Senior Vice President
Human Resources Group Leader

James T. Faulk
Assistant Vice President
Collections Group Leader

Rita E. Fecteau
Vice President
Controller

Trina S. Ferguson
Assistant Vice President
Residential Loan Administration
Group Leader

J. Daniel Fogle
Vice President
Regional Sales Group Leader
Conway Region

Mary L. Geist
Vice President
Computer Services Group Leader

Michael C. Gerald
President and Chief Executive Officer

Belinda B. Gillespie
Assistant Vice President
Office Sales Group Leader
Florence

Jimmy R. Graham
Executive Vice President
Information Systems Group Leader

Richard L. Granger
Vice President
Loan Sales Group Leader
Florence

Allen W. Griffin
Executive Vice President
Banking Administration Group Leader

Don C . Hamilton
Assistant Vice President
Mortgage Sales Group Leader
Myrtle Beach

Lisa B. James
Assistant Vice President
Deposit Servicing Group Leader

Ruth S. Kearns
Senior Vice President
Director of Public Relations
Assistant Corporate Secretary

Cecil H. Kennedy
Corporate Services Group Leader

Scott W. Lander
Vice President
Regional Sales Group Leader
North Carolina

Edward L. Loehr
Vice President
Budgeting and Treasury

Sandy L. Louden
Office Sales Group Leader
Socastee

Sherry A. Maloni
Assistant Vice President
Office Sales Group Leader
Waccamaw Medical Park

Janice B. Metz
Marketing Programs Coordinator

Cindy L. Milardo
Assistant Vice President
Loan Servicing Group Leader

Lauren E. Miller
Staff Development Coordinator

Erin P. Mitchell
Assistant Vice President
Commercial Sales Officer

Jerry L. Rexroad, CPA
Executive Vice President
Chief Financial Officer

Steve C. Sellers
Loan Sales Group Leader
Socastee

Douglas E. Shaffer
Vice President
Regional Sales Group Leader
North Strand Region

Cathe P. Singleton
Office Sales Group Leader
Murrells Inlet

Ashley M. Smith
Deposit Sales Group Leader
South Brunswick

J. Marcus Smith, Jr.
Vice President
Account Servicing Group Leader

Phillip G. Stalvey
Executive Vice President
Sales Group Leader

H. Delan Stevens
Office Sales Group Leader
Conway

Donna P. Todd
Assistant Vice President
Sales Support Group Leader

John L. Truelove
Vice President
Regional Sales Group Leader
South Strand Region

Jerry A. Vereen
Vice President
Regional Sales Group Leader
Central Region

Douglas W. Walters
Assistant Vice President
Loan Sales Group Leader
North Myrtle Beach

David E. Williams
Merchant Account Group Leader

                                       36
<PAGE>

                           ------------------------
                                COASTAL FEDERAL
                              SAVINGS BANK OFFICES
                           ------------------------

Oak Street Office
2619 Oak Street
Myrtle Beach, SC
29577-3129
(803) 448-5151

Conway Office
310 Highway 378
Conway, SC 29526
(803) 444-0225

Dunes Office
7500 North Kings Highway
Myrtle Beach, SC 29572
(803) 444-0241

Florence Office
1385 Alice Drive
Florence, SC 29505
(803) 444-1299

Murrells Inlet Office
3348 Highway 17 South
& Inlet Crossing
Murrells Inlet, SC 29576
(803) 444-0200

North Myrtle Beach Office
521 Main Street
North Myrtle Beach, SC 29582
(803) 444-0265

Socastee Office
4801 Socastee Boulevard
Myrtle Beach, SC 29575
(803) 444-0281

Surfside Office
112 Highway 17 South
& Glenns Bay Road
Surfside Beach, SC 29575
(803) 444-0250

Waccamaw Medical Park Office
112 Waccamaw Medical Park Drive
Conway, SC 29526
(803) 444-0216

South Brunswick Office
1625 Seaside Road, SW
Sunset Beach, NC 28468
(803) 444-1258
(910) 579-8160

                   ----------------------------------------
                        COASTAL INVESTMENTS CORPORATION
                                 (803) 626-0491
                   ----------------------------------------

Susan J. Cooke
Corporate Secretary
Myrtle Beach Investment Center
(803) 448-5151

Victoria J. Damore
Investment Services Representative
Conway Investment Center
(803) 626-0491

Michael C. Gerald
President and Chief Executive Officer
Myrtle Beach Investment Center
(803) 448-5151

John Michael Hill
Investment Services Representative
Myrtle Beach Investment Center
(803) 626-0491

Jerry L. Rexroad, CPA
Chief Financial Officer
Myrtle Beach Investment Center
(803) 448-5151

Julie M. Tellier
Sales Assistant
Myrtle Beach Investment Center
(803) 626-0491

                        -------------------------------
                            COASTAL FEDERAL MORTGAGE
                                 (803) 662-2273
                       -------------------------------

Susan J. Cooke
Corporate Secretary

Michael C. Gerald
President and Chief Executive Officer

Edward F. Hurley
Vice President

Jerry L. Rexroad, CPA
Chief Financial Officer

Nancy L. Watts
Assistant Vice President


                                       37
<PAGE>

                          ---------------------------
                             CORPORATE INFORMATION
                         ---------------------------

                     Common Stock and Dividend Information

       The common stock of Coastal  Financial  Corporation is quoted through the
NASDAQ Stock Market under the symbol CFCP. For information contact J.C. Bradford
at   1-800-829-4522,   Trident   Financial   Corporation  at  1-800-222-   2618,
Robinson-Humphrey   at   1-800-241-0077,   Herzog,   Heine,   Geduld,   Inc.  at
1-800-523-4936,  Raymond James &  Associates,  Inc. at  1-800-441-4103  or Wheat
First Butcher & Singer Securities at 1-800-678-3232. As of November 30, 1997 the
Corporation  had  793   shareholders   and  4,655,982  shares  of  common  stock
outstanding.  This does not reflect  the number of persons or entities  who hold
stock in nominee or "street name."


                         Market Price of Common Stock

       The table below  reflects the high and low bid stock prices  published by
NASDAQ for each quarter.



<TABLE>
<CAPTION>
                           High      Low
                            Bid      Bid
                         --------- --------
<S>                      <C>       <C>
 Fiscal Year 1997:
   First Quarter  ......    $16.50   $13.88
   Second Quarter ......     19.13    16.50
   Third Quarter  ......     23.13    21.13
   Fourth Quarter ......     25.25    22.88
 Fiscal Year 1996:
   First Quarter  ......     10.08     9.12
   Second Quarter ......     12.45     9.36
   Third Quarter  ......     13.35    11.40
   Fourth Quarter ......     15.75    13.20
</TABLE>

                                   Form 10-K

       A copy of Coastal Financial  Corporation's Annual Report on Form 10-K, as
filed with the Securities  Exchange  Commission for the year ended September 30,
1997, may be obtained  without a charge by writing to the Shareholder  Relations
Officer at the Corporate Address.


                        Annual Meeting of Shareholders

       The Annual Meeting of Shareholders of Coastal Financial  Corporation will
be held at the Myrtle  Beach  Martinique,  7100 North  Ocean  Boulevard,  Myrtle
Beach,  South  Carolina,  on Monday,  January  26,  1998 at 2:00  p.m.,  Eastern
Standard Time.
 

                            Additional Information

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


Corporate Offices

Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
803-448-5151

Transfer Agent and Registrar

Registrar and Transfer Company
P.O. Box 1010
Cranford, NJ 07016
(800) 866-1340

Independent Certified Public Accountants

KPMG Peat Marwick LLP
P.O. Box 10529
Greenville, South Carolina 29603

General Counsel

James H. Dusenbury
Dusenbury, Hendrix & Little
602 27th Avenue
Myrtle Beach, South Carolina 29577

Special Counsel

Breyer & Aggugia
1300 I Street, N.W.
Suite 470 East
Washington, DC 20005

Shareholder Relations Officer

Susan J. Cooke
Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
803-448-5151

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


                                                               [GRAPHIC OMITTED]





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<PAGE>

                 --------------------------------------------
                         COASTAL FINANCIAL CORPORATION
                 --------------------------------------------
                                Corporate Office
                                2619 Oak Street
                          Myrtle Beach, SC 29577-3129
                                 (803) 448-5151