SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

      For the Fiscal Year Ended September 30, 1996

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

                         Commission File Number: 0-19684 


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

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

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

       Registrant's telephone number, including area code: (803) 448-5151

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

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

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

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

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

         As of November 30, 1996,  there were issued and  outstanding  3,447,187
shares of the registrant's Common
Stock.
<PAGE>
         The aggregate market value of the voting stock held by nonaffiliates of
the  registrant,  based on the closing  sales price of the  registrant's  common
stock  as  quoted  on the  National  Association  of  Securities  Dealers,  Inc.
Automated  Quotation  System under the symbol  "CFCP" on November 30, 1996,  was
$74,114,521(3,447,187  shares at $21.50  per  share,  which is the ending bid on
November 30, 1996.). It is assumed for purposes of this calculation that none of
the registrant's officers, directors and 5% stockholders are affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE 

         1.  Portions of the Annual Report to  Stockholders  for the Fiscal Year
Ended September 30, 1996. (Parts I and II)

         2.  Portions  of the Proxy  Statement  for the 1997  Annual  Meeting of
Stockholders. (Part III)



                                     PART I

Item 1.  Business

General

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

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

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

         Coastal  Federal  was  organized  in 1953 as a mutual  savings and loan
association and, since that time, its deposits have been federally  insured.  In
March 1989, Coastal Federal converted from a federally  chartered mutual savings
and loan association to a federally chartered mutual savings bank. On October 4,
1990,  Coastal Federal  converted to the stock form of ownership  ("Conversion")
through the sale and  issuance of 492,541  shares of common  stock at a price of
$10.00  per share,  which  resulted  in gross  proceeds  to  Coastal  Federal of
$4,925,410.
<PAGE>
         Coastal  Federal  conducts its business  from its main office in Myrtle
Beach,  South  Carolina,  nine branch  offices  located in South  Carolina and a
lending office in Sunset Beach,  North Carolina.  At September 30, 1996, Coastal
Financial had total assets of $459.7  million,  total deposits of $313.4 million
and stockholders'  equity of $27.7 million. The deposits of the Bank are insured
by  the  Federal  Deposit  Insurance  Corporation  ("FDIC")  under  the  Savings
Association  Insurance  Fund  ("SAIF").  The  corporate  offices of the Bank are
located at 2619 Oak Street,  Myrtle  Beach,  South  Carolina  and the  telephone
number is (803) 448-5151.

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

         Coastal Federal's  principal  business currently consists of attracting
deposits from the general public and using these funds to originate conventional
one-to-four family first mortgage loans,  consumer and commercial business loans
and commercial real estate loans.

         From 1982 until 1986,  Coastal  Mortgage  Bankers and Realty Co.,  Inc.
("Coastal  Mortgage"),   Coastal  Federal's  wholly-owned  service  corporation,
invested in corporations  which were actively engaged in real estate development
activities,  primarily  in the Myrtle  Beach  area.  In 1986,  Congress  enacted
significant  changes to the tax laws that reduced the tax benefits  available on
second homes and rental  property.  The change in tax laws had a negative effect
on certain projects in which Coastal Mortgage was involved, and Coastal Mortgage
incurred  significant losses from these real estate projects.  Consequently,  in
1986 Coastal Mortgage decreased its emphasis on real estate projects, decreasing
its  loans to joint  ventures  as a  percentage  of total  loans  from  1.48% at
September  30,  1988  to  0% at  September  30,  1995  and  1996,  respectively.
Accordingly,  losses from real estate  partnerships were $394,000 in fiscal 1988
compared to income of $143,000 in fiscal 1996.

         In  1988,  the  Bank  decreased  its  emphasis  on the  origination  of
commercial  real estate loans.  Commercial  real estate loans as a percentage of
total loans have  decreased  from 20.1% of total loans at September  30, 1988 to
14.3% of total loans at September 30, 1996.

         As  part  of  its  lending  strategy,  subject  to  market  conditions,
management  intends to continue  emphasizing  the  origination  of consumer  and
commercial  business loans in addition to first mortgage loans. At September 30,
1996, 6.3% and 10.7%, respectively, of the Bank's total loan portfolio consisted
of commercial business and consumer loans.

Selected Consolidated Financial Data and Other Items

         The information contained in the table captioned "Selected Consolidated
Financial  and  Other  Data" on page 2 of the  Corporation's  Annual  Report  to
Stockholders for the Fiscal Year Ended September 30, 1996 is incorporated herein
by reference.
<PAGE>
Yields Earned and Rates Paid

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

                                                 Year Ended             At
                                                September 30,       September 30,
                                                ----------------------------------
                                                1994      1995      1996      1996
                                                ----      ----      ----      ----
<S>                                             <C>       <C>       <C>       <C>             
Weighted average yield
  on loan portfolio ....................        7.93%     8.39%     8.57%     8.59%
Weighted average yield
 on mortgage-backed
 securities ............................        7.59      7.81      7.78      7.23
Weighted average yield
 on Federal Funds and
 overnight deposits ....................        3.40      5.77      5.89      5.35
Weighted average yield
 on investment portfolio ...............        4.46      5.14      6.55      6.70
Weighted average yield
  on all interest-
  earning assets .......................        7.77      8.27      8.46      8.38
Weighted average rate
 paid on savings deposits ..............        3.29      3.96      4.08      4.12
Weighted average rate
 paid on Federal Home
 Loan Bank advances ....................        5.56      6.53      6.27      5.97
Weighted average rate
 paid on repurchase
 agreements ............................        3.11      3.70      4.63      3.57
Weighted average rate
  paid on all interest
  bearing liabilities ..................        3.68      4.75      4.70      4.44
Interest rate spread (spread
 between weighted average
 rate on all interest-earning
 assets and all interest-
 bearing liabilities)  .................        4.09      3.52      3.76      3.94
Net interest margin (net
 interest income as a percentage
 of average interest-earning
 assets) ...............................        4.12      3.62      3.86      4.07

</TABLE>
<PAGE>
Rate/Volume Analysis

         The following table sets forth certain information regarding changes to
interest  income  and  interest  expense  of the  Corporation  for  the  periods
indicated.  For each  category of  interest-earning  asset and  interest-bearing
liability,  information is provided on changes attributed to (i) changes in rate
(changes in rate  multiplied by old volume);  (ii) changes in volume (changes in
volume multiplied by old rate); and (iii) changes in rate-volume (change in rate
multiplied by change in volume).  Non-accrual  loans are included in the average
volume calculations.
<TABLE>
<CAPTION>

                                                                          Year Ended September 30,
                                   -------------------------------------------------------------------------------------------
                                         1994 Compared to 1993                          1995 Compared to 1994                       
                                          Increase (Decrease)                             Increase (Decrease)                       
                                                Due to                                          Due to   
                                   --------------------------------------------     ------------------------------------------  
                                                            Rate/                                            Rate/              
                                      Rate       Volume     Volume        Net         Rate       Volume     Volume       Net    
                                                                      (Dollars in thousands)
<S>                                <C>          <C>          <C>        <C>         <C>         <C>         <C>       <C>

Interest-Earning Assets:
 Loans ........................    $(1,810)     $ 1,179      $ (88)     $ (719)     $ 1,377     $ 3,346     $  222    $ 4,945   
 Mortgage-backed
  securities...................        (52)        (576)        41        (587)           4         567         17        588   
 Investments and
  other........................        113          (89)      (123)        (99)          11         188         34        233   
                                       ---           --        ---          --           --         ---         --        ---   

Total net change in
 income on interest-
 earning assets................     (1,749)         514       (170)     (1,405)       1,392       4,101        273      5,766   
                                     -----          ---        ---       -----        -----       -----        ---      -----   

Interest-Bearing
 Liabilities:
 Deposits......................     (1,433)          22         (3)     (1,414)       1,735        (297)       (64)     1,374   
 FHLB advances.................       (186)         291        (18)         87          526       3,215        564      4,305   
 Repurchase
  agreements...................        (10)          20        (11)         (1)          35           3          7         45   
                                        --           --         --           -           --           -          -         --   
Total net change in
 expense on interest-
 bearing liabilities...........     (1,629)         333        (32)     (1,328)       2,296       2,921        507      5,724   
                                     -----          ---         --       -----        -----       -----        ---      -----   

Net change in net
 interest income...............   $   (120)     $   181     $ (138)     $  (77)      $ (904)     $1,180     $ (234)     $  42   
                                  =========     =======     =======     =======      =======     ======     =======     ===== 
<PAGE>
<CAPTION>
                                               Year Ended September 30,
                                     -------------------------------------------
                                                1996 Compared to 1995                 
                                                 Increase (Decrease)                  
                                                     Due to 
                                     -------------------------------------------
                                                                Rate/            
                                      Rate        Volume       Volume       Net  
                                      ----        ------       ------       ---  
<S>                                  <C>         <C>            <C>      <C>                                                    
Interest-Earning Assets:                
 Loans ........................      $ 615       $ 2,361        $ 51     $ 3,027    
 Mortgage-backed                                                                      
  securities...................         (4)        1,083          (6)      1,073    
 Investments and                                                                      
  other........................        177            96          19         292    
                                       ---            --          --         ---    
                                                                                      
Total net change in                                                                   
 income on interest-                                                                  
 earning assets................        644         3,540          49       4,392    
                                       ---         -----          --       -----    
                                                                                      
Interest-Bearing                                                                      
 Liabilities:                                                                         
 Deposits......................        300         1,455          44       1,799    
 FHLB advances.................       (289)           51          (2)       (240)   
 Repurchase                                                                           
  agreements...................         16           194          49         260    
                                        --           ---          --         ---    
Total net change in                                                                   
 expense on interest-                                                                 
 bearing liabilities...........         27         1,700          91       1,819    
                                        --         -----          --       -----    
                                                                                      
Net change in net                                                                     
 interest income...............    $   617       $ 1,840       $ (42)     $2,573    
                                   =======       =======       ======     ======    
                                                                                      
</TABLE>
<PAGE>
Average Balance Sheet

          The  following  table sets forth certain  information  relating to the
Corporation's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived  by  dividing  income or  expense  by the  average  balance of assets or
liabilities,  respectively,  for the periods  presented.  Average  balances  are
derived from  month-end  balances.  Management  does not believe that the use of
month-end  balances  instead of daily  average  balances has caused any material
difference in the information presented.
<TABLE>
<CAPTION>
                                                                        Year Ended September 30,
                                        ----------------------------------------------------------------------------------------   
                                                             1994                                        1995                      
                                        -------------------------------------------   ------------------------------------------
                                           Average                           Yield/      Average                          Yield/   
                                           Balance        Interest            Rate       Balance       Interest           Rate     
                                           -------        --------            ----       -------       --------           ----     
                                                                        (Dollars in thousands)
<S>                                       <C>              <C>                 <C>       <C>             <C>               <C>

ASSETS
 Loans ...........................        $299,356         $ 23,726            7.93%     $341,557        $ 28,671          8.39%
 Investments(1) ..................          14,882              692            4.20        15,153             925          6.10
 Mortgage-backed
  securities .....................           1,897              144            7.59         9,365             732          7.82
                                          --------         --------            ----      --------        --------          ----
Total interest-earning
 assets ..........................        $316,135         $ 24,562            7.77%     $366,075        $ 30,328          8.28%
                                          ========         ========            ====      ========        ========          ==== 

LIABILITIES
 Transaction accounts ............          72,359            1,210            1.67        80,586           1,678          2.08
 Passbook accounts ...............          63,620            1,523            2.39        55,370           1,314          2.37
 Certificate accounts ............         121,142            5,783            4.77       124,287           6,898          5.55
 FHLB advances ...................          54,226            3,014            5.56       112,097           7,319          6.53
 Securities sold
  under repurchase
  agreements .....................             570               18            3.11         1,705              63          3.70
                                          --------         --------            ----      --------        --------          ---- 
Total interest-bearing
 liabilities .....................        $313,779         $ 11,548            3.68%     $363,733        $ 17,272          4.75%
                                          ========         ========            ====      ========        ========          ==== 

Net interest income/        
 interest rate spread ............                         $ 13,014            4.09%                     $ 13,056          3.52%   
                                                                                                                                  
Net yield on earning                                                                                                              
 assets ..........................                                             4.12%                                       3.62%   
                                                                                                                                  
Ratio of earning assets                                                                                                           
 to interest-bearing                                                                                                              
 liabilities .....................                                             1.01x                                       1.02x
<PAGE>
<CAPTION>
                                       Year Ended September 30,
                                  -----------------------------------
                                                 1996   
                                  -----------------------------------                  
                                   Average                    Yield/   
                                   Balance     Interest        Rate    
                                   -------      --------       -----    
<S>                               <C>          <C>             <C>
ASSETS                                             
 Loans ......................     $369,733     $ 31,698        8.57%  
 Investments(1) .............       16,730        1,217        7.27   
 Mortgage-backed                                                      
  securities ................       23,214        1,805        7.78   
                                  --------     --------        ----      
                                                                      
Total interest-earning                                                
 assets .....................     $409,677     $ 34,720        8.46%  
                                  ========     ========        ====      
                                                                      
LIABILITIES                                                           
 Transaction accounts .......      114,220        2,862        2.51   
 Passbook accounts ..........       44,631        1,160        2.60   
 Certificate accounts .......      134,415        7,667        5.70   
 FHLB advances ..............      112,878        7,079        6.27   
 Securities sold                                                      
  under repurchase                                                    
  agreements ................        6,955          323        4.63   
                                  --------     --------        ----      
Total interest-bearing                                                
 liabilities ................     $406,162     $ 19,091        4.70%  
                                  ========     ========        ====      
                                                                      
Net interest income/                                                  
 interest rate spread .......                  $ 15,629        3.76%   
                                                               
Net yield on earning                                           
 assets .....................                                  3.86%  
                                                               
Ratio of earning assets                                        
 to interest-bearing                                           
 liabilities.................                                  1.02x  
                                                               
-----------------               
 (1)     Includes short-term interest-bearing deposits and Federal funds sold.

</TABLE>
<PAGE>
Lending Activities

         General.  The principal  lending  activities of Coastal Federal are the
origination of residential one-to-four family mortgage loans, consumer loans and
commercial business loans. The Bank originates  construction and permanent loans
on single family and multi-unit dwellings,  as well as on commercial structures.
The Bank has  emphasized  the  origination of adjustable  rate  residential  and
commercial real estate mortgages since 1982.

         The  Bank's  loan  portfolio,   including  mortgage-backed  securities,
totaled  approximately  $404.2  million  at  September  30,  1996,  representing
approximately  87.9% of its total assets. On that date,  approximately  58.0% of
Coastal Federal's total loan portfolio,  including  mortgage-backed  securities,
were secured by mortgages on  one-to-four  family  residential  properties.  The
balance of the Bank's  outstanding  loans at that date consisted of construction
loans, consumer loans and commercial real estate and commercial business loans.

         In an effort  to  ensure  that the  yields  on its loan  portfolio  and
investments are  interest-rate  sensitive,  the Bank has implemented a number of
measures,  including:  (i) increased  emphasis on origination of adjustable rate
mortgages  on  residential  and  commercial  properties;   (ii)  origination  of
construction loans secured by residential properties, generally with terms for a
one-year period;  and (iii)  origination of commercial and consumer loans having
either adjustable rates or relatively short  maturities.  At September 30, 1996,
adjustable rate loans constituted  $271.4 million (or 72.0%) of the Bank's total
loan portfolio.  Therefore,  at such date, fixed rate loans comprised only 18.0%
of the total loan portfolio. These lending practices were adopted to shorten the
term of the  Bank's  assets  and make  the loan  portfolio  more  responsive  to
interest rate volatility.
<PAGE>
Loan Portfolio Analysis

     The following  tables set forth the  composition of Coastal  Federal's loan
and mortgage-backed securities portfolio by type of loan and type of security as
of the dates indicated.
<TABLE>
<CAPTION>

                                                                             At September 30,
                                                    -----------------------------------------------------------------          
                                                            1992                  1993                    1994                 
                                                    ------------------    -------------------     -------------------          
                                                      Amount   Percent       Amount   Percent       Amount    Percent     
                                                      ------   -------       ------   -------       ------    -------     
                                                                          (Dollars in thousands)
<S>                                                 <C>        <C>         <C>        <C>         <C>         <C>          
Type of Loan:

Mortgage loans:
 Construction..................................     $  8,867     3.05%     $ 12,266     4.04%     $ 23,222      6.66%    
 On existing property..........................      197,234    67.80       206,632    68.06       225,544     64.67     
 Mortgage-backed securities....................       14,640     5.03         3,525     1.16           794       .23     
 Income property (commercial)..................       34,835    11.98        35,328    11.64        42,207     12.10     
Commercial business loans......................       10,665     3.67        13,913     4.58        14,052      4.03     
Consumer loans:
  Mobile home..................................        2,299      .79         1,807      .60         1,497       .43     
  Automobiles..................................        2,661      .91         5,126     1.69         6,300      1.81     
  Equity lines of credit.......................       10,180     3.50        11,362     3.74        12,763      3.66     
  Other........................................        9,499     3.27        13,626     4.49        22,373      6.41     
                                                    --------     ----        ------    ----       --------    ------     

 Total loans, loans held for sale, and
  mortgage-backed securities...................     $290,880   100.00%     $303,585   100.0%      $348,752    100.00%    
                                                               ======                  =====                  ======     

 Less:
  Loans in process.............................       (3,535)                (5,607)               (13,087)              
  Deferred loan fees (costs)...................         (576)                  (546)                  (343)              
  Allowance for loan losses....................       (1,851)                (2,753)                (3,353)              
                                                    --------                 ------                 -------              

 Total loans and
  mortgage-backed securities, net..............     $284,918               $294,679               $331,969               
                                                    ========               ========               ========               


<CAPTION>
                                                                 At September 30,
                                                   -------------------------------------------
                                                          1995                    1996
                                                   -------------------     -------------------
                                                    Amount     Percent      Amount     Percent               
                                                    ------     -------      ------     -------               
<S>                                                <C>         <C>         <C>         <C>
Type of Loan:                                   
                                                
Mortgage loans:                                 
 Construction..................................    $ 27,905      7.10%     $ 34,566      8.10%      
 On existing property..........................     228,881     58.27       231,373     54.23       
 Mortgage-backed securities....................      12,776      3.25        27,029      6.33       
 Income property (commercial)..................      54,401     13.85        61,180     14.34       
Commercial business loans......................      19,610      4.99        26,946      6.32       
Consumer loans:                                                                                     
  Mobile home..................................       1,204       .31         1,103       .26       
  Automobiles..................................       5,941      1.51         7,261      1.70       
  Equity lines of credit.......................      13,210      3.36        12,441      2.91       
  Other........................................      28,887      7.36        24,776      5.81       
                                                   --------    ------      --------     -----       
                                                                                                    
 Total loans, loans held for sale, and                                                              
  mortgage-backed securities...................    $392,815    100.00%     $426,675    100.00%      
                                                               ======                  ======       
                                                                                                    
 Less:                                                                                              
  Loans in process.............................     (17,178)                (18,589)                
  Deferred loan fees (costs)...................         (71)                    286                 
  Allowance for loan losses....................      (3,578)                 (4,172)                
                                                   --------                --------                 
                                                                                                    
 Total loans and                                                                                    
  mortgage-backed securities, net..............    $371,988                $404,200                 
                                                   ========                ========                 

(table continued on following page)
<PAGE>
<CAPTION>


                                                                               At September 30, 
                                                   -------------------     --------------------    ---------------------    
                                                           1992                     1993                   1994             
                                                   -------------------     --------------------    ---------------------    
                                                    Amount    Percent       Amount      Percent      Amount     Percent  
                                                                             (Dollars in thousands)
<S>                                                 <C>        <C>         <C>          <C>        <C>          <C>         
Type of Security:

Residential real estate:
  Single family, one-to-four.......................$201,859     69.41%     $218,095      71.85%     $246,246      70.61%    
  Multi-family.....................................   2,306       .79         1,773        .58         1,510        .43     
Mortgage-backed securities.........................  14,640      5.03         3,525       1.16           794        .23     
Commercial or industrial real estate...............  35,828     12.32        35,829      11.80        42,207      12.10     
Developed building lots, acquisi-
 tion and development of land......................  11,123      3.82        11,881       3.91        12,718       3.65     
Automobiles........................................   2,661       .91         5,126       1.69         6,300       1.81     
Savings accounts...................................   1,077       .37           910        .30           966        .28     
Other..............................................  21,386      7.35        26,446       8.71        38,011      10.89     
                                                     ------    ------      --------     ------      --------     ------     

Total loans, loans held for sale and
 mortgage-backed securities........................$290,880    100.00%     $303,585     100.00%     $348,752     100.00%    
                                                               ======                   ======                   ======     

Less:
 Loans in process..................................  (3,535)                 (5,607)                 (13,087)               
 Deferred loan fees (costs)........................    (576)                   (546)                    (343)               
 Allowance for loan losses ........................  (1,851)                 (2,753)                  (3,353)               
                                                    ------                   ------                   ------                

Total loans and mortgage-
 backed securities, net............................$284,918                $294,679                 $331,969                
                                                   ========                ========                 ========                

<PAGE>
<CAPTION>
                                                             At September 30,
                                              ----------------------------------------------
                                                      1995                      1996              
                                              --------------------      --------------------              
                                               Amount      Percent      Amount      Percent    
                                               ------      -------      ------      -------    
<S>                                           <C>          <C>         <C>           <C>                                         
Type of Security:                         
                                          
Residential real estate:                  
  Single family, one-to-four..............    $257,408      65.53%     $247,013       57.89%     
  Multi-family............................       2,018        .51         1,833         .43      
Mortgage-backed securities................      12,776       3.25        27,029        6.33      
Commercial or industrial real estate......      54,401      13.85        61,180       14.34      
Developed building lots, acquisi-                                                                
 tion and development of land.............      15,806       4.02        17,093        4.01      
Automobiles...............................       5,941       1.51         7,261        1.70      
Savings accounts..........................         705        .18           436         .10      
Other.....................................      43,760      11.15        64,830       15.20      
                                              --------     ------      --------      ------      
                                                                                                 
Total loans, loans held for sale and                                                             
 mortgage-backed securities...............    $392,815     100.00%     $426,675      100.00%     
                                                           ======                    ======      
                                                                                                 
Less:                                                                                            
 Loans in process.........................     (17,178)                 (18,589)                 
 Deferred loan fees (costs)...............         (71)                     286                  
 Allowance for loan losses ...............      (3,578)                  (4,172)                 
                                              --------                 --------                  
                                                                                                 
Total loans and mortgage-                                                                        
 backed securities, net...................    $371,988                 $404,200                  
                                              ========                 ========                  
</TABLE>
<PAGE>
         Single  Family  Residential  Loans.  The Bank has  been  active  in the
origination of conventional loans to enable borrowers to purchase existing homes
or residential lots,  refinance  existing mortgage loans or construct new homes.
Mortgage loans originated by the Bank are generally  long-term loans,  amortized
on a monthly  basis,  with  principal  and interest due each month.  The initial
contractual  loan payment period for single family  residential  loans typically
range from 15 to 30 years.  The Bank's  experience  indicates  that real  estate
loans  remain   outstanding  for   significantly   shorter  periods  than  their
contractual  terms.  Borrowers  may  refinance or prepay loans at their  option,
subject to any  prepayment  penalty  provisions  included in the note.  The Bank
generally requires mortgage title insurance on all mortgage loans.

         Since 1982, the Bank has offered  adjustable  mortgage loans  ("ARMs"),
the interest  rates of which  adjust based upon either the cost of funds,  prime
rate or treasury  securities  indices.  The interest rates on ARMs generally may
not adjust more than 1-2% per year and 4-6% over the life of the loan.  The Bank
originates  ARMs at below  the  fully  phased-in  interest  rate  but  generally
qualifies  borrowers  at the fully  phased-in  rate when the loan to value ratio
exceeds  80%.  Monthly  payments  could  increase  significantly  at  the  first
repricing  period.  Although  Coastal  Federal's  ARMs have been  beneficial  in
helping  Coastal  Federal  improve the interest rate  sensitivity of its assets,
such loans may pose potential additional risks to Coastal Federal. A precipitous
increase  in  interest  rates  could be  expected  to result in an  increase  in
delinquencies or defaults on such loans.

         Coastal Federal continues to offer one-to-four family residential loans
with fixed rates of interest. These loans generally can be sold in the secondary
market  or are  portfolio  loans  where  the  Bank  offers  such  loans at rates
approximately 1% above conforming loan rates.

         At September  30, 1996,  approximately  $274.0  million or 57.9% of the
Bank's  loan  portfolio,  including  mortgage-backed  securities,  consisted  of
one-to-four family residential loans.

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

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

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

         At  September  30,  1996,  approximately  $34.6  million or 8.1% of the
Bank's gross loan portfolio  consisted of construction loans on both residential
($22.2 million) and commercial properties ($12.4 million).

         Commercial Real Estate Loans.  The Bank may invest,  by OTS regulation,
in non-residential real estate loans up to 400% of its capital as computed under
GAAP plus  general loan loss  reserves.  At  September  30,  1996,  this limited
Coastal Federal's aggregate  non-residential  real estate loans to approximately
$127  million.  At such time,  the Bank had  non-residential  real estate  loans
outstanding of $78.3 million. The Bank will maintain a level of these loan types
within the guidelines set forth.  The commercial real estate loans originated by
the Bank are primarily secured by shopping centers, office buildings,  warehouse
facilities, retail outlets, hotels, motels and multi-family apartment buildings.
The interest rate of the commercial real estate loans  presently  offered by the
Bank generally  adjusts every one or three years and is indexed to U.S. Treasury
securities.  Such loans  generally have a ten-year term, with the payments based
up to a 20 year  amortization  schedule.  The Bank generally  requires that such
loans have a minimum debt service  coverage of 120% of projected  net  operating
income  together  with  other  generally  accepted  underwriting   criteria.  At
September 30, 1996, the Bank had approximately $61.2 million of loans secured by
commercial real estate,  representing  approximately  14.3% of Coastal Federal's
total loan portfolio.

         Commercial real estate lending  entails  significant  additional  risks
compared to residential lending.  Commercial real estate loans typically involve
large loan  balances to single  borrowers  or groups of related  borrowers.  The
payment  experience  of such loans is typically  dependent  upon the  successful
operation of the real estate project.  These risks can be significantly affected
by supply and demand  conditions  in the market for office and retail  space and
for apartments  and, as such, may be subject,  to a greater  extent,  to adverse
conditions in the economy.  In dealing with these risk factors,  Coastal Federal
generally  limits itself to a real estate  market or to borrowers  with which it
has  experience.  The Bank  concentrates  on originating  commercial real estate
loans  secured by  properties  located  within its market areas of Horry County,
Florence County, the Pee Dee Region,  northeastern Georgetown County, all within
South Carolina and Brunswick County, North Carolina, although the Bank has, on a
limited basis,  originated or purchased  commercial real estate loans secured by
properties located in other parts of the Southeast.
<PAGE>
         Consumer  Loans.  The Bank permitted by OTS regulations to invest up to
35% of their assets in consumer loans.  The Bank currently offers a wide variety
of consumer loans on a secured and unsecured  basis  including home  improvement
loans,  loans secured by savings accounts and automobile,  truck and boat loans.
The Bank also offers a revolving line of credit secured by  owner-occupied  real
estate.  Total consumer  loans amounted to $45.6 million,  or 10.7% of the total
loan portfolio, at September 30, 1996.

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

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

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

         Coastal Federal has been making commercial business loans since 1983 on
both a secured and unsecured  basis with terms which generally do not exceed one
year.  The majority of these loans have interest rates which adjust with changes
in the prime rate as published in the Wall Street  Journal.  The Bank's non-real
estate  commercial  loans  primarily  consist of  short-term  loans for  working
capital  purposes,  seasonal  loans and lines of  credit.  The Bank  customarily
requires a personal  guaranty  of payment  by the  principals  of any  borrowing
entity and  reviews  the  financial  statements  and  income tax  returns of the
guarantors.  At September 30, 1996,  the Bank had $26.9 million  outstanding  in
commercial  business loans,  which  represented  approximately  6.3% of its loan
portfolio, including mortgage-backed securities.
<PAGE>
Loan Maturity

         The  following  table sets forth certain  information  at September 30,
1996  regarding  the  dollar  amount  of loans  and  mortgage-backed  securities
maturing in the Company's loan  portfolio  based on their  contractual  terms to
maturity  but does not  include  scheduled  payments or  potential  prepayments.
Demand  loans,  loans  having no stated  schedule  of  repayments  and no stated
maturity and overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
                                                      More than      More than     More than    More than
                                                      One Year       Three Years   Five Years   Ten Years
                                         One Year     Through        Through       Through      Through          Over
                                          or Less     Three Years    Five Years    Ten Years    Twenty Years  Twenty Years    Totals
                                          -------     -----------    ----------    ---------    ------------  ------------    ------
                                                                               (In thousands)
<S>                                     <C>           <C>           <C>           <C>           <C>           <C>           <C>

First mortgage loans .............      $ 10,674      $  9,979      $ 13,787      $ 11,784      $ 62,282      $199,981      $308,487
Other residential and
 non-residential .................        13,233         3,602         3,362         3,108        14,123         6,156        43,584
Equity lines of credit ...........        12,441          --            --            --            --            --          12,441
Consumer loans ...................         5,267         7,812         6,184         2,780         1,779          --          23,822
Commercial loans .................         4,607         3,102         2,413         3,542         2,202          --          15,866
                                        --------      --------      --------      --------      --------      --------      --------
     Total loans .................      $ 46,222      $ 24,495      $ 25,746      $ 21,214      $ 80,386      $206,137      $404,200
                                        ========      ========      ========      ========      ========      ========      ========
</TABLE>
         The following table sets forth the dollar amount of all loans due after
one year at September 30, 1996 which have fixed  interest  rates and those which
have floating or adjustable interest rates.
<TABLE>
<CAPTION>
                                            Fixed       Floating or
                                            Rates    Adjustable Rates    Totals
                                            -----    ----------------    ------
                                                      (In thousands)
<S>                                       <C>            <C>            <C>

First mortgage loans ..............       $ 76,046       $221,767       $297,813
Other residential and
 non-residential ..................          2,627         27,724         30,351
Consumer loans ....................         16,690          1,865         18,555
Commercial loans ..................          4,040          7,219         11,259
                                          --------       --------       --------
     Total loans ..................       $ 99,403       $258,575       $357,978
                                          ========       ========       ========

</TABLE>
<PAGE>
Interest Rate Sensitivity Analysis

         The following table  illustrates  the repricing  analysis of the Bank's
interest-earning  assets and  interest-bearing  liabilities  as of September 30,
1996.  For purposes of the table,  repricing  characteristics  of loans  include
estimated annual prepayment rates.
<TABLE>
<CAPTION>

                                      Zero to     Four Months   One Year to  Greater than
                                   Three Months   to One Year   Five Years    Five Years     Total
                                   ------------   -----------   ----------    ----------     -----
                                                              (In thousands)
<S>                                 <C>           <C>          <C>           <C>           <C>
Rate Sensitive Assets(1):
 Mortgage loans and
  mortgage-backed securities ....   $  27,306     $ 215,894    $  89,818     $  31,494     $ 364,512
 Non-mortgage loans .............      14,684         5,603       19,401          --          39,688
 Interest-bearing deposits and
  investment securities .........       5,222           330       17,512          --          23,064
                                    ---------     ---------    ---------     ---------     ---------
     Total ......................   $  47,212     $ 221,827    $ 126,731     $  31,494     $ 427,264
                                    =========     =========    =========     =========     =========

Rate Sensitive Liabilities:
 Core deposits(2) ...............   $  36,449     $  60,668    $  54,425     $  30,962     $ 182,504
 Time deposits ..................      56,806        42,777       31,343          --         130,926
 Borrowings .....................      49,741         5,201       38,854        17,479       111,275
                                    ---------     ---------    ---------     ---------     ---------
     Total ......................   $ 142,996     $ 108,646    $ 124,622     $  48,441     $ 424,705
                                    =========     =========    =========     =========     =========

Off-Balance Sheet Positions:
 Commitments to originate
  mortgage loans ................   $    (794)    $   3,874    $  (3,544)    $     464          --

Interest rate sensitivity gap ...   $ (96,578)    $ 117,055    $  (1,435)    $ (16,483)    $   2,559

Cumulative interest
 sensitivity gap ................   $ (96,578)    $  20,477    $  19,042     $   2,559          --

Cumulative interest sensitivity
 gap as a percent of total assets      (21.11%)        4.48%        4.16%          .56%         --

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

(2) Decay rates have been applied to all core deposits as follows:
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                       NOW          MMDA       Passbook    Non-interest
                                     Accounts     Accounts     Accounts      Demand
                                     --------    --------      --------     ------
<S>                                  <C>          <C>          <C>         <C> 
Percent Repricing:
1 - 12 months ..............          37.00%       79.00%       17.00%       37.00%
13 - 60 months .............          42.93        16.24        42.65        42.93
Over 60 months .............          20.07         4.76        40.35        20.07
                                     ------       ------       ------       ------
Total ......................         100.00%      100.00%      100.00%      100.00%
                                     ======       ======       ======       ======

</TABLE>
<PAGE>
Interest Rate Sensitivity of Net Portfolio Value

         The table below measures interest rate risk by estimating the change in
market value of the Bank's assets, liabilities,  and off-balance sheet contracts
in response to an  instantaneous  change in the general level of interest rates.
The procedure  for  measuring  interest rate risk was developed by the Office of
Thrift Supervision ("OTS") to replace the "gap" analysis (the difference between
interest-earning assets and interest-bearing  liabilities that mature or reprice
within a specific  time  period)  used  previously  by the OTS.  The model first
estimates  the level of the Bank's  market  value of portfolio  equity  ("MVPE")
(market  value of assets,  less market value of  liabilities,  plus or minus the
market value of any off-balance sheet items) under the current rate environment.
In general,  market values are estimated by discounting the estimated cash flows
of each instrument by appropriate  discount rates.  The model then  recalculates
the Bank's MVPE under  different  interest  rate  scenarios.  The change in MVPE
under the  different  interest rate  scenarios  provides a measure of the Bank's
exposure   to  interest   rate  risk.   Due  to  OTS   reporting   requirements,
classifications may vary from GAAP reporting.  The data presented below is as of
September 30, 1996.
<TABLE>
<CAPTION>
                                -400          -300           -200            -100                           +100           +200     
                               Basis         Basis         Basis            Basis           No             Basis          Basis     
                               Points        Points        Points           Points         Change          Points         Points    
                                            ------        ------          ------          ------          ------          ------    
                                                                        (In thousands)
<S>                           <C>           <C>           <C>              <C>            <C>             <C>            <C>
ASSETS
Mortgage loans and
 securities...........        $388,401      $384,624      $381,316         $377,325       $371,609        $364,304       $355,832   
Non-mortgage loans....          41,142        40,663        40,196           39,746         39,308          38,883         38,473   
Cash, deposits and
 securities...........          41,522        40,768        40,046           39,355         38,693          38,060         37,453   
Repossessed assets....             336           336           336              336            336             336            336   
Premises and equipment           5,567         5,567         5,567            5,567          5,567           5,567          5,567   
Other assets..........           9,974        11,490        13,440           16,583         19,992          23,600         26,983   
                              --------      --------      --------         --------       --------        --------       --------
TOTAL.................         486,942       483,448       480,901          478,912        475,505         470,750        464,644   
                              ========      ========      ========         ========       ========        ========       ========   

LIABILITIES
Deposits..............        $317,340      $316,484      $315,641         $314,812       $314,002        $313,204       $312,419   
Borrowings............         115,567       113,957       112,411          110,924        109,494         108,118        106,793   
Other liabilities.....           6,275         6,275         6,275            6,275          6,275           6,275          6,276   
                              --------      --------      --------         --------       --------        --------       --------
TOTAL.................         439,182       436,716       434,327          432,011        429,771         427,597        425,488 
                              ========      ========      ========         ========       ========        ========       ========   

OFF BALANCE SHEET
 POSITIONS............           $ 300          $177           $69             $(76)         $(256)          $(467)         $(674)  

MARKET VALUE OF
 PORTFOLIO EQUITY.....         $48,060       $46,909       $46,643          $46,825        $45,478         $42,686        $38,482   

<PAGE>
<CAPTION>
                                   +300            +400         
                                  Basis           Basis         
                                  Points          Points        
                                  ------          ------     
<S>                             <C>              <C>                                                                
ASSETS                         
Mortgage loans and          
 securities...........          $346,714         $337,292  
Non-mortgage loans....            38,072           37,684  
Cash, deposits and                                         
 securities...........            36,871           36,313  
Repossessed assets....               336              336  
Premises and equipment             5,567            5,567  
Other assets..........            30,200           33,253  
                                --------         --------  
TOTAL.................          $457,760         $450,445  
                                ========         ========  
                                                           
LIABILITIES                                                
Deposits..............          $311,650         $310,892  
Borrowings............           105,517          104,286  
Other liabilities.....             6,275            6,275  
                                                           
TOTAL.................           423,442          421,453 
                                ========         ========  
                                                           
OFF BALANCE SHEET                                          
 POSITIONS............             $(881)         $(1,094) 
                                                           
MARKET VALUE OF                                            
 PORTFOLIO EQUITY.....           $33,437          $27,898  
                            
</TABLE>
         Loan  Solicitation and Processing.  The Bank actively solicits mortgage
loan applications  from existing  customers,  walk-ins,  referrals and from real
estate brokers.  Commercial real estate loan  applications  also are obtained by
direct solicitation by loan officers.

         Detailed loan  applications  are obtained to determine  the  borrower's
ability  to repay,  and the more  significant  items on these  applications  are
verified   through  the  use  of  credit  reports,   financial   statements  and
confirmations through verification forms. After analysis of the loan application
and property or collateral  involved,  including an appraisal of the property by
independent appraisers approved by the Bank's Board of Directors and reviewed by
the Bank's underwriter,  a lending decision is made by the Bank. With respect to
commercial  loans,  the Bank also reviews the capital  adequacy of the business,
the ability of the  borrower  to repay the loan and honor its other  obligations
and general  economic and industry  conditions.  All  residential  mortgage loan
applications  over $500,000  require the approval of the Bank's Loan  Committee,
which consists of Directors Clemmons,  Gerald, Smart, Springs and Executive Vice
Presidents Griffin, Rexroad and Stalvey. All first mortgage loan applications in
excess of 95% of the  appraised  value of the  property  must be approved by the
Board of Directors.
<PAGE>
         Loan applicants are promptly  notified of the decision of the Bank by a
letter setting forth the terms and conditions of the decision. If approved, such
terms and conditions include the amount of the loan, interest rate, amortization
term, a brief  description of real estate to be mortgaged to the Bank and notice
of requirement of insurance coverage necessary to protect the Bank's interest in
the collateral.

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

         Loan  Originations,  Purchases  and  Sales.  The  Bank  is a  qualified
servicer  for  FHLMC and  FNMA.  Depending  upon  interest  rates  and  economic
conditions,  the Bank has sold  loans in order to provide  additional  funds for
lending,  to generate  servicing  fee income,  and to decrease the amount of its
long-term,  fixed rate loans in order to minimize the gap between the maturities
of its  interest-earning  assets  and  interest-bearing  liabilities.  The  Bank
generally  continues to collect payments on the loans, to supervise  foreclosure
proceedings,  if necessary, and to otherwise service the loans. The Bank retains
a portion of the interest paid by the borrower on the loans as consideration for
its servicing  activities.  At September 30, 1996, the Bank was servicing  loans
sold to others with a principal balance of approximately  $115.1 million.  Sales
of whole loans and participation interests by the Bank are made without right of
recourse  to the Bank by the buyer of the loans in the event of  default  by the
borrower.  The  majority of the loans sold during the year ended  September  30,
1996 were conforming  conventional  loans originated and sold by Coastal Federal
Mortgage.  These loans were sold on a servicing released basis. At September 30,
1996, the Bank's loan portfolio included purchased loans of approximately  $15.3
million, which have been primarily secured by single family residences and which
have been written on adjustable rate mortgage loan instruments.
<PAGE>
Loans Originated, Purchased and Sold

     The  following  table  shows total loans  originated,  purchased,  sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>

                                                   Year Ended September 30,
                                            -----------------------------------
                                                1994         1995         1996
                                            ---------    ---------    ---------
                                                       (In thousands)
<S>                                         <C>          <C>          <C>
Loans receivable and mortgage-backed
 securities, net at the beginning of the
 period .................................   $ 294,679    $ 331,969    $ 371,988
                                            ---------    ---------    ---------

Loans originated:
 Construction ...........................      22,338       31,849       38,172 
 Residential ............................      82,507       46,935       60,683
 Nonresidential .........................      17,156        8,307       11,897
 Land ...................................       6,831        7,263        8,355
 Commercial business ....................      21,840       20,145       23,062
 Consumer ...............................      24,089       26,530       18,201
                                            ---------    ---------    ---------
     Total loans originated .............     174,761      141,029      160,370
                                            ---------    ---------    ---------

Loans purchased:
  Multi-family residential and
   commercial real estate ...............          63        6,337       12,448
  Mortgage-backed securities ............        --          1,000       11,867
                                            ---------    ---------    ---------
     Total loans purchased ..............          63        7,337       24,315
                                            ---------    ---------    ---------

Loans sold:
  Whole loans sold ......................     (29,299)      (2,806)     (40,672)
  Mortgage-backed securities ............      (1,613)        --        (13,220)
                                            ---------    ---------    ---------
     Total loans sold ...................     (30,912)      (2,806)     (53,892)
                                            ---------    ---------    ---------

Loan and mortgage-backed securities
 principal repayments and other .........    (105,707)    (105,026)     (97,689)
                                            ---------    ---------    ---------

Other ...................................        (915)        (515)        (892)
                                            ---------    ---------    ---------

Loans receivable and mortgage-backed
  securities, net, at end of period .....   $ 331,969    $ 371,988    $ 404,200
                                            =========    =========    =========

</TABLE>
<PAGE>
         Loan Commitments.  The Bank, upon the submission of a loan application,
generally  provides  a  45-day  written  commitment  as  to  the  interest  rate
applicable  to such loan.  If the loan has not been closed  within 45 days,  the
rate may be adjusted to reflect current market conditions at the Bank's option.

         Loans which require  closing time in excess of 45 days from the date of
application are issued a written  commitment,  with a term ranging from three to
six months. For fixed rate loans, the Bank either charges a higher interest rate
on the loan or may  charge up to one point to lock in the rate for 180 days.  At
September 30, 1996,  Coastal Federal had loan commitments of approximately  $9.0
million.

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

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

         Problem  Assets  and  Asset  Classification.  Loans are  reviewed  on a
regular basis and a reserve for  uncollectible  interest is established on loans
where collection of interest is  questionable,  generally when such loans become
90 days  delinquent.  Loan balances that relate to interest amounts reserved are
considered  to be on a  nonaccrual  basis.  Typically,  payments  received  on a
nonaccrual  loan are  applied  to the  outstanding  principal  and  interest  as
determined at the time of collection of the loan.
<PAGE>
         The following table sets forth  information  with respect to the Bank's
non-performing  assets at the dates  indicated.  At each of the dates indicated,
Coastal Federal has no debt that has been restructured.
<TABLE>
<CAPTION>
                                                                        At September 30,
                                                -------------------------------------------------------------  
                                                 1992          1993           1994          1995         1996
                                                 ----          ----           ----          ----         ----
                                                                     (Dollars in thousands)
<S>                                             <C>          <C>            <C>           <C>          <C>
Loans accounted for on a nonaccrual basis:
Real estate -
   Residential..............................      312           205             79           999          307
   Commercial...............................    2,630            64          1,056           134           --
  Commercial business.......................       --            --             --           154           60
  Consumer..................................       43            44             16            36           78
                                                -----         -----         ------        ------       ------
    Total...................................    2,985            31          1,151         1,323          445
                                                -----         -----         ------        ------       ------
Accruing loans which are
 contractually past due
 90 days or more: 
  Real estate -
   Residential..............................       --            --             --            --           --
   Commercial...............................       --            --             --            --           --
  Commercial business.......................       --            --             --            --           --
  Consumer..................................       --            --             --            --          --
                                                -----         -----         ------        ------       ------
                                                   --         -----         ------         -----       -----
    Total...................................       --            --             --         __ --           --
                                                -----         -----         ------        ------       ------

Restructured loans.........................       480            --             --            --           --
Real estate owned...........................    2,555         2,197            781           789          323
Other nonperforming
 assets.....................................       --            --             --            --           --
                                                -----         -----         ------        ------       ------
Total nonperforming
 assets.....................................   $6,020        $2,510         $1,932        $2,112         $768
                                               =======       ======         ======        ======         ====
Total loans delinquent 90
 days or more to net
 loans......................................    1.11%          .10%          .03%         .36%           .12%

Total loans delinquent 90
 days or more to total
 assets.....................................     .91%          .09%          .03%         .33%           .10%

Total nonperforming assets
 to total assets............................    1.83%          .74%          .56%         .53%           .17%
</TABLE>
<PAGE>
         For the year ended September 30,1996, gross interest income which would
have been recorded had non-accruing  loans been current in accordance with their
original terms would have amounted to $46,000,  of which $13,000 was included in
interest income.

         The  allowance  for  uncollectible  interest  which is  netted  against
accrued  interest  receivable  totaled $83,000 and $50,000 at September 30, 1995
and 1996, respectively.

         The  OTS has  adopted  various  changes  in its  regulations  regarding
problem  assets  of  savings  institutions.   These  regulations,  which  became
effective on December 31, 1987,  are intended to comply with  directives  to the
Federal  Home Loan  Bank  Board  ("FHLBB")  (as  predecessor  to the OTS) in the
Competitive Equality Banking Act ("CEBA"). The regulations conform the OTS asset
classification  system to commercial  banking  practices,  eliminate the FHLBB's
previous  regulation  that had classified  certain  problem assets as "scheduled
items" and put the  establishment  of loan loss allowances on a basis consistent
with the requirements of GAAP.

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

         Coastal  Federal  had no  individual  classified  asset  in  excess  of
$450,000 as of September 30, 1996. At that date,  classified  assets amounted to
$5.1 million ($18,000.00 loss; $1.0 million  substandard;  $50,000.00  doubtful;
and $4.0 million special mention).

         Allowance for Loan Losses.  In making loans,  the Bank  recognizes  the
fact that credit losses will be experienced  and that the risk of loss will vary
with, among other things, the type of loan being made, the  creditworthiness  of
the borrower over the term of the loan and, in the case of a secured  loan,  the
quality of the security for the loan.
<PAGE>
         The Bank's  management  evaluates the need to establish  allowances for
losses on loans and other assets each year based on estimated losses on specific
loans and on any real estate held for sale or investment  when a finding is made
that a significant  decline in value has occurred.  Such  evaluation  includes a
review of all loans for which full  collectibility may not be reasonably assured
and considers, among other matters, the estimated market value of the underlying
collateral of problem  loans,  prior loss  experience,  economic  conditions and
overall  portfolio  quality.  Additions to the  allowance for losses are charged
against  earnings  in the  year  they  are  established.  The  Bank  established
provisions for losses on loans for the years ended  September 30, 1994, 1995 and
1996 of $510,000, $202,000 and $790,000, respectively. As a result, the Bank has
a $4.2 million allowance for loan losses as of September 30, 1996. The allowance
as a percentage of loans  receivable was 1.11% at September 30, 1996 compared to
1.0% at September 30, 1995.  See  "Management's  Discussion and Analysis" in the
1996  Annual  Report  to  Stockholders   attached  hereto  and  incorporated  by
reference.

         While the Bank believes it has established  its existing  allowance for
loan losses in  accordance  with GAAP at  September  30,  1996,  there can be no
assurance  that  regulators,  when  reviewing  the Bank's loan  portfolio in the
future,  will not request the Bank to  significantly  increase its allowance for
loan losses,  thereby  adversely  affecting the Bank's  financial  condition and
earnings.
<PAGE>
Loan Loss Allowance Analysis

    The following  table sets forth an analysis of Coastal  Federal's  allowance
for loan losses for the periods  indicated.  Where  specific  loan loss reserves
have been established, any difference between the loss reserve and the amount of
loss  realized  has been  charged or  credited to the loan loss  allowance  as a
charge-off or recovery.
<TABLE>
<CAPTION>

                                                                        Year Ended September 30,
                                                       --------------------------------------------------------
                                                         1992      1993        1994          1995          1996
                                                         ----      ----        ----          ----          ----
                                                                      (Dollars in thousands)
<S>                                                    <C>       <C>         <C>           <C>           <C>
Allowance at beginning of
 period...........................................     $1,532    $1,851      $2,753        $3,353        $3,578
Provision for loan losses.........................        645     1,389         510           202           790
                                                          ---    ------      ------        ------        ------
Recoveries:
 Residential real estate..........................         29        --           3           232            --
 Commercial real estate...........................        116        11         148            11            75
 Real estate construction.........................         --        --          --            --            --
 Consumer.........................................          3       106          79            12             7
                                                       ------    ------      ------        ------         -----
   Total recoveries...............................        148       117         230           255            82
                                                       ------    ------      ------        ------         -----

Charge-offs:
 Residential real estate..........................        153        71          38           206            24
 Commercial real estate...........................        119       392          13            18           216
 Real estate construction.........................         --        --          --            --            --
 Consumer.........................................        202       141          89             8            38
                                                       ------    ------      ------        ------         -----
   Total charge-offs..............................        474       604         140           232           278
                                                       ------    ------      ------        ------         -----
   Net charge-offs (recoveries) ..................        326       487         (90)          (23)          196
                                                       ------    ------      ------        ------         -----
 Allowance at end of period.......................     $1,851    $2,753      $3,353        $3,578        $4,172
                                                       ======    ======      ======        ======        ======

Ratio of allowance to net
 loans outstanding at the
 end of the period................................     0.69%     0.98%       1.01%         1.00%         1.11%

Ratio of net charge-offs (recoveries)
 to average loans outstanding
 during the period................................     0.12%     0.17%       (.03%)        (.01%)         .05%

</TABLE>
<PAGE>
Loan Loss Allowance by Category

           The  following  table sets forth the  breakdown of the  allowance for
loan losses by loan category for the periods indicated.
<TABLE>
<CAPTION>

                                                                                 September 30,
                                                  1992                              1993                             1994           
                                   --------------------------------- ---------------------------------  ----------------------------
                                            As a %      Loan Type           As a %      Loan Type            As a %      Loan Type  
                                            of out-     As a %              of out-     As a %               of out-     As a %     
                                            standing    of out-             standing    of out-              standing    of out-    
                                            loans in    standing            loans in    standing             loans in    standing   
                                   Amount   category    loans      Amount   category    loans       Amount  category     loans      
                                   ------   --------    -----      ------   --------    -----       ------  --------     -----      
                                                                         (Dollars in thousands)
<S>                                <C>       <C>       <C>          <C>        <C>       <C>        <C>         <C>      <C>
Real Estate -- mortgage
  Residential...................   $  257    0.11%       78.09%     $  542      .25%      75.48%    $  742       .30%     75.05%    
  Commercial....................    1,282    3.79        12.68       1,901     5.54       12.22      2,296      5.58      11.94     
Consumer........................      312    1.26         9.23         310      .89       12.30        315       .71      13.01     
                                   ------    ----       ------      ------     ----      ------     ------      ----     ------ 
 Total allowance for
   loan losses..................   $1,851    0.69%      100.00%     $2,753      .98%     100.00%    $3,353      1.01%    100.00%    
                                   ======               ======      ======               ======     ======               ======     

<CAPTION>
                                                                                                             
                                                       1995                               1996                   
                                       ---------------------------------   --------------------------------                   
                                                 As a %       Loan Type              As a %       Loan Type    
                                                 of out-      As a %                 of out-      As a %       
                                                 standing     of out-                standing     of out-      
                                                 loans in     standing               loans in     standing     
                                       Amount    category     loans        Amount    category     loans        
                                       ------    --------     -----        ------    --------     -----        
<S>                                    <C>        <C>          <C>         <C>          <C>         <C>
Real Estate -- mortgage         
  Residential...................       $  803       .31%        72.03%     $  837        .37%        65.35%  
  Commercial....................        2,371      4.36         14.17       2,875       3.80         22.34   
Consumer........................          404       .80         13.80         460       1.01         12.31   
                                       ------      ----        ------      ------       ----        ------   
 Total allowance for                                                                                     
   loan losses..................       $3,578      1.00%       100.00%     $4,172       1.11%       100.00% 
                                       ======                  ======      ======                   ======   
                                                                                                             
</TABLE>
<PAGE>
Investment Activities               
                                    
         Under OTS  regulations,  the Bank has  authority  to invest in  various
types of liquid  assets,  including  U.S.  Treasury  obligations,  securities of
various federal agencies and of state and municipal governments, deposits at the
FHLB of Atlanta,  certificates  of deposit of  federally  insured  institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
such  savings  institutions  may  also  invest a  portion  of  their  assets  in
commercial  paper,  corporate debt  securities  and mutual funds,  the assets of
which conform to the investments that federally  chartered savings  institutions
are otherwise authorized to make directly.  These institutions are also required
to maintain  minimum  levels of liquid assets which vary from time to time.  See
"Regulation  of Coastal  Federal - Federal Home Loan Bank  System." The Bank may
decide to increase its liquidity  above the required  levels  depending upon the
availability  of funds and  comparative  yields on  investments  in  relation to
return on loans.

         Coastal  Federal is required  under federal  regulations  to maintain a
minimum  amount of liquid  assets and is also  permitted to make  certain  other
securities investments. See "Regulation" herein and "Management's Discussion and
Analysis of  Financial  Condition  and  Results of  Operations  - Liquidity  and
Capital  Resources" in the Annual Report.  The balance of the Bank's investments
in  short-term   securities  in  excess  of  regulatory   requirements  reflects
management's  response to the  significantly  increasing  percentage of deposits
with short  maturities.  At September  30, 1996,  Coastal  Federal's  regulatory
liquidity was 8.0%, which was in excess of the required 5.0%.

         Investment  decisions  are made by the  Investment  Officer who reports
quarterly  to  the  Asset/Liability  Committee  ("ALCO  Committee").   The  ALCO
Committee  meets  quarterly  and consists of Directors  Benton,  Creel,  Bishop,
Springs, Clemmons and Gerald, Chief Financial Officer Rexroad and Executive Vice
Presidents Graham,  Griffin and Stalvey. The ALCO Committee acts within policies
established  by the Board of  Directors.  At  September  30,  1996,  the  Bank's
investment security portfolio had a market value of approximately $17.5 million.
The  investment  securities  portfolio  consisted  primarily of U.S.  Government
agency  securities.  For further  information  concerning the Bank's  securities
portfolio, see Notes 2 and 3 of the Notes to Consolidated Financial Statements.
<PAGE>
Investment Securities Analysis

         The following table sets forth Coastal Federal's investment  securities
portfolio at carrying value at the dates indicated.
<TABLE>
<CAPTION>


                                                                                September 30,
                                            ----------------------------------------------------------------------------------  
                                                        1994                          1995                        1996
                                            --------------------------     ------------------------     ----------------------
                                             Amortized      Percent of       Amortized   Percent of     Amortized   Percent of
                                             Cost(1)        Portfolio         Cost(1)     Portfolio       Cost(1)   Portfolio 
                                            --------------------------     ------------------------     ----------------------  
                                                                             (Dollars in thousands)
<S>                                           <C>            <C>           <C>              <C>        <C>          <C>

U.S. Government securities ............       $    --            --%       $    --              --%         --           --      
FHLMC .................................         1,000         13.02             --              --          --           --      
FHLB ..................................         5,000         65.10          1,000           42.94      17,334        98.13
FNMA ..................................            --                           --           --             --           --      
FFCB ..................................           999         13.01            999           42.89          --                   
Municipal .............................           681          8.87            330           14.17         330         1.87
                                              -------        ------        -------        -------       ------          --

   Total ..............................       $ 7,680        100.00%       $ 2,329          100.00%    $17,664      100.00%
                                              =======        ======        =======          ======     =======      ====== 

(1) The market value of the Bank's investment  securities  portfolio amounted to
$7.5 million,  $2.3 million and $17.5  million at September  30, 1994,  1995 and
1996, respectively.
</TABLE>
         The  following  table sets forth the  maturities  and weighted  average
yields of the debt securities at September 30, 1996.
<TABLE>
<CAPTION>
                                               Less Than    One to                         Five to
                                                One Year   Five Years                     Ten Years
                                                Amount      Yield          Amount           Yield       Amount        Yield
                                                ------      -----          ------           -----       ------        -----
                                                                         (Dollars in thousands)
<S>                                              <C>         <C>           <C>             <C>         <C>
U.S. Government        
  securities..............................       $ --          --%         $   --            --%       $    --           --%
Agency securities.........................        330        5.10           4,300 (1)      7.13         13,034 (2)     6.66
                                                 ----        ----          ------          ----        -------         ----
    Total.................................       $330        5.10%         $4,300          7.13%       $13,034         6.66%
                                                  ===        =====          =====          =====        ======         =====

(1) Includes  $4.3  million  subject to call  provisions.  Should these bonds be
called  prior to maturity the Bank may not be able to obtain the same yield with
similar term securities.

(2) Includes  $13.1 million  subject to call  provisions.  Should these bonds be
called  prior to maturity the Bank may not be able to obtain the same yield with
similar term securities.
</TABLE>
<PAGE>
Service Corporation Activities

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

                                                            
                                 COASTAL FEDERAL       


                                COASTAL MORTGAGE
                                    BANKERS*
                                                            




North Beach         Shady Forest    Sherwood       Ridge         501 Development
Investments, Inc.   Development     Development    Development   Corporation  
                    Corporation     Corporation    Corporation     

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

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

         Since 1982, Coastal Mortgage and its subsidiaries have been involved in
real estate operations, either as the sole owner/developer or as a joint venture
partner.

         o  Through  its  investment  in 501  Development  Corporation,  Coastal
Mortgage  has  a  50%   ownership   interest  in  a  project  that  consists  of
approximately 50 acres in Horry County,  which has received zoning approval as a
planned unit development.  At September 30, 1996, the total remaining investment
in this project was approximately $47,000.

         With the  exception  of one  project,  for  which a joint  venture  was
created to dispose of real estate acquired through foreclosure,  the Corporation
has not  entered  into any real  estate  activity  since 1984 and has,  in fact,
almost eliminated its investment in these real estate activities.  These efforts
are  reflected  in the  reduction  of  Corporation's  investment  and  loans  to
subsidiaries  from $8.5 million at September 30, 1987 to approximately  $187,000
at September 30, 1996.

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

         The  following  table  summarizes  the balances of  permanent  loans to
individual  unit  purchasers,   by  project,  at  September  30,  1996  (net  of
participations sold to other financial institutions).
<TABLE>
<CAPTION>
                              Number of            Total                    Slow Loans(1)
Project                       Borrowers            Amount            Number        Amount
-------                       ---------            ------            ------        ------
<S>                              <C>             <C>                   <C>           <C>

Beach Cove                        89             $5,978,804            --            $  --
Condominium
North Myrtle Beach,
South Carolina

Bluewater                        111             $5,579,894            --            $  --
Condominium
Myrtle Beach,
South Carolina

Cobblestone Villas                61             $2,300,008            --            $  --
Condominium
Myrtle Beach,
South Carolina

Carolina Pines                    27             $  939,761            --            $  --
Condominium
Conway, South Carolina

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

         The business of real estate  development  involves  substantial  risks.
Development activities typically involve substantial capital outlays both before
and  during  construction.  Post-construction  operations  also may  result in a
negative  cash flow and losses due to an inability to recoup costs until project
sales occur, substantial cost overruns or other factors over which the developer
has little or no control. Seasonality,  location and general economic and market
conditions,  particularly in resort  locations such as the Myrtle Beach area, as
well as the size of the project and the  experience,  reputation and performance
of the  developer  and the project  operator are other facts which may adversely
affect real estate development projects.  Adverse changes in these factors could
cause additional  losses.  In addition,  the development and sale of condominium
projects is subject to a number of federal and state  statutes,  including,  but
not  limited  to,  the  Interstate  Land  Sales  Full  Disclosure  Act,  Federal
Securities Act of 1933, state "Blue Sky" laws,  state real estate laws,  Federal
Unfair Trade  Practices Act, South Carolina  Unfair Trade  Practices Act and the
Racketeer Influenced and Corrupt Organizations Act, the violation of which could
result in  liability  to the  participant.  Furthermore,  changes in the federal
income tax have reduced the  attractiveness of rental property as an investment,
which may adversely affect the ability to sell these properties.

         As discussed under "Regulation Of Coastal Federal", Coastal Mortgage is
a "nonincludable  subsidiary" as defined in the OTS capital  regulations and the
Bank  must  exclude  its  investment  in and  loans to it when  calculating  its
regulatory capital. As of September 30, 1996, the Bank's investment in and loans
to Coastal Mortgage totalled approximately $187,000.00.

Deposit Activities and Other Sources of Funds

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

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

         The following table sets forth  information  concerning the Bank's time
deposits and other deposits at September 30, 1996.
<TABLE>
<CAPTION>
   Average                                                                                            Percentage  
   Interest                                                         Minimum                             of Total
   Rate      Term                   Category                         Amount         Balance             Deposits  
   ----      ----                   --------                         ------         -------             --------  
                                                                                  (In thousands)
<S>          <C>                    <C>                         <C>                <C>                  <C> 
                                    Checking and Savings

     1.50%   None                   NOW                              $  100        $ 35,654              11.38%
      --     None                   Commercial checking                 100          19,926               6.36
     4.93    Money market Demand                                1,000-2,500          84,997              27.12
     2.50    None                   Passbook savings                100-500          39,287              12.53
     2.25    Money market Passbook                                    2,500           3,553               1.13
                                                                      -----         -------
                                    Total checking and savings                     $183,417              58.52%
                                                                                   --------              ----- 


                                    Certificates of Deposit

     4.78     3 months              Fixed term, fixed rate          $ 1,000        $ 2,122                 .68%
     5.54     6 months              Fixed term, fixed rate            1,000         23,479                7.49
     5.12     9 months              Fixed term, fixed rate            1,000          9,293                2.96
     5.64    12 months              Fixed term, fixed rate            1,000         47,059               15.01
                                         and variable rate
     5.83    18 months              Fixed term, fixed rate
                                         and variable rate            1,000         20,981                6.69 
     5.92    24 months              Fixed term, fixed rate            1,000          4,049                1.29
     5.65    30 months              Fixed term, fixed rate            1,000          2,189                 .70
     5.97    36 months              Fixed term, fixed rate            1,000          8,944                2.85
     6.06    48 months              Fixed term, fixed rate            1,000          4,728                1.51
     6.18    96 months              Fixed term, fixed rate            1,000             26                 .01
       --    30-365 days            Mini-jumbo certificates          50,000             --                  --
       --    30-365 days            Jumbo certificates              100,000             --                  --
                                                                                    ------                -----

                                    Total fixed                                    $122,870              39.20%
                                                                                   ========              ===== 

     5.00    18 months              Variable rate                     $ 100        $  4,593               1.47%
     5.63    30 months              Variable rate                       100           2,550                .81
                                                                                   --------              -----    

                                    Total variable                                 $  7,143               2.28%
                                                                                   ========              ===== 
                                                                   
                                    Total certificates                             $130,013              41.48%
                                                                                   ========              ===== 

                                    Total deposits                                 $313,430             100.00%
                                                                                   ========             ====== 
</TABLE>
<PAGE>
Deposit Flow

     The  following  table sets forth the  balances  of savings  deposits in the
various types of savings accounts offered by the Bank at the dates indicated.
<TABLE>
<CAPTION>
                                                                                At September 30, 
                                                   ---------------------------------------------------------------------    
                                                          1994                                   1995                       
                                                   ----------------              ---------------------------------------    
                                                              Percent                         Percent                      
                                                                of                              of             Increase    
                                                     Amount    Total             Amount       Total          (Decrease)    
                                                   -------------------           --------------------        -----------    
                                                                           (Dollars in thousands)
<S>                                                <C>         <C>              <C>           <C>              <C> 
Transaction accounts:
  NOW.........................................     $ 30,244     12.23%          $ 29,852       10.93%             $(392)    
  Commercial checking.........................       12,605      5.10             16,494        6.04              3,889     
                                                   --------     -----             ------       -----              -----     

Total transaction accounts....................       42,849     17.33             46,346       16.97              3,497     
                                                   --------     -----             ------       -----              -----     

Money market demand accounts..................       30,461     12.31             41,516       15.20             11,055     
Passbook savings accounts.....................       64,318     25.99             46,421       17.00            (17,897)    

Fixed-rate certificates (original maturity):
 3 months.....................................        1,549       .63              3,431        1.26              1,882     
 6 months.....................................       13,830      5.59              9,522        3.49             (4,308)    
 9 months.....................................        1,126       .46             26,751        9.80             25,625     
 12 months....................................        9,931      4.01             57,315       21.00             47,384     
 18 months....................................       64,158     25.94             12,426        4.55            (51,732)    
 24 months....................................        2,714      1.10              3,845        1.41              1,131     
 30 months....................................          975       .39              1,786         .65                811     
 36 months....................................        3,063      1.24              9,504        3.48              6,441     
 48 months....................................        2,399       .97              4,613        1.69              2,214     
 96 months....................................           34       .01                 24          --                (10)    
 Mini-jumbo...................................           --        --                 --          --                 --     
 Jumbo........................................           --        --                 --          --                 --     
                                                   --------      -----          --------      ------             ------     
                                                     99,779     40.34            129,217       47.33             29,438     
                                                  ---------     -----           --------      ------             ------     

Variable rate certificates:
 (original maturity)
 18 months....................................        7,308      2.95              7,100        2.60               (208)    
 30 months....................................        2,670      1.08              2,499         .90               (171)    
                                                   --------   -------              -----       -----               ----     
Total variable................................        9,978      4.03              9,599        3.50               (379)    
                                                    -------    ------              -----        ----               ----     

Total certificates............................      109,757     44.37            138,816       50.83             29,059     
                                                   --------     -----            -------       -----             ------     

Total deposits................................     $247,385    100.00%          $273,099      100.00%           $25,714     
                                                   ========    =======          ========      =======           =======     

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                At September 30,
                                                    -------------------------------------
                                                                     1996                          
                                                    -------------------------------------                          
                                                                   Percent                       
                                                                     of         Increase  
                                                        Amount      Total      (Decrease) 
                                                    -------------------------------------   
<S>                                                  <C>           <C>           <C>                                        
Transaction accounts:                          
  NOW.........................................       $ 35,654       11.38%       $ 5,802    
  Commercial checking.........................         19,926        6.36          3,432    
                                                       ------        ----          -----    
                                                                                            
Total transaction accounts....................         55,580       17.74          9,234    
                                                       ------       -----          -----    
                                                                                            
Money market demand accounts..................         84,997       27.12         43,481    
Passbook savings accounts.....................         42,840       13.66         (3,581)   
                                                                                            
Fixed-rate certificates (original maturity):                                                
 3 months.....................................          2,122         .68         (1,309)   
 6 months.....................................         23,479        7.49         13,957    
 9 months.....................................          9,293        2.96        (17,458)   
 12 months....................................         47,059       15.01        (10,256)   
 18 months....................................         20,981        6.69          8,555    
 24 months....................................          4,049        1.29            204    
 30 months....................................          2,189         .70            403    
 36 months....................................          8,944        2.85           (560)   
 48 months....................................          4,728        1.51            115    
 96 months....................................             26         .01              2    
 Mini-jumbo...................................             --          --             --    
 Jumbo........................................             --          --             --    
                                                       -------        ----        ------     
                                                      122,870       39.20         (6,347)   
                                                       ------        ------        ------   
                                                
Variable rate certificates:                    
 (original maturity)                           
 18 months....................................          4,593     1.47            (2,507)  
 30 months....................................          2,550      .81                51  
                                                        -----      ---                --  
Total variable................................          7,143     2.28            (2,456)  
                                                        -----     ----            ------   
                                                                                                     
Total certificates............................        130,013    41.48            (8,803)  
                                                      -------    -----           -------  
                                                                                                     
Total deposits................................       $313,430   100.00%          $40,331  
                                                     ========   =======          =======  
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                 At  September 30,
                                                    1994                       1995                              1996
                                           --------------------   -------------------------------     ------------------------------
                                                        Percent               Percent                           Percent
                                                          of                    of      Increase                   of      Increase
                                             Amount      Total    Amount      Total    (Decrease)     Amount      Total   (Decrease)
                                           --------------------   -------------------------------     ------------------------------
                                                                             (Dollars in thousands)
<S>                                        <C>         <C>       <C>          <C>      <C>           <C>          <C>      <C>
 
Fixed and variable rate certificates 
     which mature as follows:
  Within 1 year ...............            $ 96,909      88.3%   $117,724      84.8%   $ 20,815      $ 94,651      72.8%   $(23,073)
  After 1 but within 2 years ..               9,394       8.5       8,749       6.3        (645)       28,241      21.7      19,492
  After 2 but within 3 years ..               2,617       2.4       8,449       6.1       5,832         5,484       4.2      (2,965)
Thereafter ....................                 837        .8       3,894       2.8       3,057         1,637       1.3      (2,257)
                                           --------     -----    --------     -----    --------      --------     -----    --------

 Total .......................             $109,757     100.0%   $130,013     100.0%   $ 29,059      $130,013     100.0%   $ (8,803)
                                           ========     =====    ========     =====    ========      ========     =====    ========

</TABLE>

NOTE:  Individual  Retirement  Accounts  ("IRAs")  are  included in  certificate
       balances.  Such  accounts  amounted to $15.3  million,  $16.0 million and
       $15.2 million at September 30, 1994, 1995 and 1996, respectively.

Time Deposits by Rates

    The following table sets forth the Bank's time deposits  classified by rates
as of the dates indicated.
<TABLE>
<CAPTION>


                                                     At September 30,
Rate                                      1994             1995             1996
----                                      ----             ----             ----
                                                      (In thousands)
<S>                                   <C>              <C>              <C>

 0.00 - 5.99% ...............         $108,994         $ 76,939         $113,871
 6.00 - 8.00% ...............              359           61,402           15,623
 8.01 - 10.00% ..............              140              124              130
10.01 - 12.00% ..............              264              351              389
                                      --------         --------         --------

   Total ....................         $109,757         $138,816         $130,013
                                      ========         ========         ========
</TABLE>
<PAGE>
Time Deposits by Maturity and Rate

    The following table sets forth the amount and maturities of time deposits at
September 30, 1996.
<TABLE>
<CAPTION>

                                                     Amount Due
                  --------------------------------------------------------------------------  
                    Less Than      1-2          2-3          3-4        After
Rate                 One Year     Years        Years         Years     4 Years       Total
----                 --------     -----        -----         -----     -------      ------
                                                  (In thousands)
<S>                <C>          <C>          <C>          <C>          <C>          <C>

   
 0.00 - 5.99%      $ 91,529     $ 19,862     $  1,798     $    656     $     26     $113,871
 6.00 - 8.00%         2,603        8,379        3,686          955         --         15,623
 8.01 - 10.00%          130         --           --           --           --            130
10.01 - 12.00%          389         --           --           --           --            389
                   --------     --------     --------     --------     --------     --------

   Total .....     $ 94,651     $ 28,241     $  5,484     $  1,611     $     26     $130,013
                   ========     ========     ========     ========     ========     ========

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

         Borrowings.  Demand and time  deposits are the primary  source of funds
for Coastal  Federal's  lending and  investment  activities  and for its general
business purposes. The Bank has in the past, however,  relied upon advances from
the FHLB of  Atlanta to  supplement  its  supply of  lendable  funds and to meet
deposit  withdrawal  requirements.  The FHLB of Atlanta has served as one of the
Bank's  primary  borrowing  sources.  Advances  from  the  FHLB of  Atlanta  are
typically  secured by the Bank's first  mortgage  loans.  At September 30, 1996,
Coastal  Federal had advances  totaling  $104.6 million from the FHLB of Atlanta
due on various  dates  through  2005 with a weighted  average  interest  rate of
5.97%.

         The FHLB of  Atlanta  functions  as a central  reserve  bank  providing
credit for savings institutions and certain other member financial institutions.
As a member,  Coastal  Federal is required  to own capital  stock in the FHLB of
Atlanta and is  authorized  to apply for  advances on the security of such stock
and certain of its mortgage loans and other assets (principally securities which
are  obligations  of, or  guaranteed  by, the United  States)  provided  certain
standards related to creditworthiness  have been met. Advances are made pursuant
to several different programs. Each credit program has its own interest rate and
range of  maturities.  Depending  on the program,  limitations  on the amount of
advances are based either on a fixed percentage of an institution's net worth or
on the FHLB's  assessment  of the  institution's  creditworthiness.  The FHLB of
Atlanta determines specific lines of credit for each member institution.
<PAGE>
         In addition to the borrowings  described  above, the Bank, from time to
time, has borrowed funds under reverse repurchase  agreements  pursuant to which
it  sells   securities   (generally   secured  by  government   securities   and
mortgage-backed  securities)  under an agreement to buy them back at a specified
price  at a  later  date.  These  agreements  to  repurchase  are  deemed  to be
borrowings  collateralized  by the  securities  sold. At September 30, 1996, the
Bank did not have any broker  repurchase  agreements.  The Bank has also offered
repurchase   agreements  to  its  customers   which  are  borrowings   that  are
collateralized by underlying government  securities.  At September 30, 1996, the
Bank had $3.4 million outstanding in customer repurchase agreements.

         The following tables set forth certain information regarding short-term
borrowings by the Bank at the end of and during the periods indicated:
<TABLE>
<CAPTION>
                                                        At September 30,
                                              ---------------------------------
                                                 1994         1995         1996
                                                 ----         ----         ----
                                                     (Dollars in thousands)
<S>                                           <C>          <C>          <C>
Outstanding balance:
  Securities sold under agreements
    to repurchase:
    Customer ............................     $ 1,906      $ 2,677      $ 3,365
    Broker ..............................        --           --           --
  Short-term advances ...................      61,071       36,989       54,404

Weighted average rate paid on:
  Securities sold under agreements
    to repurchase:
    Customer ............................        4.92%        3.77%        3.57%
    Broker ..............................        --           --           --
  Short-term advances ...................        5.62         6.40         5.68

Maximum amount of borrowings outstanding
  at any month end:
  Securities sold under agreements
    to repurchase:
    Customer ............................     $ 2,158      $ 3,448      $ 3,950
    Broker ..............................        --           --         12,840
  Short-term advances ...................      61,071       85,078       68,213
Approximate average short-term borrowings
  outstanding with respect to:
  Securities sold under agreements
    to repurchase:
    Customer ............................     $   600      $ 1,700      $ 2,900
    Broker ..............................        --           --          4,100
  Short-term advances ...................      20,700       61,400       56,600


Weighted average rate paid on:
  Securities sold under agreements
    to repurchase:
    Customer ............................        3.11%        3.70%        3.55%
    Broker ..............................        --           --           5.40
  Short-term advances ...................        5.46         6.17         5.68
</TABLE>
<PAGE>
Competition

         As of September 30, 1996,  Coastal Federal had the largest market share
(14.1%) of any financial  institution  located in Horry County,  South  Carolina
according  to  Sheshunoff  Information  Services,  Inc.  The Bank  faces  strong
competition in the attraction of deposits (its primary source of lendable funds)
and in the  origination of loans.  Its most direct  competition for deposits and
loans has  historically  come from other financial  institutions  located in its
primary  market area. The Bank estimates that there are over 70 offices of other
financial institutions in its primary market area. Particularly in times of high
interest  rates,  the Bank has  faced  additional  significant  competition  for
investors' funds from short-term money market securities and other corporate and
government  securities.  The Bank's competition for loans comes principally from
other financial institutions, mortgage banking companies and mortgage brokers.

Personnel

         As of September 30, 1996, the Company had 158 full-time  Associates and
15 part-time  Associates.  The  Associates  are not  represented by a collective
bargaining  unit.  The Bank  believes its  relationship  with its  Associates is
excellent.

                         REGULATION OF COASTAL FINANCIAL
General

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

Holding Company Acquisitions

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

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

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

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

Affiliate Restrictions

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

Qualified Thrift Lender Test

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

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

Proposed Federal Legislation

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

Federal Regulation of Savings Associations

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

         Federal  Deposit  Insurance  Corporation.  The  FDIC is an  independent
federal agency established  originally to insure the deposits,  up to prescribed
statutory  limits,  of  federally  insured  banks and to preserve the safety and
soundness of the banking industry.  In 1989 the FDIC also became the insurer, up
to the  prescribed  limits,  of the deposit  accounts held at federally  insured
savings  associations  and established two separate  insurance  funds:  the Bank
Insurance  Fund  ("BIF")  and the SAIF.  As  insurer of  deposits,  the FDIC has
examination,   supervisory   and   enforcement   authority   over  all   savings
associations.
<PAGE>
         The Bank's accounts are insured by the SAIF. The FDIC insures  deposits
at the Bank to the maximum  extent  permitted  by law. The Bank  currently  pays
deposit insurance  premiums to the FDIC based on a risk-based  assessment system
established  by the  FDIC for all  SAIF-member  institutions.  Under  applicable
regulations,  institutions are assigned to one of three capital groups which are
based  solely on the level of an  institution's  capital -- "well  capitalized,"
"adequately  capitalized,"  and  "undercapitalized"  -- which are defined in the
same manner as the regulations  establishing the prompt corrective action system
under  Section 38 of the FDIA, as discussed  below.  These three groups are then
divided  into  three  subgroups  which  reflect  varying  levels of  supervisory
concern,  from those  which are  considered  to be  healthy  to those  which are
considered  to be of  substantial  supervisory  concern.  The  matrix so created
results in nine assessment risk  classifications,  with rates currently  ranging
from  .23%  of  insured  deposits  for  well   capitalized,   financially  sound
institutions  with only a few minor  weaknesses to .31% of insured  deposits for
undercapitalized  institutions  that pose a substantial risk of loss to the SAIF
unless effective  corrective action is taken.  Until the first half of 1996, the
same amounts applied to BIF member institutions. The FDIC is authorized to raise
assessment rates in certain  circumstances.  The Bank's assessments expensed for
the year ended  September  30,1996,  equaled  $622,000,  excluding  the  special
assessment discussed below.

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

         The DIF Act  provides  for the  merger of the BIF and the SAIF into the
Deposit  Insurance  Fund on January 1, 1999,  but only if no insured  depository
institution  is a savings  association on that date.  The DIF  contemplates  the
development  of  a  common  charter  for  all  federally  chartered   depository
institutions  and the  abolition of separate  charters  for  national  banks and
federal savings  associations.  It is not known what form the common charter may
take and what effect,  if any,  the adoption of a new charter  would have on the
operation of the Bank.
<PAGE>
         The FDIC may terminate the deposit insurance of any insured  depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance  temporarily during the hearing process for the permanent  termination
of  insurance,  if the  institution  has no tangible  capital.  If  insurance of
accounts is  terminated,  the  accounts at the  institution  at that time,  less
subsequent withdrawals,  shall continue to be insured for a period of six months
to two years,  as determined by the FDIC.  Management is unaware of any existing
circumstance  which could result in termination of the deposit  insurance of the
Bank.

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

         The Bank, as a member of the  FHLB-Atlanta,  is required to acquire and
hold  shares of  capital  stock in the  FHLB-Atlanta  in an amount  equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or (ii) 1/20 of its advances  (borrowings)  from the FHLB-Atlanta.
The  Bank  is  in  compliance  with  this  requirement  with  an  investment  in
FHLB-Atlanta stock of $5.2 million at September 30, 1996.

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

         Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings  accounts,  bankers'  acceptances,  and specified U.S.
Government,  state or federal agency  obligations and certain other investments)
equal to a monthly  average of not less than a specified  percentage  (currently
5.0%)  of  its  net  withdrawable  accounts  plus  short-term  borrowings.   OTS
regulations  also require each savings  institution to maintain an average daily
balance of short-term liquid assets at a specified  percentage  (currently 1.0%)
of the total of its net withdrawable  savings accounts and borrowings payable in
one  year or  less.  Monetary  penalties  may be  imposed  for  failure  to meet
liquidity requirements.  See "Management's  Discussion and Analysis of Financial
Condition  and  Results  of  Operations  --  Liquidity  and  Capital  Resources"
contained in the Annual Report

         Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
Federal Deposit Insurance Corporation  Improvement Act of 1991 ("FDICIA"),  each
federal  banking  agency is required to implement a system of prompt  corrective
action for  institutions  which it regulates.  The federal banking agencies have
promulgated substantially similar regulations to implement this system of prompt
corrective action.  Under the regulations,  an institution shall be deemed to be
(i) "well  capitalized" if it has a total  risk-based  capital ratio of 10.0% or
more,  has a Tier I  risk-based  capital  ratio  of 6.0% or  more,  has a Tier I
<PAGE>
leverage  capital  ratio  of  5.0%  or  more  and is not  subject  to  specified
requirements  to meet and  maintain  as specific  capital  level for any capital
measure;  (ii)  "adequately  capitalized" if it has a total  risk-based  capital
ratio of 8.0% or more, a Tier I risk-based  capital  ratio of 4.0% or more and a
Tier I leverage capital ratio of 4.0% or more (3.0% under certain circumstances)
and does not meet the definition of "well capitalized;" (iii) "undercapitalized"
if it has a total  risk-based  capital  ratio that is less than  8.0%,  a Tier I
risk-based  capital  ratio that is less than 4.0% or a Tier I  leverage  capital
ratio  that  is  less  than  4.0%  (3.0%  under  certain  circumstances);   (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
Tier I  leverage  capital  ratio  that is less than  3.0%;  and (v)  "critically
undercapitalized"  if it has a ratio of tangible  equity to total assets that is
equal to or less than 2.0%.

         Section 38 of the FDIA and the  implementing  regulations  also provide
that a federal  banking  agency  may,  after  notice  and an  opportunity  for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may  require  an  adequately  capitalized  institution  or  an  undercapitalized
institution to comply with  supervisory  actions as if it were in the next lower
category if the institution is in an unsafe or unsound  condition or engaging in
an  unsafe  or  unsound  practice.  (The  OTS may  not,  however,  reclassify  a
significantly undercapitalized institution as critically undercapitalized.)

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

         At September 30, 1996, the Bank was  categorized as "well  capitalized"
under the prompt corrective action regulations of the OTS.

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

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

         Currently,  the QTL test requires that either an institution qualify as
a  domestic  building  and  loan  association  under  the Code or that 65% of an
institution's  "portfolio  assets" (as defined)  consist of certain  housing and
consumer-related  assets  on a  monthly  average  basis  in nine out of every 12
months.  Assets that  qualify  without  limit for  inclusion  as part of the 65%
requirement are loans made to purchase, refinance,  construct, improve or repair
loans;  mortgage-backed  securities (where the mortgages are secured by domestic
residential  housing or manufactured  housing);  FHLB stock;  direct or indirect
obligations  of the FDIC;  and loans for  educational  purposes,  loans to small
businesses  and loans made through  credit  cards.  In addition,  the  following
assets,  among others, may be included in meeting the test subject to an overall
limit of 20% of the savings  institution's  portfolio assets: 50% of residential
mortgage  loans  originated  and sold  within  90 days of  origination;  100% of
consumer  loans;  and stock  issued by the FHLMC or the FNMA.  Portfolio  assets
consist  of total  assets  minus the sum of (i)  goodwill  and other  intangible
assets,  (ii) property used by the savings  institution to conduct its business,
and  (iii)  liquid  assets  up to 20%  of the  institution's  total  assets.  At
September 30, 1996, the Bank's qualified thrift investments  exceeded 65% of its
portfolio assets as required by regulation.

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

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

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

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

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

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

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

         At September 30, 1996,  Coastal Federal's core capital of approximately
$27.3 million, or 5.96% of adjusted total assets, was $13.5 million in excess of
the OTS requirement of $13.7 million, or 3% of adjusted total assets. As of such
date, the Bank's tangible  capital of approximately  $27.3 million,  or 5.96% of
adjusted  total assets,  was $20.4 million in excess of the OTS  requirement  of
$6.9 million, or 1.5% of adjusted total assets.  Finally, at September 30, 1996,
the Bank had  risk-based  capital of  approximately  $30.8  million or 10.41% of
total  risk-weighted  assets,  which  was  $7.1  million  in  excess  of the OTS
risk-based capital requirement of $23.6 million or 8% of risk-weighted assets.
<PAGE>
         Limitations On Capital  Distributions.  OTS regulations  impose uniform
limitations  on the  ability of all  savings  associations  to engage in various
distributions  of capital  such as  dividends,  stock  repurchases  and cash-out
mergers. In addition,  OTS regulations require the Bank to give the OTS 30 days'
advance  notice of any proposed  declaration  of dividends,  and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends. The
regulation  utilizes a  three-tiered  approach  which permits  various levels of
distributions based primarily upon a savings association's capital level.

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

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

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

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

         Loans  to One  Borrower.  Under  the  HOLA,  savings  institutions  are
generally  subject  to the  national  bank  limit  on  loans  to  one  borrower.
Generally,  this limit is 15% of the Bank's unimpaired capital and surplus, plus
an additional 10% of unimpaired capital and surplus,  if such loan is secured by
readily-marketable  collateral,  which is defined to include  certain  financial
instruments  and  bullion.  The OTS by  regulation  has amended the loans to one
borrower  rule to permit  savings  associations  meeting  certain  requirements,
including  capital  requirements,  to extend loans to one borrower in additional
amounts under circumstances  limited essentially to loans to develop or complete
residential  housing units.  At September 30, 1996, the Bank's limit on loans to
one  borrower  was $4.6  million.  At September  30,  1996,  the Bank's  largest
aggregate  amount of loans to one  borrower was $3.0  million,  all of which was
performing according to its terms.
<PAGE>
         Activities  of  Savings  Associations  and Their  Subsidiaries.  FIRREA
provides that, when a savings  association  establishes or acquires a subsidiary
or elects to conduct any new activity  through a subsidiary that the association
controls,  the savings  association shall notify the FDIC and the OTS 30 days in
advance and provide the  information  each agency may, by  regulation,  require.
Savings  associations  also must  conduct  the  activities  of  subsidiaries  in
accordance with existing regulations and orders.

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

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

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

         The Bank's authority to extend credit to executive officers,  directors
and 10%  shareholders,  as well  as  entities  controlled  by such  persons,  is
currently  governed by Sections 22(g) and 22(h) of the Federal  Reserve Act, and
Regulation O thereunder. Among other things, these regulations require that such
loans be made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Regulation O also places  individual and aggregate limits on the amount of loans
the  Bank  may make to such  persons  based,  in  part,  on the  Bank's  capital
position, and requires certain board approval procedures to be followed. The OTS
regulations,  with  certain  minor  variances,  apply  Regulation  O to  savings
institutions.
<PAGE>
         Regulatory and Criminal Enforcement Provisions. Under the FDIA, the OTS
has primary  enforcement  responsibility  over savings  institutions and has the
authority  to  bring  action  against  all   "institution-affiliated   parties,"
including  stockholders,  and any  attorneys,  appraisers  and  accountants  who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured  institution.  Formal enforcement action may range from the
issuance of a capital directive or cease and desist order to removal of officers
or directors, receivership, conservatorship or termination of deposit insurance.
Civil  penalties  cover a wide range of violations and can amount to $25,000 per
day, or $1 million per day in especially  egregious  cases.  Under the FDIA, the
FDIC has the authority to recommend to the Director of the OTS that  enforcement
action be taken with respect to a particular savings  institution.  If action is
not taken by the  Director,  the FDIC has  authority  to take such action  under
certain  circumstances.  Federal law also  establishes  criminal  penalties  for
certain violations.

                                    TAXATION

Federal Taxation

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

         Tax Bad Debt Reserves.  For taxable years beginning prior to January 1,
1996, savings institutions such as the Bank which met certain definitional tests
primarily relating to their assets and the nature of their business ("qualifying
thrifts") were permitted to establish a reserve for bad debts and to make annual
additions  thereto,  which additions may, within specified formula limits,  have
been deducted in arriving at their taxable  income.  The Bank's  deduction  with
respect to  "qualifying  loans,"  which are  generally  loans secured by certain
interests in real property,  may have been computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income,  computed  with certain  modifications  and reduced by the amount of any
permitted  additions to the nonqualifying  reserve.  Each year the Bank selected
the most favorable way to calculate the deduction attributable to an addition to
the tax bad debt reserve. The Bank used the percentage-of-taxable-income  method
for the taxable years ended September 30, 1996, 1995 and 1994.

         Recently enacted legislation  repealed the reserve method of accounting
for bad debt  reserves for tax years  beginning  after  December 31, 1995.  As a
result, savings associations will no longer be able to calculate their deduction
for bad debts using the percentage-of-taxable-income  method. Instead, they will
be required to compute their deduction based on specific  charge-offs during the
taxable year or, if the savings  association or its controlled  group had assets
of less than $500  million,  based on actual  loss  experience  over a period of
years.  The  legislation  also requires  savings  associations to recapture into
taxable  income over a six-year  period their  post-1987  additions to their bad
debt tax reserves,  thereby  generating  additional  current tax  liability.  At
September 30, 1996, the Bank's post-1987  reserves totaled  approximately  $1.45
million.  The  recapture  may be suspended  for up to two years if, during those
years,  the  institution  satisfies a  residential  loan  requirement.  The Bank
anticipates meeting the residential loan requirement for the taxable year ending
September 30, 1997.
<PAGE>
         Under prior law, if the Bank  failed to satisfy the  qualifying  thrift
definition  tests in any taxable year,  it would be unable to make  additions to
its bad debt reserve. Instead, the Bank would be required to deduct bad debts as
they occur and would  additionally be required to recapture its bad debt reserve
deductions  ratably over a multi-year  period. At September 30, 1996, the Bank's
total bad debt reserve for tax purposes was approximately $ 6.65 million.  Among
other things, the qualifying thrift definitional tests required the Bank to hold
at least 60% of its assets as "qualifying  assets".  Qualifying assets generally
include cash,  obligations of the United States or any agency or instrumentality
thereof,  certain obligations of a state or political subdivision thereof, loans
secured  by  interests  in  improved  residential  real  property  or by savings
accounts,  student  loans and  property  used by the Bank in the  conduct of its
banking business.  Under current law, a savings association will not be required
to recapture its pre-1988 bad debt reserves if it ceases to meet the  qualifying
thrift definitional tests.  However, if the Bank fails to meet the definition of
a  "bank"  under  Internal  Revenue  Code  Section  581 it will be  required  to
recapture its pre-1988 tax bad debt reserves.  The Bank anticipates  meeting the
definition of a "bank" in the future.

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

         Corporate   Alternative   Minimum  Tax.  The  Code  imposes  a  tax  on
alternative  minimum taxable income ("AMTI") at a rate of 20%. The excess of the
tax bad debt reserve  deduction  using the  percentage of taxable  income method
over the deduction that would have been allowable under the experience method is
treated as a preference  item for purposes of computing  the AMTI.  In addition,
only  90% of AMTI  can be  offset  by net  operating  loss  carryovers.  AMTI is
increased by an amount  equal to 75% of the amount by which the Bank's  adjusted
current earnings exceeds its AMTI (determined  without regard to this preference
and prior to reduction for net operating  losses).  For taxable years  beginning
after  December 31, 1986, and before  January 1, 1996, an  environmental  tax of
 .12% of the  excess of AMTI (with  certain  modification)  over $2.0  million is
imposed on  corporations,  including  the Bank,  whether  or not an  Alternative
Minimum Tax ("AMT") is paid.
<PAGE>
         Dividends-Received  Deduction and Other Matters.  The  Corporation  may
exclude from its income 100% of dividends  received from the Bank as a member of
the same  affiliated  group of  corporations.  The corporate  dividends-received
deduction is generally 70% in the case of dividends  received from  unaffiliated
corporations   with  which  the  Corporation  and  the  Bank  will  not  file  a
consolidated  tax return,  except that if the  Corporation or the Bank owns more
than 20% of the stock of a corporation  distributing a dividend, then 80% of any
dividends received may be deducted.

         There have not been any IRS audits of the Corporation's  Federal income
tax returns during the past five years.

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

         For information  regarding income taxes payable by Coastal Federal, see
Note 10 of the Notes to Consolidated  Financial  Statements.  Coastal  Federal's
federal  income tax returns for 1986 were audited and no  additional  assessment
was required.
<PAGE>
Item 2.  Properties

         The  following  table sets forth the location of the offices of Coastal
Financial's subsidiaries,  as well as certain additional information relating to
these offices, as of September 30, 1996.
<TABLE>
<CAPTION>

                                                   Total Investment
                                                   Including Land,            Net Book
                                     Year          Building, Furniture       Value as of      Square        Owned/
Location                            Opened         and Fixtures                9/30/96        Footage       Leased
--------                            ------         ------------                -------        -------       ------
                                                               (Dollars in thousands)
<S>                                 <C>               <C>                    <C>              <C>            <C>     
Main Office
2619 Oak St.                        1980              $6,219                 $2,761           25,000         Owned
Myrtle Beach, SC (1)

Dunes Office
7500 North Kings Hwy                1971                 506                    150            2,000         Owned
Myrtle Beach, SC

Ocean Drive Office
521 Main Street                     1973                 893                    485            4,100         Owned
North Myrtle Beach, SC

Surfside Office
112 Highway 17 South                1975                 583                    196            2,300         Owned
 & Glenns Bay Road
Surfside Beach, SC

Conway Office
310 Highway 378                     1976                 885                    337            2,882         Owned
Conway, SC

Socastee Office
1 Cimerron Drive                    1981                 780                    268            2,275         Owned
Myrtle Beach, SC

Murrells Inlet Office
Highway 17 South                    1986               1,049                    649            3,450         Owned
Murrells Inlet, SC

Waccamaw Medical Pk Office
7000 Waccamaw Medical Pk Rd         1986                 598                    363            1,450         Owned
Conway, SC

Florence Office
1385 Alice Drive                    1996                 350                    343            2,500         Leased
Florence, SC
<PAGE>
<CAPTION>
                                                   Total Investment
                                                   Including Land,            Net Book
                                     Year          Building, Furniture       Value as of      Square        Owned/
Location                            Opened         and Fixtures                9/30/96        Footage       Leased
--------                            ------         ------------                -------        -------       ------
                                                               (Dollars in thousands)
<S>                                 <C>               <C>                    <C>              <C>            <C>     
Coastal Mortgage Bankers and
 Realty Co., Inc.
2619 Oak Street                     1970                   2                      0             N/A           N/A
Myrtle Beach, SC

Coastal Investments
 Corporation
2619 Oak Street                     1987                  47                     27             N/A           N/A
Myrtle Beach, SC

Coastal Federal Mortgage, Inc.
1385 Alice Drive                    1995                 156                    142           2,818          Leased
Florence, SC

Sunset Beach Office
7290 Beach Drive, SW                1994                  19                     15             900          Leased
Sunset Beach, NC
------------

(1) The original  main office was located at 816 North Kings  Highway and opened
in January 1954. The main office was moved to its new location in 1980.
</TABLE>
         The  net  book  value  of  Coastal  Federal's   investment  in  office,
properties and equipment  totaled $5.7 million at September 30, 1996. See Note 6
of Notes to the  Consolidated  Financial  Statements.  Coastal  Federal uses the
services of an independent  data processing  service to process customer records
and monetary  transactions,  post deposit and general  ledger entries and record
activity in installment lending, loan servicing and loan originations.

Item 3. Legal Proceedings

         The Bank is a  defendant  in two  significant  lawsuits  as  summarized
below.

         The first  action  commenced  on August 9, 1993,  and the  Plaintiff is
seeking approximately $400,000 in damages. The Plaintiff contended that the Bank
breached its fiduciary  duties in handling of their accounts.  The Bank defended
this  suit and was  found  without  damages  on  October  28,  1996 by the South
Carolina  Circuit  Court.  The  Plaintiff  appealed this lawsuit on November 12,
1996.  At this  date,  the Bank does not know if or when the  action  will go to
trial.  The Bank  will  continue  to  vigorously  defend  this suit and does not
anticipate any settlement discussions.
<PAGE>
         The  second  lawsuit  involves  a  wholly-owned  subsidiary  of Coastal
Mortgage  Bankers  & Realty  Company,  Inc.  An answer to this suit was filed on
October 29, 1993 on behalf of the Joint Venture.  The Plaintiff's  complaint was
amended to add  additional  Defendants on June 25, 1994.  The Plaintiff  alleges
construction  deficiencies  and seeks  damages in excess of $15.0  million.  The
cause of  action  is  negligent  construction,  breach of  implied  warranty  of
workmanship,  habitability and fitness.  A subsidiary of the Bank is a one-third
owner in the joint  venture  company  which is being sued.  The joint venture is
vigorously defending this suit.

         Based  upon the  present  status  of  these  cases,  the  Corporation's
understanding  of the  facts  in  each  case,  and  discussion  with  its  legal
representatives,  the  Corporation  does not believe that any of these  lawsuits
represent a material FAS 5 contingency  which would require accrual or financial
statement  disclosure.  As a result,  the  Corporation  has not  established any
specific  allowances  for the  suits.  Due to the nature of the  uncertainty  of
litigation, the Corporation can not predict the amount of loss, if any, that may
ultimately result from this litigation.

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

         Not applicable.


                                     PART II


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

         The information  contained under the section  captioned "Market for the
Corporation's Common Stock and Related Stockholder Matters" in the Corporation's
Annual  Report to  Stockholders  for the Fiscal  Year Ended  September  30, 1996
("Annual Report") is incorporated herein by reference.

Item 6.  Selected Financial Data

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

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

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

Item 8.  Financial Statements and Supplementary Data

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

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

         The  registrant  has not,  within the 24 months  before the date of the
most recent financial statements,  changed its accountants,  nor have there been
any disagreements on accounting and financial disclosures.
<PAGE>
Item 10.  Directors and Executive Officers of the Registrant

         The information  contained under the section  captioned  "Proposal I --
Election of Directors" in the Bank's  definitive  proxy statement for the Bank's
1997 Annual Meeting of  Stockholders  (the "Proxy  Statement")  is  incorporated
herein by reference.

         Certain executive officers of the Bank also serve as executive officers
of the Corporation.  The day-to-day  management duties of the executive officers
of the Corporation and the Bank relate primarily to their duties as to the Bank.
<PAGE>
<TABLE>
<CAPTION>
                      Executive Officers of the Registrant

Name, Age and Position                       Business Experience
<S>                                          <C>
Michael C. Gerald, 47,                       Mr.  Gerald  has  been  associated  with             
President, Chief Executive                   Coastal Federal since 1974 and serves as
Officer and a Director                       Director,  President and Chief Executive
                                             Officer of the Corporation and Bank. Mr.
                                             Gerald  also  serves  as  Director   and
                                             President of Coastal  Mortgage Bankers &
                                             Realty  Company,  Inc., as a Director of
                                             Coastal   Federal   Mortgage,    Coastal
                                             Investments   Corporation   and  Coastal
                                             Technology   Solutions.   He   currently
                                             serves  on  the  Board  of  Visitors  of
                                             Coastal   Carolina   University's   Wall
                                             School of  Business  Administration  and
                                             Computer   Science,   the   Governmental
                                             Affairs Committee of America's Community
                                             Bankers,  the Board of  Directors of the
                                             Institute  of Financial  Education,  the
                                             Board  of  Trustees  of  the  Springmaid
                                             Villas Art Museum and is a member of the
                                             Coastal Education Foundation.

     
Jimmy R. Graham, 48,                         Mr.  Graham  serves  as  Executive  Vice       
Executive Vice President and                 President and Information  Systems Group
Information Systems Group                    Leader of Coastal  Federal.  Mr.  Graham
Leader                                       serves as  Executive  Vice  President of
                                             Coastal   Financial    Corporation   and
                                             President and CEO of Coastal  Technology
                                             Solutions.  He has been  associated with
                                             the Bank since 1977.


Jerry L. Rexroad, CPA, 36,                   Mr.  Rexroad joined the Company in April
Executive Vice President and                 1995 and is Executive Vice President and
Chief Financial Officer                      Chief   Financial   Officer  of  Coastal
                                             Federal    and     Coastal     Financial
                                             Corporation.  Mr. Rexroad also serves as
                                             the  Chief   Financial   Officer  and  a
                                             Director  for Coastal  Federal  Mortgage
                                             Bankers & Realty Company,  Inc., Coastal
                                             Investments     Corporation,     Coastal
                                             Technology Solutions and Coastal Federal
                                             Mortgage.   He   currently   serves   as
                                             Chairman Elect of the Junior Achievement
                                             Board of Directors and Advisory  Council
                                             of Horry  County.  He is a Past Chairman
                                             of the  Board  and  Treasurer  of Junior
                                             Achievement of  Greenville.  Mr. Rexroad
                                             is the Vice  President of the  Financial
                                             Manager's Society of South Carolina.
<PAGE>
                                             He is a certified public accountant, and
                                             is a member  of the  AICPA  and  SCACPA.
                                             Prior  to  joining  the   Company,   Mr.
                                             Rexroad  was a  partner  with  KPMG Peat
                                             Marwick  LLP  where  he was  partner  in
                                             charge  of  the  Financial  Institutions
                                             practice in South Carolina.


Allen W. Griffin, 36,                        Mr. Griffin is currently  Executive Vice
Executive Vice President                     President and Sales Servicing Group  
and Sales Servicing                          Leader  for  Coastal  Federal.  He  also
Group Leader                                 serves as an Executive Vice President of              
                                             the Corporation.  He has been associated
                                             with the  Bank  for the past ten  years.
                                             Mr.  Griffin is a Director of the Myrtle
                                             Beach Rotary Club and is also a Director
                                             of the  Eastern  Group of Robert  Morris
                                             Associates  Chapter and past Director of
                                             the   YMCA,   Junior   Achievement   and
                                             vocational rehabilitation.


Phillip G. Stalvey, 40,                      Mr.  Stalvey is Executive Vice President
Executive Vice President                     and Sales Group Leader for the Bank.  He
and Sales Group Leader                       also   serves  as  an   Executive   Vice
                                             President  of the  Corporation  and is a
                                             director of Coastal Federal Mortgage. He
                                             has been associated with Coastal Federal
                                             for the past 15 years. In addition,  Mr.
                                             Stalvey  is  the  past   President   and
                                             Director  of the  Myrtle  Beach  Civitan
                                             Club,  a  committee  member  of a  local
                                             Scout  Troop,  and  Commissioner  on the
                                             City of Myrtle Beach Planning and Zoning
                                             Board.


Susan J. Cooke, 46,                          Ms.   Cooke   is  Vice   President   and
Vice President and                           Corporate Secretary for Coastal Federal,
Corporate Secretary                          Corporate    Secretary    for    Coastal
                                             Financial Corporation,  Coastal Mortgage
                                             Bankers & Realty Company,  Inc., Coastal
                                             Investments   Corporation   and  Coastal
                                             Technology Solutions. Ms. Cooke has been
                                             employed  with Coastal  Federal for nine
                                             years.  She is a member of the  American
                                             Business  Women's  Association  and  the
                                             National    Association    for    Female
                                             Executives.

</TABLE>
<PAGE>
Item 11.  Executive Compensation

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


Item 12.  Security Ownership of Certain Beneficial Owners and
          Management

         (a)      Security Ownership of Certain Beneficial Owners

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

         (b)      Security Ownership of Management

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

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

Item 13.  Certain Relationships and Related Transactions

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

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


                                              COASTAL FINANCIAL CORPORATION

Date:  December 27, 1996                      By: /s/ Michael C. Gerald
                                                   ---------------------
                                              Michael C. Gerald
                                              President/Chief Executive Officer
                                              (Duly Authorized Representative)

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

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

Date: December 27, 1996                 Date: December 27, 1996

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

Date: December 27, 1996                 Date: December 27, 1996

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

Date: December 27, 1996                 Date: December 27, 1996

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

Date: December 27, 1996                 Date: December 27, 1996 

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

Date: December 27, 1996
<PAGE>
                                     PART IV

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

         1.   Independent Auditors' Report*

         2.   All Financial Statements*

             (a)  Consolidated Statements of Financial Condition as of September
                  30, 1995 and 1996.

             (b)  Consolidated  Statements  of  Operations  for the Years  Ended
                  September 30, 1994, 1995 and 1996.

             (c)  Consolidated  Statements of Stockholders' Equity for the Years
                  Ended September 30, 1994, 1995 and 1996.

             (d)  Consolidated  Statements  of Cash  Flows for the  Years  Ended
                  September 30, 1994, 1995 and 1996.

             (e)  Notes to Consolidated Financial Statements.

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

         4.   Exhibits

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

                   3 (b)         Bylaws of Coastal Financial Corporation**

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

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

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

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

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

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

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

                     (h)         1990 Stock Option Plan***

                     (i)         Directors Performance Plan****

                  13             Annual Report to Stockholders for the Fiscal 
                                 Year Ended September 30, 1996*

                  21             Subsidiaries of the Registrant

                  23             Consent of Independent Auditors
<PAGE>
         5.   No reports on Form 8-K have been filed  during the last quarter of
              the fiscal year covered by this report.
-----------------

*  Incorporated  by reference  from the Annual  Report to  Stockholders  for the
fiscal year ended September 30, 1996, attached as an exhibit hereto.

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

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

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