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, 2003

                                       OR

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

Registrant's telephone number, including area code:       (843) 205-2000
                                                          --------------

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|

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. YES |X| NO |_|.

      The aggregate market value of the voting and non-voting common equity held
by non affiliates of the registrant, based upon the closing sales price of the
registrant's common stock as quoted on the NASDAQ System under the symbol "CFCP"
as of the last business day of the registrant's most recently completed second
fiscal quarter, was $125,703,910 (12,879,499) shares at $9.76 per share. It is
assumed for purposes of this calculation that none of the registrant's officers,
directors and 5% stockholders are affiliates.

As of December 18, 2003, there were issued and outstanding 12,960,874 shares of
the registrant's Common Stock.


                                       1
<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

      1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
September 30, 2003 (Parts I and II)

      2. Portions of the Proxy Statement for the 2004 Annual Meeting of
Stockholders. (Part III)


                                       2
<PAGE>

                                     PART I

Item 1.  Business

General

      Coastal Financial Corporation ("Coastal Financial" or the "Corporation")
was incorporated in the State of Delaware in June 1990, for the purpose of
becoming a savings and loan holding company for Coastal Federal Bank, formerly
named 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 Investor
Services, Inc., formerly named Coastal Investment Services, Inc., was
transferred to Coastal Financial and became a first tier subsidiary of the
Corporation. The financial results contained herein relate primarily to the
Corporation's principal subsidiary, Coastal Federal.

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

      Coastal Federal conducts its business from its main office in Myrtle
Beach, South Carolina, thirteen branch offices located in South Carolina, one
branch office located in Sunset Beach, North Carolina, one branch office in
Southport, North Carolina, one branch office in Shallotte, North Carolina and
two branch offices located in Wilmington, North Carolina. At September 30, 2003
Coastal Financial had total assets of $1.2 billion, total deposits of $697.0
million and stockholders' equity of $73.7 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 (843) 205-2000.

     Twelve of Coastal  Federal's  nineteen  offices are in Horry County,  South
Carolina and one office is in Georgetown County, South Carolina.  The economy of
the Horry County area depends  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  materially  and  adversely
affected.



                                       3
<PAGE>


      Coastal Federal's principal business currently consists of attracting
deposits from the general public and using these funds to originate consumer,
commercial business loans, commercial real estate loans and residential mortgage
loans. Commercial real estate loans were 36.2% of total loans at September 30,
2003.

      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 residential mortgage loans. At September 30, 2003,
3.4% and 6.9% respectively, of the Bank's total loan portfolio consisted of
commercial business and consumer loans.

     The Company maintains an Internet website at http://www.coastalfederal.com.
                                                  ------------------------------
The Company makes available its annual reports on Form 10-K,  quarterly  reports
on Form 10-Q,  current  reports on Form 8-K and amendments to such reports filed
or furnished  pursuant to Section 13(a) or 15(d) of the  Securities and Exchange
Act of 1934, as amended,  and other information related to the Company,  free of
charge,  on this site as soon as reasonably  practicable after it electronically
files those documents with, or otherwise furnish them to, the SEC. The Company's
Internet website and the information  contained therein or connected thereto are
not intended to be incorporated into this annual report on Form 10-K.


                                       4
<PAGE>

Rate/Volume Analysis

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

<TABLE>
<CAPTION>
                                                      Year Ended September 30,
                          --------------------------------------------------------------------------------------
                                     2001 Compared to 2000                     2002 Compared to 2001
                                      Increase (Decrease)                        Increase (Decrease)
                                            Due to                                     Due to
                          -----------------------------------------   -----------------------------------------
                            Rate      Volume     Rate/       Net        Rate      Volume     Rate/       Net
                            ----      ------     -----       ---        ----      ------     -----       ---
                                                 Volume                                     Volume
                          --------   --------   --------   --------   --------   --------   --------   --------
                                                         (Dollars in thousands)
<S>                       <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Interest-Earning Assets:
 Loans .................  $    286   $  1,597   $     10   $  1,893   $ (6,372)  $    852   $   (118)  $ (5,638)
 Mortgage-backed
 Securities/Investments       (691)     1,024        (50)       283     (1,943)     1,386       (187)      (744)
                           --------   --------   --------   --------   --------   --------   --------   --------

Total net change in
 income on interest-
 earning assets ........      (405)     2,621        (40)     2,176     (8,315)     2,238       (305)    (6,382)
                           --------   --------   --------   --------   --------   --------   --------   --------

Interest-Bearing
 Liabilities:
 Deposits ..............       135      3,435         40      3,610     (7,799)     3,629     (1,460)    (5,630)
 FHLB advances .........      (380)       662        (23)       259     (1,486)    (2,268)       303     (3,451)
 Repurchase
   Agreements ..........      (766)    (3,837)       420     (4,183)    (1,811)    (1,645)     1,060     (2,396)
                           --------   --------   --------   --------   --------   --------   --------   --------

Total net change in
 expense on interest-
 bearing liabilities ...    (1,011)       260        437       (314)   (11,096)      (284)       (97)   (11,477)
                           --------   --------   --------   --------   --------   --------   --------   --------

Net change in net
 Interest income .......  $    606   $  2,361   $   (477)  $  2,490   $  2,781   $  2,522   $   (208)  $  5,095
                           ========   ========   ========   ========   ========   ========   ========   ========

<CAPTION>

                                   Year Ended September 30,
                          ----------------------------------------
                                   2003 Compared to 2002
                                    Increase (Decrease)
                                          Due to
                          ----------------------------------------
                            Rate      Volume    Rate/       Net
                            ----      ------    -----       ---
                                               Volume
                          --------   --------  --------   --------
                                  (Dollars in thousands)
<S>                       <C>        <C>       <C>        <C>
Interest-Earning Assets:
 Loans .................  $ (4,869)  $  7,469  $  (903)   $  1,697
 Mortgage-backed
 Securities/Investments     (2,695)     7,903    (1,564)     3,644
                           --------   --------  --------   --------

Total net change in
 income on interest-
 earning assets ........    (7,564)    15,372    (2,467)     5,341
                           --------   --------  --------   --------

Interest-Bearing
 Liabilities:
 Deposits ..............    (3,487)     2,333      (597)    (1,751)
 FHLB advances .........    (1,271)     3,184      (527)     1,386
 Repurchase
   Agreements ..........        (4)     1,534       (13)     1,517
                           --------   --------  --------   --------

Total net change in
 expense on interest-
 bearing liabilities ...    (4,762)     7,051    (1,137)     1,152
                           --------   --------  --------   --------

Net change in net
 Interest income .......  $ (2,802)  $  8,321  $ (1,330)  $  4,189
                           ========   ========   ========   ========
</TABLE>


                                       5
<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. Non-accrual loans are included in
average balance calculations.

<TABLE>
<CAPTION>
                                                                  Year Ended September 30,
                                  ------------------------------------------------------------------------------------------
                                              2001                           2002                           2003
                                  --------  --------  --------   --------  --------  --------   --------  --------  --------
                                  Average              Yield/    Average             Yield/     Average              Yield/
                                  Balance   Interest    Rate     Balance   Interest   Rate      Balance   Interest    Rate
                                  -------   --------    ----     -------   --------   ----      -------   --------    ----
                                                                 (Dollars in thousands)
<S>                               <C>       <C>           <C>    <C>       <C>           <C>    <C>       <C>           <C>
ASSETS
  Loans ........................  $521,575  $ 45,899      8.80%  $531,257  $ 40,261      7.58%  $629,817  $ 41,958      6.67%

  Mortgage-backed
    Securities/Investments(1) ..   206,367    14,356      6.95    226,295    13,612      6.02    357,680    17,256      4.81
                                  --------  --------  --------   --------  --------  --------   --------  --------  --------

Total interest-earning
  assets .......................  $727,942  $ 60,255      8.26%  $757,552  $ 53,873      7.11%  $987,497  $ 59,214      6.00%
                                  ========  ========  ========   ========  ========  ========   ========  ========  ========

LIABILITIES
  Transaction accounts .........   250,784     7,404      2.95    309,624     4,524      1.46    369,871     3,925      1.06
  Passbook accounts ............    34,071       741      2.17     36,870       459      1.24     40,913       427      1.04
  Certificate accounts .........   194,575    11,235      5.77    222,723     8,767      3.94    258,355     7,647      2.96
  FHLB advances ................   188,666    11,133      5.90    150,239     7,682      5.11    212,501     9,068      4.27
  Securities sold under
    repurchase agreements ......    49,891     2,810      5.63     20,676       414      2.00     97,288     1,931      1.98
                                  --------  --------  --------   --------  --------  --------   --------  --------  --------
Total interest-bearing
  liabilities ..................  $717,987  $ 33,323      4.64%  $740,132  $ 21,846      2.95%  $978,928  $ 22,998      2.35%
                                  ========  ========  ========   ========  ========  ========   ========  ========  ========

Net interest income/
  interest rate spread .........            $ 26,932      3.62%            $ 32,027      4.16%            $ 36,216      3.65%

Net yield on interest earning
  assets .......................                          3.70%                          4.23%                          3.67%

Ratio of interest earning assets
  to interest-bearing
  liabilities ..................                          1.01x                          1.02x                           1.01x
</TABLE>

-----------------
(1)   Includes short-term interest-bearing deposits and Federal funds sold.


                                       6
<PAGE>

Lending Activities

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

      The Bank's loan portfolio totaled approximately $701.8 million at
September 30, 2003, representing approximately 59.4% of its total assets. On
that date, approximately 42.4% of Coastal Federal's total loan portfolio was
secured by mortgages on one-to-four family residential properties.

      In an effort to ensure that the yields on its loan portfolio and
investments are interest-rate sensitive, the Bank has implemented a number of
measures, including: (i) emphasis on origination of adjustable rate mortgages on
residential and commercial properties; (ii) origination of construction loans
secured by residential properties, generally with terms for a one-year period or
less; and (iii) origination of commercial and consumer loans having either
adjustable rates or relatively short maturities. At September 30, 2003,
adjustable rate loans constituted approximately $506.7 million (or 72.2%) of the
Bank's total loan portfolio. Therefore, at such date, fixed rate loans comprised
only 27.8% 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.


                                       7
<PAGE>

Loan Portfolio Analysis

The following table set forth the composition of the Corporation's loan
portfolio by type of loan as of the dates indicated.


<TABLE>
<CAPTION>
                                                                    At September 30,
                                  ------------------------------------------------------------------------------------
                                        1999                  2000                  2001                  2002
                                  ------------------    ------------------    ------------------    ------------------
                                  Amount     Percent    Amount     Percent    Amount     Percent    Amount     Percent
                                  ------     -------    ------     -------    ------     -------    ------     -------
                                                                 (Dollars in thousands)
<S>                              <C>          <C>      <C>          <C>      <C>          <C>      <C>          <C>
Mortgage loans:

  Construction ................  $  46,766      9.48%  $  54,905     10.13%  $  60,765     11.56%  $  45,544      7.99%

  Single family to 4 family
    units .................... .   265,069     53.73     283,851     52.39     268,670     51.10     261,296     45.88

  Income property (Commercial).    114,931     23.29     133,569     24.65     137,282     26.11     202,117     35.49

Commercial business loans .....     22,818      4.62      23,357      4.31      18,886      3.59      18,377      3.23

Consumer loans:

  Mobile home .................      1,166      0.24       1,374      0.25       2,056      0.39       3,446      0.61

  Automobiles .................      6,809      1.38       7,789      1.44       6,599      1.26       7,117      1.25

  Equity lines of credit ......     21,081      4.27      23,009      4.25      22,379      4.26      24,273      4.26

  Other .......................     14,738      2.99      13,915      2.58       9,161      1.73       7,378      1.29
                                 ---------    ------   ---------    ------   ---------    ------   ---------    ------
Total loans and loans
   held for sale ..............  $ 493,378    100.00%  $ 541,769    100.00%  $ 525,798    100.00%  $ 569,548    100.00%
                                              ======                ======                ======                ======

Less:

  Loans in process ............    (15,315)              (13,329)              (13,983)               (6,365)

  Deferred loan costs, net ....        354                   519                   372                   245

  Allowance for loan losses ...     (6,430)               (7,064)               (7,159)               (7,883)
                                 ---------             ---------             ---------             ---------

Total loans and loans held
    for sale, net .............  $ 471,987             $ 521,895             $ 505,028             $ 555,545
                                 =========             =========             =========             =========

<CAPTION>

                                         2003
                                ---------------------
                                   Amount    Percent
                                   ------    -------
                                (Dollars in thousands)
<S>                              <C>           <C>
Mortgage loans:

  Construction ................  $  81,227     11.16%

  Single family to 4 family
    units .....................    308,293     42.37

  Income property (Commercial)     263,688     36.24

Commercial business loans .....     24,475      3.36

Consumer loans:

  Mobile home .................      4,607       .63

  Automobiles .................      8,516      1.17

  Equity lines of credit ......     26,639      3.66

  Other .......................     10,234      1.41
                                 ---------    ------
Total loans and loans
    held for sale .............  $ 727,679    100.00%
                                              ======

Less:

  Loans in process ............    (16,570)

  Deferred loan costs, net ....        556

  Allowance for loan losses ...     (9,832)
                                 ---------

Total loans and loans held
     for sale, net ............  $ 701,833
                                 =========
</TABLE>


                                       8
<PAGE>

      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 that generally do not exceed one
year. The majority of these loans have interest rates that 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, 2003, the Bank had $24.5 million outstanding in
commercial business loans, which represented approximately 3.4% of its loan
portfolio.

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

     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,  2003,  this limited
Coastal Federal's aggregate  non-residential  real estate loans to approximately
$361.2  million.  At such date, the Bank had  non-residential  real estate loans
outstanding of $263.7 million  compared to $202.1 million at September 30, 2002.
During fiscal 2000 through 2003, the Bank opened eight  offices.  The Bank hired
commercial  lending  officers to lead many of these  offices and intends to have
commercial  lending  officers  leading a majority of its banking  offices.  As a
result of this  focus,  the Bank has  approximately  doubled  the  number of its
commercial  lending  officers  over the  last two  years.  The Bank  expects  to
continue to focus significant  origination efforts in commercial real estate and
commercial  lending. It is expected that the Bank's commercial real estate loans
will continue to comprise the most significant portion of the Bank's loan growth
in future years.


                                       9
<PAGE>


      The commercial real estate loans originated by the Bank are primarily
secured by shopping centers, office buildings, warehouse facilities, retail
outlets, hotels, motels and multi-family apartment buildings. The interest rate
of the commercial real estate loans presently offered by the Bank generally
adjusts every one, three or five years and is indexed to U.S. Treasury
securities or adjusts monthly indexed to the prime interest rate. Such loans
generally have a fifteen to twenty year term, with the payments based on a
similar amortization schedule. In many cases, the Bank may require the loan to
include a call option at the Bank's option in three to ten years. The Bank
generally requires that such loans have a minimum debt service coverage of 120%
of projected net operating income together with other generally accepted
underwriting criteria.

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

      Consumer Loans. The Bank is permitted by OTS regulations to invest up to
35% of its assets in consumer loans. The Bank currently offers a wide variety of
consumer loans on a secured and unsecured basis including home improvement
loans, loans secured by savings accounts and automobile, truck and boat loans.
The Bank also offers a revolving line of credit secured by owner-occupied real
estate. Total consumer loans, including equity lines of credit generally secured
by one-to-four family residences, amounted to $50.0 million, or 6.9% of the
total loan portfolio, at September 30, 2003.

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


                                       10
<PAGE>


      Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
assets which may depreciate rapidly, such as automobiles, boats and other moving
vehicles. In such cases, 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, a change in family status such as
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.

      Residential Mortgage Loans. The Bank originates loans to enable borrowers
to purchase existing homes or residential lots, refinance existing mortgage
loans or construct new homes. Residential mortgage loans originated by the Bank
are generally long-term loans, amortized on a monthly basis, with principal and
interest due each month. The contractual loan payment period for residential
mortgage loans typically ranges from 10 to 30 years. The Bank's experience
indicates that real estate loans remain outstanding for significantly shorter
periods than their contractual terms. Borrowers may refinance or prepay loans at
their option, subject to any prepayment penalty provisions included in the note.
The Bank generally requires mortgage title insurance on all single family first
mortgage and residential mortgage loans.

      The Bank offers adjustable rate residential mortgage loans ("ARMs"), the
interest rates of which generally adjust based upon either the prime rate or
treasury securities indices. Although Coastal Federal's ARMs are beneficial in
helping Coastal Federal improve the interest rate sensitivity of its assets,
such loans may pose potential additional risks to Coastal Federal. A precipitous
increase in interest rates could be expected to result in an increase in
delinquencies or defaults on such loans. Whereas a significant decrease in rates
could cause repayments to increase significantly.

     Coastal Federal also offers residential  mortgage 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  somewhat  above
conforming loan rates. Loans sold to correspondents amounted to $1.6 million and
$1.5  million,  respectively,  in fiscal  2002 and 2003.  Coastal  Federal  sold
approximately  $12.3 million and $43.9  million,  respectively,  of mortgages in
2002 and 2003 to FHLMC.  In addition,  Coastal  Federal  securitized  loans into
FHLMC mortgage-backed  securities of $84.0 million and $95.6 million in 2002 and
2003, respectively.  The securitized  mortgage-backed  securities were generally
sold in the secondary market within a few days of securitization.


                                       11
<PAGE>


      At September 30, 2003, approximately $308.3 million or 42.4% of the Bank's
loan portfolio consisted of one-to-four family residential loans.

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

      The interest rate on commercial real estate construction loans presently
offered by the Bank is generally indexed to the prime rate as published in The
                                                                           ---
Wall Street Journal. Both residential and commercial real estate construction
-------------------
financing generally expose the Bank to a greater risk of loss than long-term
financing on improved, occupied real estate, due in part to the fact that the
loans are underwritten on projected, rather than historical, income and rental
results. The Bank's risk of loss on such loans generally depends 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. Coastal
Federal generally provides a permanent financing commitment on residential and
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 residential and 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.


                                       12
<PAGE>



      At September 30, 2003, approximately $81.2 million or 11.2% of the Bank's
gross loan portfolio consisted of construction loans on both residential ($27.5
million) and commercial properties ($53.7 million). Undisbursed proceeds on
these loans amounted to $16.6 million at September 30, 2003.


                                       13
<PAGE>

Loan Maturity

            The following table sets forth certain information at September 30,
2003 regarding the dollar amount of loans maturing in the Company's loan
portfolio based on their contractual terms to maturity including scheduled
payments and potential prepayments. Prepayment estimates used are based on the
OTS NPV Model prepayment functions. Specific prepayment speeds applied to loans
are a function of their underlying coupons, lifetime rate caps and maturities.
Demand loans (without a stated maturity), loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one year
or less.

                                           More than
                                           One Year
                               One Year     Through     More than
                               or Less     Five Years   Five Years     Totals
                               -------     ----------   ----------     ------
                                        (In thousands)

First mortgage loans .......  $  230,573   $  165,875   $   79,293   $  475,741
Other residential and
   non-residential .........      48,054       91,878       22,957      162,889
Equity lines of credit .....      24,123        1,987          633       26,743
Consumer loans .............       9,012       13,968          107       23,087
Commercial loans ...........       6,629       16,020           --       22,649
                              ----------   ----------   ----------   ----------
     Total loans ...........  $  318,391   $  289,728   $  102,990   $  711,109
                              ==========   ==========   ==========
Less:
 Deferred loan costs, net ..                                                556
 Allowance for loan losses .                                             (9,832)
                                                                     ----------
     Total loans, net ......                                         $  701,833
                                                                     ==========

      The following table sets forth the dollar amount of all loans expected to
be repaid after one year at September 30, 2003 which have fixed interest rates
and those which have floating or adjustable interest rates.

                                      Fixed        Floating or
                                      Rates      Adjustable Rates     Totals
                                      -----      ----------------     ------
                                                 (In thousands)

First mortgage loans ........        $ 81,268        $163,900        $245,168
Other residential and
  non-residential ...........          21,239          93,596         114,835
Equity lines of credit ......             341           2,279           2,620
Consumer loans ..............           9,218           4,857          14,075
Commercial loans ............           8,416           7,604          16,020
                                     --------        --------        --------
 Total loans ................        $120,482        $272,236        $392,718
                                     ========        ========        ========


                                       14
<PAGE>

      Loan Solicitation and Processing. The Bank actively solicits mortgage loan
applications from the Communities it serves.

      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, or Credit Administration Group, a lending decision is
made by the Bank. With respect to commercial loans, the Bank also reviews the
capital adequacy of the business, the ability of the borrower to repay the loan
and honor its other obligations and general economic and industry conditions.
All loan applications over $1 million require the approval by a member or
members, depending on loan size, of the Bank's Internal Loan Committee, Director
Gerald and Executive Vice Presidents Rexroad and Stalvey. All loan applications
greater than $2.5 million require the approval of the Bank's Loan Committee that
consists of Directors Clemmons, Gerald, Thompson and Executive Vice Presidents
Rexroad and Stalvey. All residential mortgage loan applications in excess of 80%
of the lesser of appraised value or purchase price of the property, unless the
borrowers have private mortgage insurance, generally must be approved by a
member of the Bank's Internal Loan Committee.

      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 Federal Emergency Management Agency, 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 residential mortgage
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 generally require escrow on these premiums regardless of the
loan-to-value ratio.

     Residential  Mortgage Loan  Originations,  Purchases and Sales. The Bank is
qualified to service loans for FHLMC and FNMA. Depending upon interest rates and
economic  conditions,  the Bank has sold  loans in order to  provide  additional
funds for lending,  to generate servicing fee income, and to decrease the amount
of its  long-term,  fixed rate loans in order to  minimize  the gap  between the
maturities of its interest-earning assets and interest-bearing  liabilities. The
Bank  generally  continues  to  collect  payments  on the  loans,  to  supervise
foreclosure  proceedings,  if necessary, and to otherwise service the loans. The
Bank  retains a portion of the  interest  paid by the  borrower  on the loans as
consideration for its servicing activities.  At September 30, 2003, the Bank was
servicing loans sold to others with a principal balance of approximately  $219.8
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.  At September 30, 2003,  the Bank's  consolidated  loan
portfolio  included  purchased loans of approximately  $5.8 million,  which have
been primarily  secured by single family  residences and which have been written
as adjustable rate mortgage loan instruments.  These loans are generally secured
by  properties  located in the  Southeast  and were  purchased  according to the
Bank's non-conforming mortgage loan underwriting standards.


                                       15
<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,
                                                   ---------------------------------------------
                                                     2001              2002              2003
                                                   ---------         ---------         ---------
                                                                  (In thousands)
<S>                                                <C>               <C>                 <C>
Loans receivable, net, at the beginning
     of the period ........................        $ 521,895         $ 505,028         $ 555,545
                                                   ---------         ---------         ---------

Loans originated:
    Construction ..........................           66,769           100,717           134,036
    Residential ...........................          106,043           192,095           483,352
    Nonresidential & commercial business ..           83,463            67,951            74,472
    Land ..................................           23,665            43,819            62,011
    Consumer ..............................           16,134            13,626            15,705
                                                   ---------         ---------         ---------
          Total loans originated ..........          296,074           418,208           769,576
                                                   ---------         ---------         ---------

Loans purchased, primarily single
family residential mortgages ..............               20               233                 0
                                                   ---------         ---------         ---------

Loans sold ................................          (28,541)          (13,907)          (45,367)
                                                   ---------         ---------         ---------

Loan principal repayment and other ........         (233,653)         (268,120)         (477,676)
                                                   ---------         ---------         ---------

Securitization of mortgage loans ..........          (47,157)          (83,982)          (95,635)

Other .....................................           (3,610)           (1,915)           (4,610)
                                                   ---------         ---------         ---------

Loans receivable, net, at end of period ...        $ 505,028         $ 555,545         $ 701,833
                                                   =========         =========         =========
</TABLE>


                                       17
<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, 2003, the Company had residential loan origination commitments of
approximately $39.3 million, home equity loans and consumer lines of credit of
$42.0 million, commercial lines of credit of $11.0 million, standby letters of
credit of $2.9 million and unused business and personal credit card lines of
$12.9 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 loan which are charged to the borrower for funding
the loan. In certain circumstances, 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 mortgage 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
mortgage 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 mortgage 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.


                                       18
<PAGE>

      The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated.

<TABLE>
<CAPTION>
                                                                              At September 30,
                                                  ---------------------------------------------------------------------
                                                       1999           2000           2001           2002           2003
                                                       ----           ----           ----           ----           ----
                                                                            (Dollars in thousands)
<S>                                               <C>               <C>            <C>            <C>            <C>
Loans accounted for on a nonaccrual basis:
  Real estate -
     Residential .........................        $   1,097         $2,080         $1,554         $  785         $3,538
     Commercial ..........................              267          2,478          1,185             18          2,816
  Commercial business ....................               --             --            322          2,423            793
  Consumer ...............................               67            224            193            288            302
                                                  ---------         ------         ------         ------         ------
             Total .......................            1,431          4,782          3,254          3,514          7,449
                                                  ---------         ------         ------         ------         ------

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

Restructured loans .......................              418            419          1,693            970            369
Real estate owned, net ...................               96            867          2,363          1,046          1,627
Other nonperforming assets ...............               --             --             --             --             --
                                                  ---------         ------         ------         ------         ------
Total nonperforming assets ...............        $   1,945         $6,068         $7,310         $5,530         $9,445
                                                  =========         ======         ======         ======         ======
Total nonaccrual loans to
  net loans ..............................             0.30%          0.92%          0.64%          0.63%          1.06%
Total nonaccrual loans to
  total assets ...........................             0.20%          0.62%          0.43%          0.37%          0.63%
Total nonperforming assets
  to total assets ........................             0.27%          0.79%          0.96%          0.58%          0.80%

Total nonperforming assets,excluding
restructured loans which are generally
performing under the restructured
terms, to total assets ...................             0.21%           0.73%         0.74%          0.48%           .77%
</TABLE>

     In fiscal years 2001, 2002 and 2003,  interest income which would have been
recorded was approximately $377,000,  $301,000 and $623,000,  respectively,  had
nonaccruing  loans been current in  accordance  with their  original  terms.  At
September 30, 2002, impaired loans totaled $3.2 million. There were $4.9 million
in impaired  loans at September  30, 2003.  Included in the  allowance  for loan
losses at September 30, 2002 was $194,000  related to impaired loans compared to
$263,000 at September  30, 2003.  The average  recorded  investment  in impaired
loans for the year ended  September  30, 2002 was $3.1 million  compared to $4.0
million for the year ended  September 30, 2003.  Interest  income  recognized on
impaired  loans in  fiscal  2002 was  $36,000.  Interest  income  recognized  on
impaired loans in fiscal 2003 was $134,000.


                                       19
<PAGE>


      The allowance for uncollectible interest which is netted against accrued
interest receivable totaled $349,000 and $691,000 at September 30, 2002 and
2003, respectively.

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

      Coastal Federal had four individually classified assets in excess of $1.2
million as of September 30, 2003. At that date, classified assets amounted to
$27.3 million ($9.3 million substandard; $529,000 doubtful; and $17.4 million
special mention). Substandard assets consist primarily of twenty-nine loans with
aggregate balances of approximately $7.7 million at September 30, 2003. The
largest amount to any one borrower was $1.2 million. Special mention assets
consist primarily of twenty-six loans with aggregate balances of approximately
$16.0 million at September 30, 2003.

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

                                       20
<PAGE>


      The evaluation of the allowance is segregated into general allocations and
specific allocations. For general allocations, the portfolio is segregated into
risk-similar segments for which historical loss ratios are calculated and
adjusted for identified trends or changes in current portfolio characteristics.
Historical loss ratios are calculated by product type for consumer loans
(installment and revolving), mortgage loans, and commercial loans. To allow for
modeling error, a range of probable loss ratios is then derived for each
segment. The resulting percentages are then applied to the dollar amounts of the
loans in each segment to arrive at each segment's range of probable loss levels.

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

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

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

      Assessing the adequacy of the allowance is a process that requires
considerable judgment. Management's methodology and judgments are based on the
information currently available and includes numerous assumptions about current
events, which are believed to be reasonable, but which may or may not be valid.
Thus, there can be no assurance that loan losses in future periods will not
exceed the current allowance amount or that future increases in the allowance
will not be required. No assurance can be given that management's ongoing
evaluation of the loan portfolio in light of changing economic conditions and
other relevant circumstances will not require significant future additions to


                                       21
<PAGE>

the allowance, thus adversely affecting the operating results of the Company.
Management believes that the current level of the allowance for loan losses is
presently adequate considering the composition of the loan portfolio, the
portfolio's loss experience, delinquency trends, current regional and local
economic conditions and other factors.

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

      The Company established provisions for loan losses for the year ended
September 30, 2001, 2002 and 2003, of $955,000, $1.2 million and $2.7 million,
respectively. For the years ended September 30, 2001, 2002 and 2003, the Company
had net charge-offs of $860,000, $511,000 and $706,000, respectively. Net
charge-offs as a percentage of average outstanding loans were .17%, .10%, and
..11% for fiscal years ended 2001, 2002, and 2003. At September 30, 2003, the
Company had an allowance for loan losses of $9.8 million, which was 1.40% of net
loans.

See "Management's Discussion and Analysis - Non-Performing Assets" in the 2003
Annual Report to Stockholders attached hereto and incorporated by reference.


                                       22
<PAGE>

      Loan Loss Allowance Analysis

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

<TABLE>
<CAPTION>
                                                            Year Ended September 30,
                                      --------------------------------------------------------------------
                                        1999            2000            2001           2002           2003
                                        ----            ----            ----           ----           ----
                                                             (Dollars in thousands)
<S>                                   <C>            <C>              <C>            <C>            <C>
Allowance at beginning of
  period                              $5,668         $ 6,430          $7,064         $7,159         $7,883
Allowance recorded on
  acquired loans                         112              50              --             --             --
Sale of Florence office loans             --             (75)             --             --             --
Provision for loan losses                750             978             955          1,235          2,655
                                      ------         -------          ------         ------         ------
Recoveries:
    Residential loans                    184              12               3              4             --
    Commercial loans                      13              --              --             --             92
    Construction loans                    --              --              --             --             --
    Consumer loans                        55              65              57             62             44
                                      ------         -------          ------         ------         ------
       Total recoveries                  252              77              60             66            136
                                      ------         -------          ------         ------         ------

Charge-offs:
    Residential loans                     15              28             167             --             46
    Construction loans                     8              --             226             90            388
    Construction Loans                    --              --              --             --             --
    Consumer loans                       329             368             527            487            408
                                      ------         -------          ------         ------         ------
       Total charge-offs                 352             396             920            577            842
                                      ------         -------          ------         ------         ------
       Net charge-offs                   100             319             860            511            706
                                      ------         -------          ------         ------         ------
Allowance at end of period            $6,430         $ 7,064          $7,159         $7,883         $9,832
                                      ======         =======          ======         ======         ======

Ratio of allowance to net
  loans outstanding at the
  end of the period                     1.36%           1.35%           1.42%          1.42%          1.40%

Ratio of net charge-offs
  to average loans outstanding
  during the period                      .02%            .06%            .17%           .10%           .11%
</TABLE>


                                       23
<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,
                          ------------------------------------------------------------------------------------------------------
                                      1999                               2000                               2001
                          --------------------------------   --------------------------------   --------------------------------

                                      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
                           ------    --------      -----      ------    --------      -----      ------    --------      -----
<S>                       <C>           <C>       <C>        <C>           <C>       <C>        <C>           <C>       <C>
                                                                     (Dollars in thousands)

Residential               $ 1,747       0.56%      66.01%    $ 2,081       0.60%      66.53%    $ 2,148       0.65%      65.55%

Commercial                  4,191       3.04       29.18       4,719       3.01       30.07       4,893       3.13       30.92

Consumer                      492       2.17        4.81         264       1.49        3.40         118       0.66        3.53
                          -------                -------     -------                -------     -------                -------

Total Allowance for
    loan losses           $ 6,430       1.36%     100.00%    $ 7,064       1.35%     100.00%    $ 7,159       1.42%     100.00%
                          =======                =======     =======                =======     =======                =======

<CAPTION>
                                                     September 30,
                          -------------------------------------------------------------------
                                       2002                               2003
                          --------------------------------   --------------------------------
                                      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>
                                                (Dollars in thousands)

Residential               $ 2,272       0.72%      57.08%    $ 1,992       0.51%      55.61%

Commercial                  5,273       2.39       39.69       7,229       2.51       41.06

Consumer                      338       1.88        3.23         611       2.62        3.33
                          -------                -------     -------                -------

Total Allowance for
    loan losses           $ 7,883       1.42%     100.00%    $ 9,832       1.40%     100.00%
                          =======                =======     =======                =======
</TABLE>


                                       24
<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
and Supervision - 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 and Supervision" herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" in the Annual Report. The balance
of the Bank's investments in short-term securities in excess of regulatory
requirements reflects management's response to the significantly increasing
percentage of deposits with short maturities.

      Investment decisions are made by the Investment Officer who reports
quarterly to the Asset/Liability Committee ("ALCO Committee"). The ALCO
Committee meets quarterly and consists of Directors Creel, Bishop, Thompson,
Clemmons and Gerald, and Executive Vice Presidents Graham, Rexroad, Douglas,
Sherry and Stalvey and Vice President Loehr. The ALCO Committee acts within
policies established by the Board of Directors. At September 30, 2003, the
Bank's investment portfolio had a market value of approximately $399.2 million.
The investment securities portfolio consisted primarily of mortgage-backed
securities. For further information concerning the Bank's securities portfolio,
see Notes 2 and 3 of the Notes to Consolidated Financial Statements attached
hereto and incorporated by reference.

      At September 30, 2003, Coastal Federal did not own any securities, other
than those disclosed in the following table, that had an aggregate book value in
excess of 10% of its retained earnings at that date.


                                       25
<PAGE>

Securities Analysis

      The following table sets forth Coastal Federal's investment securities
portfolio at amortized cost at the dates indicated.

<TABLE>
<CAPTION>
                                                                       September 30,
                                                                       -------------
                                                2001                        2002                         2003
                                                ----                        ----                         ----
                                      Amortized     Percent of     Amortized     Percent of     Amortized     Percent of
                                      Cost(1)       Portfolio      Cost(1)       Portfolio      Cost(1)       Portfolio
                                      -------       ---------      -------       ---------      -------       ---------
                                                                    (Dollars in thousands)
<S>                                   <C>               <C>        <C>               <C>        <C>               <C>
U.S. Government agency Securities:
    FHLMC .........................   $    1,893        100.00%            --            --            --            --
    FHLB ..........................           --            --     $    1,998        100.00%    $    1,998         12.38%
    State and municipal
    Obligations ...................           --            --             --            --         14,141         87.62
                                      ----------    ----------     ----------    ----------     ----------    ----------

          Total ...................   $    1,893        100.00%    $    1,998        100.00%    $   16,139        100.00%
                                      ==========    ==========     ==========    ==========     ==========    ==========
</TABLE>

(1)   The market value of the Bank's investment securities portfolio amounted to
      $2.0 million, $2.0 million and $15.9 million at September 30, 2001, 2002
      and 2003, respectively.

     The following table sets forth the final maturities and weighted average
yields of the securities at amortized cost at September 30, 2003.

<TABLE>
<CAPTION>
                                             One Year            More than One       More than Five             More than
                                              or Less            to Five Years        to Ten Years              Ten Years
                                              -------            -------------        ------------              ---------
                                         Amount     Yield       Amount     Yield    Amount     Yield        Amount     Yield
                                         ------     -----       ------     -----    ------     -----        ------     -----
<S>                                    <C>           <C>     <C>             <C>    <C>        <C>       <C>            <C>
                                                                          (Dollars in thousands)
U.S. Government agency securities:
    FHLB ..........................   $      --       --%   $      --        --%   $1,998      5.30%    $      --        --%
    State and municipal
    Obligations ...................          --       --           --        --        --        --        14,141      4.16%
                                      ---------    ------    ---------    ------    ------    ------     ---------    ------
          Total ...................   $      --       --%    $      --        --%   $1,998      5.30%    $  14,141      4.16%
                                      =========    ======    =========    ======    ======    ======     =========    ======
</TABLE>

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


                                       26
<PAGE>

The following table sets forth Coastal Federal's mortgage-backed securities
portfolio, at amortized cost, at the dates indicated.

<TABLE>
<CAPTION>
                                                                   September 30,
                                 --------------------------------------------------------------------------------
                                          2001                         2002                         2003
                                 ------------------------     ------------------------     ------------------------
                                 Amortized     Percent of     Amortized     Percent of     Amortized     Percent of
                                 Cost(1)       Portfolio      Cost(1)       Portfolio      Cost(1)       Portfolio
                                 --------      --------       --------      --------       --------      --------
<S>                              <C>             <C>          <C>             <C>          <C>             <C>
                                                               (Dollars in thousands)
Mortgage-backed Securities:
       FHLMC ..............      $ 12,223          6.61%      $ 57,628         17.87%      $133,674         35.44%
       FNMA ...............       123,271         66.64        206,448         64.01        205,200         54.41
       GNMA ...............        20,630         11.15         22,139          6.86         26,659          7.07
       CMO ................        28,856         15.60         36,320         11.26         11,617          3.08
                                 --------      --------       --------      --------       --------      --------

             Total ........      $184,980        100.00%      $322,535        100.00%      $377,150        100.00%
                                 ========      ========       ========      ========       ========      ========
</TABLE>

(1)   The market value of the Bank's mortgage-backed securities portfolio
      amounted to $190.6 million, $331.8 million and $383.3 million at September
      30, 2001, 2002 and 2003, respectively.

            The following table sets forth the maturities and weighted average
yields of the securities, at amortized cost, at September 30, 2003.

<TABLE>
<CAPTION>
                              One Year            More than One        More than Five           More than
                               or Less            to Five Years         to Ten Years            Ten Years
                         -------------------   -------------------   -------------------    -------------------
                          Amount      Yield     Amount     Yield      Amount     Yield       Amount     Yield
                          ------      -----     ------     -----      ------     -----       ------     -----
                                                        (Dollars in thousands)
<S>                      <C>              <C>  <C>              <C>  <C>            <C>     <C>            <C>
Mortgage-backed
Securities:
       FHLMC .........   $     --         --%  $     --         --%  $     --         --%   $133,674       5.52%
       FNMA ..........         --         --         --         --      3,302       3.62     201,898       5.85
       GNMA ..........         --         --         --         --         --         --      26,659       6.39
       CMO ...........         --         --         --         --         --         --      11,617       5.17
                         --------   --------   --------   --------   --------   --------    --------   --------

             Total ...   $     --         --%  $     --         --%  $  3,302       3.62%   $373,848       5.75%
                         ========   ========   ========   ========   ========   ========    ========   ========
</TABLE>


                                       27
<PAGE>

Service Corporation Activities

      The Company has two wholly-owned subsidiaries, Coastal Federal and Coastal
Financial Capital Trust I. 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, and a
subsidiary Coastal Federal Holding Corporation, which was incorporated in 1998
under the laws of Delaware. Coastal Mortgage Bankers is not active in any real
estate operations.


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

                                  COASTAL FEDERAL

                                -------------------
                                        |     |
                                        |     |       -------------------
                                        |     |
                                        |     |        COASTAL FEDERAL(1)
                                        |     |             HOLDING
                                        |     --------    CORPORATION
                                        |
                                        |             -------------------
                                        |                       |
                                        |             -------------------
                                -------------------
                                                         COASTAL REAL
                                 COASTAL MORTGAGE       ESTATE INVESTMENT
                                     BANKERS*             CORPORATION

                                -------------------   -------------------
                                        |
                                        |
     ------------------------------------------------------------------------
     |                    |             |             |                     |
------------------  -------------  ------------  -------------  ----------------

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

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

*    Inactive

(1)   First tier operating subsidiary of Coastal Federal Bank consolidated with
      Coastal Federal Bank for regulatory reporting.


                                       28
<PAGE>

      On February 20, 1998, Coastal Real Estate Investment Corporation ("CREIC")
was incorporated in North Carolina. CREIC is a wholly owned operating subsidiary
of Coastal Federal Holding Corporation ("CFHC") and is a real estate investment
trust ("REIT"). CREIC engages in the investment and management of real estate
related assets, primarily mortgage loans. On September 1, 1998, CREIC was
capitalized with approximately $131.8 million of mortgage loans from Coastal
Federal. On December 10, 1998, CREIC became a wholly owned subsidiary of CFHC
through an exchange of stock transaction. On January 10, 2002, January 10, 2003
and January 24, 2003, CREIC received capital contributions from CFHC of $35.0
million, $50.0 million and $50.0 million, respectively, to purchase loans.

      On June 25, 1998, Coastal Federal Holding Corporation was incorporated in
the state of Delaware. CFHC is a wholly owned subsidiary of Coastal Federal Bank
and is a passive investment company. All of CFHC's consolidated operating
activities are consolidated into Coastal Federal Bank. CFHC engages in the
management of its investment in CREIC and the management of the related
dividends received on that investment.

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 to compensate for reductions in the
availability of funds from other sources. They may also be used 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 checking accounts, money market accounts, savings
accounts, certificates of deposit and retirement accounts. Deposit account terms
vary, according to the minimum balance required, the time periods the funds must
remain on deposit and the interest rate, among other factors. In determining the
terms of its deposit accounts, Coastal Federal considers the rates offered by
its competition, profitability to Coastal Federal, matching deposit and loan
products and its customer preferences and concerns. Coastal Federal generally
reviews its deposit mix and pricing at least monthly.


                                       29
<PAGE>

Deposit Flow

      The following table sets forth the balances of deposits in the various
types of deposit accounts offered by the Bank at the dates indicated.


<TABLE>
<CAPTION>
                                                                    At September 30,
                              -------------------------------------------------------------------------------------------------
                                           2001                            2002                              2003
                              -----------------------------   -------------------------------  --------------------------------
                                        Percent   Increase              Percent     Increase              Percent     Increase
                               Amount   of Total (Decrease)    Amount   of Total   (Decrease)   Amount    of Total   (Decrease)
                               ------   --------- ----------   ------   --------   ----------   ------    --------   ----------
                                                                   (Dollars in thousands)
<S>                           <C>        <C>      <C>         <C>        <C>       <C>         <C>           <C>       <C>
Transaction accounts:
    NOW checking ...........  $  55,926   10.54%  $   6,981   $  67,381   10.58%   $  11,455   $  98,171   14.08%     $30,790
    Noninterest-bearing
    checking ...............     49,098    9.26      13,884      63,003    9.89       13,905      86,258   12.38       23,255
                              ---------  ------   ---------   ---------  ------    ---------   ---------  ------    ---------

Total transaction accounts .    105,024   19.80      20,865     130,384   20.47       25,360     184,429   26.46       54,045
                              ---------  ------   ---------   ---------  ------    ---------   ---------  ------    ---------

Money market demand accounts    193,631   36.51      73,498     212,924   33.42       19,293     206,010   29.56       (6,914)
Savings accounts ...........     33,317    6.28      (2,888)     39,092    6.13        5,775      46,236    6.63        7,144

Fixed-rate certificates
 (original maturity):
   3 months ................      3,689    0.70          (6)      4,968    0.78        1,279       3,477     .50       (1,491)
   6 months ................     47,126    8.89     (15,251)     90,177   14.15       43,051      82,349   11.81       (7,828)
   9 months ................     30,180    5.69      26,969      17,613    2.76      (12,567)      6,702     .96      (10,911)
   12 months ...............     44,866    8.46      12,216      57,206    8.98       12,340      57,777    8.29          571
   18 months ...............     31,638    5.97       7,118      30,994    4.87         (644)     46,044    6.61       15,050
   24 months ...............     25,120    4.74       7,047      27,939    4.39        2,819      36,313    5.21        8,374
   30 months ...............      2,751    0.52      (5,869)      3,041    0.48          290       2,923     .42         (118)
   36 months ...............      2,294    0.43        (981)     11,580    1.82        9,286      11,649    1.67           69
   48 months ...............      6,586    1.24       1,765       7,936    1.25        1,350      10,108    1.45        2,172
   96 months ...............         18    0.00         (15)         19    0.00            1          20    0.00            1
                              ---------  ------   ---------   ---------  ------    ---------   ---------  ------    ---------

                                194,268   36.64      32,993     251,473   39.48       57,205     257,362   36.92        5,889
                              ---------  ------   ---------   ---------  ------    ---------   ---------  ------    ---------
Variable rate certificates:
  (original maturity)
                                     --    0.00          --         163    0.02          163         130     .02          (33)
    18 months ..............      2,146    0.40        (141)      1,471    0.23         (675)      1,311     .19         (160)
    30 months ..............      1,978    0.37          --       1,574    0.25         (404)      1,534     .22          (40)
                              ---------  ------    ---------  ---------  ------    ---------   ---------  ------    ---------
Total variable .............      4,124    0.77        (321)      3,208    0.50         (916)      2,975     .43         (233)
                              ---------  ------    ---------  ---------  ------    ---------   ---------  ------    ---------
Total certificates .........    198,392   37.41      32,672     254,681   39.98       56,289     260,337   37.35        5,656
                              ---------  ------   ---------   ---------  ------    ---------   ---------  ------    ---------

Total deposits .............  $ 530,364  100.00%  $ 124,147   $ 637,081  100.00%   $ 106,717   $ 697,012     100%   $  59,931
                              =========  ======   =========   =========  ======    =========   =========  ======    =========
</TABLE>


                                       30
<PAGE>

Time Deposits by Maturity and Rate

      The following table sets forth the amount and maturities of time deposits
at September 30, 2003.

                                             Amount Due
                                             ----------

                 Less Than One    1-2       2-3       3-4      After
    Rate              Year       Years     Years     Years    4 Years    Total
    ----              ----       -----     -----     -----    -------    -----
                                         (In thousands)

0.00 - 1.99% ...    $ 83,956    $  3,151  $    286  $      3  $     --  $ 87,396
2.00 - 3.99% ...     109,864      34,396     2,414     2,904       100   149,678
4.00 - 5.99% ...       3,029      11,256     4,754       231       299    19,569
6.00 - 7.99% ...       1,387       1,747         7        --        20     3,161
8.00 - 10.00%  .         487          46        --        --        --       533
                    --------    --------  --------  --------  --------  --------

    Total ......    $198,723    $ 50,596  $  7,461  $  3,138  $    419  $260,337
                    ========    ========  ========  ========  ========  ========


      The following table sets forth the amount and maturities of time deposits
with balances of $100,000 or more at September 30, 2003.

                                   Amount Due
--------------------------------------------------------------------------------
  Within           Over 3              Over 6         Over 12
 3 Months     through 6 months    through 12 months   Months          Total
--------------------------------------------------------------------------------
                                 (In thousands)

  $26,558          $ 31,506           $19,759         $19,102        $ 96,925
  =======          ========           =======         =======        ========

      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.

      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 and certain of the Bank's
mortgage-backed securities portfolio. At September 30, 2003, Coastal Federal had
advances totaling $244.1 million from the FHLB of Atlanta due on various dates
through 2012 with a weighted average interest rate of 3.89%. Certain of these
advances are subject to call provisions. Call provisions are more likely to be
exercised by the FHLB when rates rise.


                                       31
<PAGE>

      The FHLB of Atlanta functions as a central reserve bank providing credit
for financial institutions and certain other member financial institutions. As a
member, Coastal Federal is required to own capital stock in the FHLB of Atlanta
and is authorized to apply for advances on the security of such stock and
certain of its mortgage loans, certain commercial real estate loans, and other
assets (principally securities which are obligations of, or guaranteed by, the
United States) provided certain standards related to creditworthiness have been
met. Advances are made pursuant to several different programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either on a fixed
percentage of an institution's net worth or on the FHLB's assessment of the
institution's creditworthiness. The FHLB of Atlanta determines specific lines of
credit for each member institution.

      In addition to the borrowing 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, 2003, the Bank had $125.9 million in
broker repurchase agreements. The Bank has also offered repurchase agreements to
its customers that are borrowings collateralized by underlying government
securities. At September 30, 2003, the Bank had $7.7 million outstanding in
customer repurchase agreements.


                                       32
<PAGE>

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

                                                    At September 30,
                                             ------------------------------
                                               2001       2002       2003
                                             --------   --------   --------
                                                 (Dollars in thousands)
Outstanding balance:
    Securities sold under agreements
       to repurchase:
       Customer ...........................  $  3,703   $  4,070   $  7,703
       Broker .............................    15,000     30,000    125,899
    Short-term FHLB advances (1) ..........    46,400    110,350     91,435

Weighted average rate paid on:
    Securities sold under agreements
       to repurchase:
       Customer ...........................      3.36%      1.37%      0.81%
       Broker .............................      2.97       1.84       1.64
    Short-term FHLB advances (1) ..........      5.13       4.52       3.81

Maximum amount of borrowings outstanding
    At any month end:
    Securities sold under agreements
       to repurchase:
       Customer ...........................  $  3,726   $  5,625   $  7,703
       Broker .............................    67,099     30,000    125,899
    Short-term FHLB advances (1) ..........   138,946    110,350    121,582

Approximate average short-term borrowings
    outstanding with respect to:
    Securities sold under agreements
       to repurchase:
       Customer ...........................  $  2,361   $  3,600   $  4,812
       Broker .............................    45,461     15,007     92,476
    Short-term FHLB advances (1) ..........    50,884     59,243     86,191

Weighted average rate paid on:
    Securities sold under agreements
       to repurchase:
       Customer ...........................      3.73%      1.58%      1.02%
       Broker .............................      5.65       2.39       2.04
    Short-term FHLB advances (1) ..........      5.90       4.52       3.81

(1)   Short-term FHLB advances include various advances which are subject to
      call by FHLB, within one year.


                                       33
<PAGE>

Competition

      As of June 30, 2003, Coastal Federal held the largest share of deposits, a
16.4% share, in Horry County, S.C. according to the Federal Deposit Insurance
Corporation. Coastal Federal also held an 10.4% share in Brunswick County, N.C.
and a 0.4% share in Wilmington, N.C. 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 89 offices of other
financial institutions in Horry County, 29 offices in Brunswick County and 57
offices in Wilmington. 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, 2003, the Company had 303 full-time Associates and 24
part-time Associates. The Associates are not represented by a collective
bargaining unit. The Bank believes its relationship with its Associates is
excellent.

                           REGULATION AND SUPERVISION

General

      As a savings and loan holding company, the Company is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the Office of Thrift Supervision. The Bank is subject to extensive
regulation, examination and supervision by the Office of Thrift Supervision, as
its primary federal regulator, and the Federal Deposit Insurance Corporation, as
the deposit insurer. The Bank is a member of the Federal Home Loan Bank System
and, with respect to deposit insurance, of the Savings Association Insurance
Fund managed by the Federal Deposit Insurance Corporation. The Bank must file
reports with the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation 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 savings institutions. The Office of
Thrift Supervision and/or the Federal Deposit Insurance Corporation conduct
periodic


                                       34
<PAGE>

examinations to test the Bank's safety and soundness and compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. 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 regulatory requirements and policies, whether by the Office of
Thrift Supervision, the Federal Deposit Insurance Corporation or the Congress,
could have a material adverse impact on the Company, the Bank and their
operations. Certain of the regulatory requirements applicable to the Bank and to
the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on the
Bank and the Company.

Holding Company Regulation

      The Company is a nondiversified unitary savings and loan holding company
within the meaning of federal law. Under prior law, a unitary savings and loan
holding company, such as the Company, was not generally restricted as to the
types of business activities in which it may engage, provided that the Bank
continued to be a qualified thrift lender. See "Federal Savings Institution
Regulation - QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no
company may acquire control of a savings association after May 4, 1999 unless it
engages only in the financial activities permitted for financial holding
companies under the law or for multiple savings and loan holding companies as
described below. Further, the Gramm-Leach-Bliley Act specifies that existing
savings and loan holding companies may only engage in such activities. The
Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for
activities with respect to unitary savings and loan holding companies existing
prior to May 4, 1999, so long as the Bank continues to comply with the QTL Test.
The Company does qualify for the grandfathering. Upon any non-supervisory
acquisition by the Company of another savings institution or savings bank that
meets the qualified thrift lender test and is deemed to be a savings institution
by the Office of Thrift Supervision, the Company would become a multiple savings
and loan holding company (if the


                                       35
<PAGE>

acquired institution is held as a separate subsidiary) and would generally be
limited to activities permissible for bank holding companies under Section
4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the
Office of Thrift Supervision, and certain activities authorized by Office of
Thrift Supervision regulation.

      A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the Office of Thrift Supervision and from acquiring or retaining control of a
depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating applications by holding companies to acquire savings
institutions, the Office of Thrift Supervision considers the financial and
managerial resources and future prospects of the Company and institution
involved, the effect of the acquisition on the risk to the deposit insurance
funds, the convenience and needs of the community and competitive factors.

      The Office of Thrift Supervision may not approve any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (i) the approval
of interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.

      Although savings and loan holding companies are not currently subject to
specific capital requirements or specific restrictions on the payment of
dividends or other capital distributions, federal regulations do prescribe such
restrictions on subsidiary savings institutions as described below. The Bank
must notify the Office of Thrift Supervision 30 days before declaring any
dividend to the Company. In addition, the financial impact of a holding company
on its subsidiary institution is a matter that is evaluated by the Office of
Thrift Supervision and the agency has authority to order cessation of activities
or divestiture of subsidiaries deemed to pose a threat to the safety and
soundness of the institution.

      Acquisition of the Company. Under the Federal Change in Bank Control Act
("CIBCA"), a notice must be submitted to the Office


                                       36
<PAGE>

of Thrift Supervision if any person (including a company), or group acting in
concert, seeks to acquire 10% or more of the Company's outstanding voting stock,
unless the Office of Thrift Supervision has found that the acquisition will not
result in a change of control of the Company. Under the CIBCA, the Office of
Thrift Supervision has 60 days from the filing of a complete notice to act,
taking into consideration certain factors, including the financial and
managerial resources of the acquirer and the anti-trust effects of the
acquisition. Any company that so acquires control would then be subject to
regulation as a savings and loan holding company.

Federal Savings Institution Regulation

      Business Activities. The activities of federal savings banks are governed
by federal law and regulations. These laws and regulations delineate the nature
and extent of the activities in which federal savings banks may engage. In
particular, certain lending authority for federal savings banks, e.g.,
commercial, non-residential real property loans and consumer loans, is limited
to a specified percentage of the institution's capital or assets.

      Capital Requirements. The Office of Thrift Supervision capital regulations
require savings institutions to meet three minimum capital standards: a 1.5%
tangible capital ratio, a 4% leverage ratio (3% for institutions receiving the
highest rating on the CAMELS examination rating system) and an 8% risk-based
capital ratio. In addition, the prompt corrective action standards discussed
below also establish, in effect, a minimum 2% tangible capital standard, a 4%
leverage ratio (3% for institutions receiving the highest rating on the CAMELS
system), and, together with the risk-based capital standard itself, a 4% Tier 1
risk-based capital standard. The Office of Thrift Supervision regulations also
require that, in meeting the tangible, leverage and risk-based capital
standards, institutions must generally deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank.

      The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a


                                       37
<PAGE>

risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision
capital regulation based on the risks believed inherent in the type of asset.
Core (Tier 1) capital is defined as common stockholders' equity (including
retained earnings), certain noncumulative perpetual preferred stock and related
surplus, and minority interests in equity accounts of consolidated subsidiaries
less intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets and up to 45% of unrealized gains on available-for-sale
equity securities with readily determinable fair market values. Overall, the
amount of supplementary capital included as part of total capital cannot exceed
100% of core capital.

The OTS has authority to establish higher capital requirements where it
determines that the circumstances of a particular association require it. At
September 30, 2003, the Bank met each of its capital requirements. See Note 14
of the Notes to Consolidated Financial Statements for further information.

      Prompt Corrective Regulatory Action. The Office of Thrift Supervision is
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
undercapitalization. Generally, a savings institution that has a ratio of total
capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core)
capital to risk-weighted assets of less than 4% or a ratio of core capital to
total assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the Office of
Thrift Supervision is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the Office of Thrift
Supervision within 45 days of the date a savings institution receives notice
that it is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance


                                       38
<PAGE>

with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The Office of Thrift Supervision could also take any one of a number
of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.

      Insurance of Deposit Accounts. The Bank is a member of the Savings
Association Insurance Fund. The Federal Deposit Insurance Corporation maintains
a risk-based assessment system by which institutions are assigned to one of
three categories based on their capitalization and one of three subcategories
based on examination ratings and other supervisory information. An institution's
assessment rate depends upon the categories to which it is assigned. Assessment
rates for Savings Association Insurance Fund member institutions are determined
semi-annually by the Federal Deposit Insurance Corporation and currently range
from zero basis points for the healthiest institutions to 27 basis points of
assessable deposits for the riskiest.

      The Federal Deposit Insurance Corporation has authority to increase
insurance assessments. A significant increase in Savings Association Insurance
Fund insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Bank. Management cannot predict what
insurance assessment rates will be in the future.

      Insurance of deposits may be terminated by the Federal Deposit Insurance
Corporation upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.

      Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable


                                       39
<PAGE>

collateral. At September 30, 2003, the Bank's limit on loans to one borrower was
$13.9 million, and the Bank's largest aggregate outstanding balance of loans to
one borrower was $12.5 million.

      QTL Test. The HOLA requires savings institutions to meet a qualified
thrift lender test. Under the test, a savings association is required to either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.

      A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of September 30, 2003, the Bank met the qualified thrift lender
test. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered "qualified thrift
investments."

      Limitation on Capital Distributions. Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a savings
institution, including cash dividends, payments to repurchase its shares and
payments to shareholders of another institution in a cash-out merger. Under the
regulations, an application to and the prior approval of the Office of Thrift
Supervision is required prior to any capital distribution if the institution
does not meet the criteria for "expedited treatment" of applications under
Office of Thrift Supervision regulations (i.e., generally, examination ratings
in the two top categories), the total capital distributions for the calendar
year exceed net income for that year plus the amount of retained net income for
the preceding two years, the institution would be undercapitalized following the
distribution or the distribution would otherwise be contrary to a statute,
regulation or agreement with Office of Thrift Supervision. If an application is
not required, the institution must still provide prior notice to Office of
Thrift Supervision of the capital distribution if, like the Bank, it is a
subsidiary of a holding company. In the event the Bank's capital fell below its
regulatory requirements or the Office of Thrift Supervision notified it that it
was in need of more than normal supervision, the Bank's ability to make capital
distributions could be restricted. In addition, the Office of


                                       40
<PAGE>

Thrift Supervision could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the Office
of Thrift Supervision determines that such distribution would constitute an
unsafe or unsound practice.

      Assessments. Savings institutions are required to pay assessments to the
Office of Thrift Supervision to fund the agency's operations. The general
assessments, paid on a semi-annual basis, are computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the Bank's latest quarterly thrift financial report. The assessments paid by the
Bank for the fiscal year ended September 30, 2003 totaled $185,000.

      Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under circumstances that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.

      The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is also
governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval


                                       41
<PAGE>

procedures to be followed.

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

      Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
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. If the Office of Thrift
Supervision determines that a savings institution fails to meet any standard
prescribed by the guidelines, the Office of Thrift Supervision may require the
institution to submit an acceptable plan to achieve compliance with the
standard.

Federal Home Loan Bank System

      The Bank is a member of the Federal Home Loan Bank System, which consists
of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member institutions. The Bank, as a member
of the Federal Home Loan Bank, is required to acquire and hold shares of capital
stock in that Federal Home Loan Bank in an amount at least equal to $500,1.0% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the Federal Home Loan Bank, whichever is greater. The Bank was


                                       42
<PAGE>

in compliance with this requirement with an investment in Federal Home Loan Bank
stock at September 30, 2003 of $14.0 million.

      The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, the Bank's net interest income would
likely also be reduced. Recent legislation has changed the structure of the
Federal Home Loan Banks funding obligations for insolvent thrifts, revised the
capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict the
effect that these changes may have with respect to its Federal Home Loan Bank
membership.

Federal Reserve System

      The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows: a
3% reserve ratio is assessed on net transaction accounts up to and including
$45.4 million; a 10% reserve ratio is applied above $45.4 million. The first
$6.6 million of otherwise reservable balances (subject to adjustments by the
Federal Reserve Board) are exempted from the reserve requirements. The amounts
are adjusted annually. The Bank complies with the foregoing requirements.

                                    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.


                                       43
<PAGE>

      Tax Bad Debt Reserves. For discussion related to the Bank's Tax Bad Debt
Reserves, please refer to Note 12 of the Company's Annual Report to Stockholders
for the fiscal year ended September 30, 2003.

      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%. Generally, 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 (prior to reduction for net operating losses).

      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.


                                       44
<PAGE>

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

      State Income Taxation. South Carolina has adopted the Code as it relates
to savings and loan associations, effective for taxable years beginning after
December 31, 1985. Coastal Federal is subject to South Carolina income tax at
the rate of 6% and North Carolina income tax at a rate of 6.9%. 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 12 of the Notes to Consolidated Financial Statements.


                                       45
<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, 2003.

<TABLE>
<CAPTION>
                                             Total Investment
                                              Including Land,       Net Book          Approximate
                                     Year    Building, Furni-       Value as             Square      Owned/
Location                            Opened   ture and Fixtures      Of 9/30/03          Footage      Leased
--------                            ------   -----------------      ----------          -------      ------
                                                              (Dollars in thousands)
<S>                                  <C>          <C>                <C>                 <C>          <C>
Main Office                          1980         $ 11,611           $  4,529            25,000       Owned
2619 Oak St
Myrtle Beach, SC (1)

Dunes Office                         1971              836                239             2,000       Owned
7500 North Kings Hwy
Myrtle Beach, SC

North Myrtle Beach Office            1973            2,026              1,317             4,100       Owned
521 Main Street
North Myrtle Beach, SC

Surfside Office
112 Highway 17 South                 1975            1,515                581             3,300       Owned
  & Glenns Bay Road
Surfside Beach, SC

Conway Office                        1976            1,177                451             2,882       Owned
310 Wright Boulevard
Conway, SC

Socastee Office                      1981            1,046                271             2,275       Owned
4801 Socastee Boulevard
Myrtle Beach, SC

Murrells Inlet Office
3348 Highway 17 South & Inlet        1986            1,175                606             3,450       Owned
Crossing
Murrells Inlet, SC

Waccamaw Medical Pk Office           1986              693                301             1,450       Owned
112 Waccamaw Medical Pk Drive
Conway, SC

Sunset Beach Office                  1998            1,134                817             3,000       Owned
1625 Seaside Road S.W
Sunset Beach, NC

Coastal Federal University
Center                               1997            1,701                747            17,500       Owned
504 27th Avenue North
Myrtle Beach, SC

Conway Annex Property                1999            2,013                743            10,000       Owned
1515 4th Avenue
Conway, SC
</TABLE>


                                       46
<PAGE>

<TABLE>
<S>                                         <C>             <C>               <C>              <C>               <C>
Little River Office                         1999            $1,203            $  965            2,300            Owned
1602 Highway 17
Little River, SC

Bi-Lo 38th Avenue                           2000               333               186              600            Leased
1245 38th Avenue North
Myrtle Beach, SC

Wilmington Office                           1999               194                87            1,400            Lease
5710 Oleander Drive, Suite 209
Wilmington, NC

Carolina Forest Office                      2000             1,253             1,016            3,500            Owned
3894 Renee Drive
Myrtle Beach, SC

Southport Office                            2001               280               176            1,600            Leased
4956-1 Long Beach Road SE
Southport, NC

Central Business District Office            2001               196               122            1,800            Leased
109 Market Street
Wilmington, NC

Bi-Lo Socastee Office                       2001               286               160              486            Leased
5020 Dick Pond Road
Myrtle Beach, SC

Loris Office                                2002               378               282            1,040            Leased
4262 Main Street
Loris, SC

Pawleys Island Office
Coastal Federal Town Center                 2002             1,058               994            3,150            Owned
11403 Ocean Highway
Pawleys Island, SC

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

Coastal Investor Services, a
division of Coastal Federal Bank            1987               136                13             N/A              N/A
2619 Oak Street
Myrtle Beach, SC

Shallotte Office                            2003               614               609            2,000            Owned
200 Smith Avenue
Shallotte, NC

                                                                                                  N/A
                                                                                               Land only
Wilmington-Main                             2003               576               575              for            Owned
4320 17th Street                                                                               Extension
Wilmington, NC                                                                                   future
                                                                                                Banking
                                                                                                 Center
</TABLE>


                                       47
<PAGE>

<TABLE>
<S>                                         <C>               <C>               <C>            <C>             <C>
Residential Lending Admin.                  2003             $492              $301            4,100           Owned
604 27th Avenue North
Myrtle Beach, SC
</TABLE>

(1)   The original main office was located at 816 North Kings Highway and opened
      in January 1954. The main office was moved to its new location in 1980.

      The net book value of the Company's investment in office, properties and
equipment totaled $16.1 million at September 30, 2003. See Note 6 of the 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 Company is not a defendant in any lawsuits. The subsidiaries are
defendants in lawsuits arising out of the normal course of business. Based upon
current information received from counsel representing the subsidiaries in these
matters, the Company believes none of the lawsuits would have a material impact
on the Company's financial status.

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, 2003
("Annual Report") is incorporated herein by reference.

Item 6. Selected Financial Data

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

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

      The information contained in the section captioned

                                       48
<PAGE>

"Management's Discussion and Analysis" in the Annual Report is incorporated
herein by reference.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

      The information contained in the section captioned "Interest Rate Risk
Disclosure" in the Annual Report is incorporated herein by reference.

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 disclosure.

Item 9A. Evaluation of Disclosure Controls and Procedures and Changes in
         Internal Controls

      The Company's management, including the Company's principal executive
officer and principal financial officer, have evaluated the effectiveness of the
Company's "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act"). Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company's disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the "SEC") (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and (2) is accumulated and communicated to the Company's
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure. In
addition, based on that evaluation, no change in the Company's internal control
over financial reporting occurred during the year ended September 30, 2003 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.


                                       49
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

      The information contained under the sections captioned "Proposal I --
Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive proxy statement for the Bank's 2003
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.
The executive officers of the Company and the Bank are elected annually by the
respective Boards of Directors and hold office until their successors have been
elected and qualified or until they are removed from office.


                                       50
<PAGE>

Executive Officers of the Registrant

Name, Age and Position             Business Experience
----------------------             -------------------

Michael C. Gerald, 54              Mr. Gerald has been associated with Coastal
President, Chief Executive         Federal since 1974 and serves as Director,
Officer and a 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 Director
                                   and President of Coastal Real Estate
                                   Investment Corporation, and as a Director of
                                   Coastal Retirement, Estate and Tax Planners,
                                   Inc. He currently serves on the Board of
                                   Visitors of Coastal Carolina University's
                                   Wall School of Business, the Board of
                                   Directors of the Waccamaw Community
                                   Foundation, the Board of Directors of the
                                   Coastal Education Foundation, the Board of
                                   Directors of the South Carolina Bankers
                                   Association, the Board of Directors of SC
                                   BancPAC and the Board of Trustees of the USC
                                   Business Partnership Foundation.

Jimmy R. Graham, 55,               Mr. Graham serves as Executive Vice President
Executive Vice President and       and Chief Information Officer of Coastal
Chief Information Officer          Federal. Mr. Graham serves as Executive Vice
                                   President of Coastal Financial Corporation.
                                   He has been associated with the bank since
                                   1977.


                                       51
<PAGE>
Jerry L. Rexroad, CPA, 43,     Mr. Rexroad joined the Company in April 1995
Executive Vice President and   and is Executive Vice President and Chief
Chief Financial Officer        Financial Officer of Coastal Federal and
                               Coastal Financial Corporation. Mr. Rexroad
                               also serves as the Chief Financial Officer
                               and a Director for Coastal Mortgage Bankers &
                               Realty Company, Inc., Coastal Investor
                               Services, Inc., Coastal Planners Holding
                               Corporation, Coastal Retirement Estate and
                               Tax Planners, Coastal Federal Mortgage,
                               Coastal Real Estate Investment Corporation
                               and President of Coastal Federal Holdings
                               Corporation. He currently serves on the
                               Junior Achievement Board of Directors of
                               Horry County. He is a Past Chairman of the
                               Board of Directors for Junior Achievement of
                               Horry County as well as Past Chairman of the
                               Board of Directors for Junior Achievement of
                               Greenville. Mr. Rexroad is a Director of
                               PowerHouse Ministries, Inc. and Chairman of
                               the Board of Deacons at Grand Strand Baptist
                               Church. 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 LLP where he was partner
                               in charge of the Financial Institutions
                               practice in South Carolina.

Phillip G. Stalvey, 47,        Mr. Stalvey is Executive Vice President and
Executive Vice President       Banking Group Leader for the Bank. He also
and Banking Group Leader       serves as an Executive Vice President of the
                               Corporation and is a director of Coastal
                               Federal Mortgage and Coastal Investor
                               Services, Inc. He has been associated with
                               Coastal Federal for the past 22 years. In
                               addition, Mr. Stalvey is a member of the
                               Florence Stake Presidency with his Church and
                               a member of the Myrtle Beach Air Force Base
                               Redevelopment Authority.

Steven J. Sherry, 52           Mr. Sherry joined the Company in May 1998 and
Executive Vice President and   is Executive Vice President and Director of
Director of Marketing          Marketing for the Bank. He also serves as
                               Executive Vice President and Chief Marketing
                               Officer for Coastal Financial Corporation.
                               Mr. Sherry is a member of the Bank Marketing
                               Association and the ABA Marketing Network.
                               He is active with Horry County United Way and
                               serves on the Executive Board of the Franklin
                               G. Burroughs-Simeon B. Chapin Art Museum.
                               Mr. Sherry holds numerous achievement awards
                               for marketing and advertising.


                                       52
<PAGE>
Susan J. Cooke, 53             Ms. Cooke is Senior Vice President and
Senior Vice President and      Corporate Secretary for Coastal Federal and
Corporate Secretary            for Coastal Financial Corporation, Corporate
                               Secretary for Coastal Mortgage Bankers &
                               Realty Company, Inc., and Coastal Investor
                               Services, Inc. Ms. Cooke has been employed
                               with Coastal Federal for sixteen years. She
                               is a member of the American Society of
                               Corporate Secretaries, Inc. and the National
                               Association for Female Executives.

Robert D. Douglas, 44          Mr. Douglas joined the corporation in June
Executive Vice President       1994 and serves as Executive Vice President
Human Resources/Coastal        of the Bank and Coastal Financial
Federal University Group       Corporation.  He previously served as
                               Chairman of the Human Resources Committee of
                               the South Carolina Community Bankers
                               Association.  He has served on various
                               advisory committees for the Horry County Drug
                               and Alcohol Commission, and the South
                               Carolina Employment Security Commission,
                               Coastal Carolina and Horry Georgetown
                               Technical College, and Grand Strand Area
                               Chamber of Commerce.

The Company has adopted a Code of Ethics, a copy of which is filed as Exhibit 14
to the report. The Company intends to disclose any changes or waivers from the
Code of Ethics in a report on Form 8-K.


                                       53
<PAGE>

Item 11. Executive Compensation

      The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation" 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 "Stock Ownership" of the Proxy
            Statement.

      (b)   Security Ownership of Management

            Information required by this item is incorporated herein by
            reference to the section captioned "Stock Ownership" 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.

      (d)   Equity Compensation Plan Information as of September 30, 2003:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                                                                         Number of securities
                                                                         remaining available
                                                                         for future issuance
                        Number of securities                                  under equity
                          to be issued upon       Weighted-average        compensation plans
                             exercise of        price of outstanding           (excluding
                         outstanding options,     options, warrants       securities reflected
   Plan Category         warrants and rights          and rights              in column (a))
        (a)                     (b)                      (c)                       (d)
-----------------------------------------------------------------------------------------------
<S>                          <C>                        <C>                       <C>
Equity compensation
plans approved by            1,580,011                  $7.64                     303,184
security holders
-----------------------------------------------------------------------------------------------
Equity compensation
plans not approved               N/A                     N/A                         N/A
by security holders
-----------------------------------------------------------------------------------------------
Total                        1,580,011                  $7.64                     303,184
-----------------------------------------------------------------------------------------------
</TABLE>

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.


                                       54
<PAGE>

                                     PART IV

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

      1.    Independent Auditors' Report(1)

      2.    All Financial Statements(1)

            (a)   Consolidated Statements of Financial Condition as of September
                  30, 2002 and 2003.

            (b)   Consolidated Statements of Operations for the Years Ended
                  September 30, 2001, 2002, 2003.

            (c)   Consolidated Statements of Stockholders' Equity and
                  Comprehensive Income for the Years Ended September 30, 2001,
                  2002, 2003.

            (d)   Consolidated Statements of Cash Flows for the Years Ended
                  September 30, 2001, 2002, 2003.

            (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(2)

            3     (b) Certificate of Amendment to Certificate of Incorporation
                      of Coastal Financial Corporation(7)

            3     (c) Bylaws of Coastal Financial Corporation(1)

            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 Steven J. Sherry

                  (e) Employment Agreement with Jimmy R. Graham

                  (f) 1990 Stock Option Plan (2)


                                       55
<PAGE>

                  (g) Directors Performance Plan(3)

                  (h) 2000 Stock Option Plan(6)

                  (i) Loan Agreement with Bankers Bank(8)

            13        Annual Report to Stockholders for the Fiscal Year Ended
                      September 30, 2003

            14        Code of Ethics

            21        Subsidiaries of the Registrant

            23        Consent of Independent Auditors

            31    (a) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
                      Officer

            31    (b) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
                      Officer

            32    (a) Section 1350 Certification of Chief Executive Officer

            32    (b) Section 1350 Certification of Chief Financial Officer

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

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

(3)   Incorporated by reference to the proxy statement for the 1996 Annual
      Meeting of Stockholders.

(4)   Incorporated by reference to 1997 Form 10-K filed with the Securities and
      Exchange Commission on January 2, 1998.

(5)   Incorporated by reference to 1998 Form 10-K filed with the Securities and
      Exchange Commission on December 29, 1998.

(6)   Incorporated by reference to the proxy statement for the 2000 Annual
      Meeting of Stockholders.

(7)   Incorporated by reference to the March 31, 1998 Form 10-Q filed with the
      Securities and Exchange Commission on May 15, 1998.



                                       56
<PAGE>

(8)   Incorporated by reference to the December 31, 1997 Form 10-Q filed with
      the Securities and Exchange Commission on February 13, 1998.


                                       57
<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 19, 2003       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/Michael C. Gerald                 By:    /s/Jerry L. Rexroad
       --------------------                        -------------------
       Michael C. Gerald                           Jerry L. Rexroad
        President/Chief Executive                   Executive Vice President
        Officer And a Director                      And Chief Financial Officer
        (Principal Executive                        (Principal Financial and
        Officer)                                    Accounting Officer)

Date:  December 19, 2003                           December 19, 2003


By:    /s/James T. Clemmons                 By:    /s/Frank A. Thompson, II
       --------------------                        ------------------------
       James T. Clemmons                           Frank A. Thompson, II
        Chairman of the Board                       Director

Date:  December 19, 2003                    Date:  December 19, 2003


By:    /s/James C. Benton                   By:    /s/James P. Creel
       ------------------                          -----------------
       James C. Benton                             James P. Creel
        Director                                    Director

Date:  December 19, 2003                    Date:  December 19, 2003


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

Date:  December 19, 2003                    Date:  December 19, 2003



                                     58