EXHIBIT 13

                      ANNUAL REPORT TO STOCKHOLDERS FOR THE

                      FISCAL YEAR ENDED SEPTEMBER 30, 2003


COASTAL FINANCIAL CORPORATION


                                                                            2003
                                                                   ANNUAL REPORT

<PAGE>



COASTAL FINANCIAL CORPORATION
Corporate Office: 2619 Oak Street o Myrtle Beach, South Carolina o 29577-3129


                               2003 ANNUAL REPORT
                                  843.205.2000


<PAGE>

                                A Quest for Excellence
                                1954-2004

                                Celebrating Our First Fifty Years Of Operation
                                By Focusing On Moving To The Next Level
                                The Transformation From A Very Good Organization
Dedication                      To An Exceptional Organization

Dedication On January 12, 1954, when Coastal Federal officially opened its doors
for business, its future was already well-secured by the Vision and Values of
its founders. These civic-minded individuals envisioned a Community based and
owned banking organization which would be a catalyst for enabling the Community,
its residents and businesses to reach their full potential.

And, thanks to their strong belief that it was, and always would be,
inextricably linked as partners with its Community, Coastal Federal's journey,
through its first 50 years to what it is today, has to be one of the more
interesting stories in the history of American small business.

A quick trip back through time takes us from its grand opening in 1954, through
a period of very slow growth, during which it remained a one-location bank until
1971. The late-seventies and the decade of the eighties brought rapid growth,
but a very difficult economic environment and was followed by the conversion to
public ownership in 1990. Since that point, its Transformation To A Very Good
Organization, as evidenced by U.S. Banker Magazine having ranked it the #1
Community Bank in the Carolinas for each of the past four years, continues to
affirm our belief that, when you have good people working together for the
common goals of the Community, there is no limit to the growth and prosperity
that can be achieved.

Over the past 50 years, in keeping with the Vision and Values of our founders,
we have been committed to Exceeding the Expectations of our Customers by
delivering our only product, which is Service, in the only manner which adds
value, as Trusted Financial Advisors, through our only real competitive
advantage, our exceptional Associates.

And over the thirteen years since becoming a publicly owned company, all of us
at Coastal Financial Corporation have focused on accomplishing Our Basic
Corporate Objective Of Maximizing The Value Of Our Shareholders' Investment by
working diligently toward the achievement of Our Long-Term Goal Of Being The
Best Financial Services Company In Our Marketplace.

Our ongoing commitment to the Vision and Values of our founders, as expressed
through our QUEST FOR EXCELLENCE Operating Philosophy and our Vision 2005 Plan,
has again produced outstanding results for our Shareholders and we are
absolutely convinced that this approach will help to ensure that our best days
are yet to come and facilitate our Transformation From A Very Good Organization
To An Exceptional Organization.

Share Price Performance

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

      Initial Public Offering October 4, 1990            $10.00
      Sept. 30, 1991                                     $10.00
      Sept. 30, 1992                                     $27.20
      Sept. 30, 1993                                     $68.31
      Sept. 30, 1994                                     $85.56
      Sept. 30, 1995                                     $85.92
      Sept. 30, 1996                                    $134.94
      Sept. 30, 1997                                    $217.16
      Sept. 30, 1998                                    $215.52
      Sept. 30, 1999                                    $177.72
      Sept. 30, 2000                                    $113.80
      Sept. 30, 2001                                    $217.36
      Sept. 30, 2002                                    $299.07
      Sept. 30, 2003                                    $374.19

The price of Coastal Financial Corporation's common stock increased 25% since
September 30, 2002 and has grown at a compound annual rate of over 31% since
1990. These historical results may not be indicative of future stock price
performance. Share data has been restated to reflect all stock splits, stock
dividends, and reinvested cash dividends.


2
<PAGE>

Financial Highlights

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

<TABLE>
<CAPTION>
                                                                              At or for Years Ended September 30,
                                                               ------------------------------------------------------------------
                                                                  1999          2000          2001          2002          2003
                                                               ----------    ----------    ----------    ----------    ----------
                                                                         (Dollars in thousands, except per share data)
<S>                                                            <C>           <C>           <C>           <C>           <C>
Financial Condition Data:
Total  assets ..............................................   $  713,013    $  768,838    $  763,214    $  950,796    $1,181,209
Loans receivable, net ......................................      455,351       511,701       488,754       536,851       682,737
Mortgage-backed securities .................................      182,115       189,239       190,553       331,808       383,324
Cash, interest-bearing deposits and investment securities ..       30,296        25,715        36,320        27,816        37,484
Deposits ...................................................      399,673       406,217       530,364       637,081       697,012
Borrowings .................................................      262,541       303,151       160,808       228,622       392,797
Stockholders` equity .......................................       41,237        46,945        57,248        66,386        73,707
Operating Data:
Interest  income ...........................................   $   49,559    $   58,079    $   60,255    $   53,873    $   59,214
Interest expense ...........................................       26,991        33,636        33,323        21,846        22,998
                                                               ----------    ----------    ----------    ----------    ----------
Net  interest  income ......................................       22,568        24,443        26,932        32,027        36,216
Provision for loan losses ..................................          750           978           955         1,235         2,655
                                                               ----------    ----------    ----------    ----------    ----------
Net interest income after provision for loan losses ........       21,818        23,465        25,977        30,792        33,561
                                                               ----------    ----------    ----------    ----------    ----------
Other Income:
Fees and service charges on loans and deposit accounts .....        2,025         2,126         2,634         3,148         3,489
Gain on sales of loans held for sale .......................          979           631         1,295         1,462         2,985
Gain (loss) on sales of investment securities, net .........           73           (17)          (56)          102            --
Gain (loss) on sales of mortgage-backed securities, net ....          191        (1,554)          727           238           469
Real estate operations .....................................          (29)          (64)         (453)         (137)          (18)
Other income ...............................................        2,334         4,759         3,755         3,326         3,983
                                                               ----------    ----------    ----------    ----------    ----------
Total other income .........................................        5,573         5,881         7,902         8,139        10,908
Total general and administrative expense ...................       15,286        16,191        19,292        22,824        27,156
                                                               ----------    ----------    ----------    ----------    ----------
Earnings before income taxes ...............................       12,105        13,155        14,587        16,107        17,313
Income taxes ...............................................        4,390         4,698         5,287         5,901         6,141
                                                               ----------    ----------    ----------    ----------    ----------
Net  income ................................................   $    7,715    $    8,457    $    9,300    $   10,206    $   11,172
                                                               ==========    ==========    ==========    ==========    ==========
Net earnings per common diluted share ......................   $      .56    $      .62    $      .70    $      .77    $      .83
                                                               ==========    ==========    ==========    ==========    ==========
Cash dividends per common share ............................   $      .14    $      .14    $      .16    $      .17    $      .20
                                                               ==========    ==========    ==========    ==========    ==========
Weighted average shares outstanding diluted ................       13,767        13,571        13,304        13,237        13,441
                                                               ==========    ==========    ==========    ==========    ==========
</TABLE>

All share and per share data have been restated to reflect a 5% stock dividend
declared on November 10, 1999, a 10% stock dividend declared on March 14, 2000,
a 3 for 2 stock dividend declared on July 31, 2001, and two 10% stock dividends
declared on May 27, 2003 and August 28, 2003.

Key Operating Ratios:

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

                                                                                     At or for Years Ended September 30,
                                                                                     -----------------------------------
                                                                                1999       2000      2001      2002      2003
                                                                                ----       ----      ----      ----      ----
<S>                                                                             <C>        <C>       <C>       <C>       <C>
Other Data:
Return on assets (net income divided by average assets) .....................     1.14%     1.13%     1.20%     1.23%     1.04%
Return on average equity (net income divided by average equity) .............    19.30%    19.52%    17.75%    16.92%    15.84%
Average equity to average assets ............................................     5.93%     5.80%     6.59%     7.29%     6.59%
Book value per share ........................................................   $ 3.06    $ 3.55    $ 4.41    $ 5.18    $ 5.70
Dividend payout ratio .......................................................    23.28%    22.61%    21.58%    21.77%    23.20%
Interest rate spread (difference between average yield on interest-earning
  assets and average cost of interest-bearing liabilities) ..................     3.55%     3.50%     3.64%     4.14%     3.65%
Net interest margin (net interest income as a percentage of average
  interest-earning assets) ..................................................     3.67%     3.57%     3.77%     4.24%     3.67%
Allowance for loan losses to total loans at end of period ...................     1.36%     1.35%     1.42%     1.42%     1.40%
Ratio of non-performing assets to total assets (1) ..........................     0.21%     0.73%     0.74%     0.48%     0.77%
Tangible capital ratio ......................................................     6.29%     6.56%     7.28%     6.57%     7.14%
Core capital ratio ..........................................................     6.29%     6.56%     7.28%     6.57%     7.14%
Risk-based capital ratio ....................................................    12.64%    12.45%    13.30%    12.74%    13.17%
</TABLE>

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

                                                                               3
<PAGE>

Dear Friends

The year 2004 marks our 50th anniversary and begins a celebration of our first
fifty years of operation. It is also an appropriate opportunity for us to
express appreciation to our founders, who created this organization with a
strong sense of purpose and values and a clear vision of the opportunities the
future would hold, and to the many talented Leaders who have, over the years,
encouraged the organization to strive to reach its full potential and
facilitated its progress.

Unlike the histories of growth by merger and acquisition of many banks across
the country, the history of Coastal Federal is all about internal growth fueled
by the steady expansion of the Communities of coastal North and South Carolina.

In the beginning, growth was very slow as the Grand Strand and its adjacent
coastal Communities had not yet been discovered or fully appreciated for their
many attributes. Once our Country was solidly back on its feet after World War
II, and the members of that great generation who lived within a day's drive
discovered and fell in love with this vacation paradise, our Community began to
grow like wildfire.

And, as the demand for business and real estate development grew, Coastal
Federal was there to meet those financial needs with a full array of financial
services delivered by qualified and trusted financial advisors.

Over the past fifty years, while the world, and its values system has changed at
a constantly increasing pace, we at Coastal Financial Corporation, in keeping
with the Vision and Values of our founders, have staked our future on our QUEST
FOR EXCELLENCE Operating Philosophy which allows us to conduct our operations
with a view toward the long-term and a focus on doing the right things for our
Associates, our Customers and our Communities. Thanks to the solid foundation
established by our founders, we have maintained a strong belief that a shared
sense of purpose and values is critical to the attainment of Our Basic Corporate
Objective Of Maximizing The Value Of Our Shareholders' Investment and Our
Long-Term Goal Of Being The Best Financial Services Company In Our Marketplace.

The result of this ever-increasing focus has been the continued evolution of
Coastal Financial Corporation to its present status as a Very Good Organization.
Our challenge now is The Transformation From A Very Good Organization To An
Exceptional Organization. While this journey is an ambitious one, thanks to the
strong framework established by our founders, and sustained over the years by
each of our subsequent Leaders, it is one which we are well-positioned to
undertake.

Further evidence of our readiness to begin this move to the next level is
present in the results of this year's operations. Despite the very challenging
economic conditions of this past year, our commitment to our QUEST FOR
EXCELLENCE Operating Philosophy and Vision 2005 Plan has continued to guide our
operations and has produced another year of exceptional financial results and
some notable milestones:

      o     Coastal Financial Corporation's net income for 2003 totaled $11.2
            million, compared to $10.2 million in 2002. On a fully diluted
            basis, these results equated to a 7.8% increase, from $0.77 per
            share in 2002 to $0.83 per share in 2003. Major contributors to this
            growth in net income were continued strong Core Deposit and loan
            growth and effective expense control. From an overall operations
            perspective, our strategy of focusing on Core Deposits and promoting
            more interaction and integration among all of our operating areas
            has begun to pay off, as reflected in the number of cross-referrals
            which were recorded this year.

      o     Deposits from the residents and businesses of the Communities we
            serve increased by approximately $59.9 million, or 9.4% to $697.0
            million.

      o     Loans grew by 26%, primarily reflecting a continued strong focus on
            our business banking line of business. The infrastructure we have
            developed in support of our business banking activities over the
            past several years has shown success, and, in order to increase our
            effectiveness, during 2003, we have continued this investment in
            infrastructure through the creation of a small business banking
            group which is specifically designed to embrace the specialized
            financial services needs of a much larger segment of our small
            business Community. By clearly differentiating our business banking
            and commercial banking offerings and approaches, we will be
            significantly better positioned to meet the unique needs of the
            businesses and business owners in the Communities we serve.

      o     Our residential banking operations generated total originations in
            excess of $305 million.

      o     Coastal Investor Services, our Investment Services Division, had
            another banner year. Assets under management through Raymond James
            increased by 23% to $212 million. Total revenues from this area of
            our operations continued to increase, resulting in Raymond James
            Financial Services ranking Coastal Investor Services fourth, out of
            over 240 Financial Institution Division affiliates.

      o     The framework supporting our focus on financial planning activities
            was enhanced with the formation of Coastal Retirement, Estate & Tax
            Planners, Inc. during the fourth


4
<PAGE>

                                                                    Dear Friends

            quarter of 2003. Coastal Retirement, Estate and Tax Planners offers
            professional, objective, fee-based financial planning services and
            is a crucial step in our overall branding strategy which will make
            it easier for our Customers to do more of their financial services
            related business with us.

o     Our financial services distribution system continued to expand to serve
      more of the Communities of coastal North Carolina, with the opening of our
      newest office in Shallotte, North Carolina in September of this year,
      bringing our total number of full-service Banking Centers to nineteen.

o     In recognizing the role of technology in our Mission of working toward
      Exceeding the Expectations of our Customers, during 2003, we completed a
      long-planned Information Technology Platform system conversion which has
      armed us with enabling capability to both better serve our Customers and
      operate at optimum efficiency levels.

o     Coastal Federal University continued to enable Coastal Financial
      Corporation's superior performance through its never-ending focus on our
      philosophy of becoming a learning organization. In addition to delivering
      an ever-increasing array and number of curriculum offerings designed to
      enable each of our Associates to achieve their full personal and
      professional potential, the Dean of Coastal Federal University and our
      outstanding faculty members helped to facilitate the exceptionally well
      executed Information Technology Platform conversion by providing
      approximately 1,000 hours of classroom training. Other key achievements in
      support of our Transformation To An Exceptional Organization were
      evidenced by the development of a new Business Banking College curriculum
      and the initiation of a Leadership Development College.

In addition to our excellent operating results for 2003, which again met our
high expectations, the market price of Coastal Financial's common stock, at
September 30, 2003, was 25.0% higher than the market price at September 30,
2002.

And, equally as impressive, is the fact that, since 1990, our operating earnings
have increased at a compound annualized rate in excess of 16%.

Since becoming a publicly owned company in 1990, Coastal Financial Corporation's
stock has grown at a compound annual rate of over 31%, taking our market
capitalization from $4.6 million in October 1990, to $180.8 million at the close
of this fiscal year. Put another way, an initial investment of $10,000 in
October of 1990 would have grown to over $365,000 at September 30, 2003, without
regard to the reinvestment of cash dividends.

One of the best indicators of performance is Return On Shareholders' Equity, and
this measure for 2003 was, again, outstanding. Our Return On Average
Shareholders' Equity of 15.8% ranks us among the top performing financial
services companies in America.

Adding to our own sense of satisfaction with these financial results during 2003
was the continuation of significant public recognition of our progress toward
the attainment of Our Basic Corporate Objective Of Maximizing The Value Of Our
Shareholders' Investment and Our Long-Term Goal Of Being The Best Financial
Services Company In Our Marketplace. Several very good examples follow:

      o     Coastal Financial Corporation, for the 4th consecutive year, was
            ranked the #1 Community Bank in the Carolinas by U. S. BANKER
                                                             ------------
            MAGAZINE, in its August 2003 publication. In this edition, U. S.
            --------
            BANKER MAGAZINE featured its Ranking of the Top 100 Publicly Traded
            ---------------
            Mid-Tier Banks. This ranking spotlighted banks with assets between
            $1 and $15 billion, based upon a 3-year average measure of Return On
            Average Equity. Coastal Financial Corporation was ranked 1st in the
            Carolinas and 39th nationally in this listing.

      o     Coastal Federal Bank, for the sixth consecutive year, placed 1st in
            voting by the readers of the (Myrtle Beach) SUN NEWS in the
                                                        --------
            Financial Institutions category of the SUN NEWS Best Of The Beach
                                                   --------
            Competition for 2003.

      o     Coastal Federal Bank placed 1st in voting by the readers of the SUN
                                                                            ---
            NEWS in the Mortgage Company category of the SUN NEWS Best Of The
            ----                                         --------
            Beach Competition for 2003.

      o     Coastal Investor Services/Raymond James Financial Services placed
            1st in voting by the readers of the SUN NEWS in the Financial
                                                --------
            Planning category of the SUN NEWS Best Of The Beach Competition for
                                     --------
            2003.

      o     The 2003 SHESHUNOFF MARKET SHARE REPORT ranked Coastal Federal Bank
                -----------------------------------
            the leader in deposit market share for Horry County for the twelve
            months ended June 30, 2003.

All of us at Coastal Financial are pleased with these forms of recognition
because each, in its own way, represents tangible evidence that our focus on the
Vision and Values of our founders, as expressed in our QUEST FOR EXCELLENCE
Operating Philosophy and our Vision 2005 Plan, has enabled us to continue to
deliver value to all of our stakeholders.


                                                                               5
<PAGE>

2003 Our Best Year Yet

Given the many and varied challenges which existed during 2003, our operating
results continue to affirm what can be achieved through the aligned effort of an
organization which is focused on the execution of well-conceived and articulated
business strategies. The consciously-held commitment our Associates have for
following the Mission, Values and Guiding Principles of our QUEST FOR EXCELLENCE
Operating Philosophy in executing the strategies established in our Vision 2005
Plan has enabled the financial performance during fiscal 2003 which, again, met
our high expectations and will serve to underpin and gird our Transformation
From A Very Good Organization To An Exceptional Organization.

Noteworthy Financial Results for Fiscal 2003

DILUTED EARNINGS PER SHARE

      o     Net income for 2003 totaled $11.2 million, compared to $10.2 million
            in 2002. On a fully diluted basis, these results equated to a 7.8%
            increase, from $0.77 per share in 2002 to $0.83 per share in 2003.

      o     Shareholders' equity advanced 11.0% to $73.7 million.

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

                             1999             $0.56
                             2000             $0.62
                             2001             $0.70
                             2002             $0.77
                             2003             $0.83

BOOK VALUE PER SHARE

      o     Book value per share grew 10.0% to $5.70.

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

                             1999             $3.06
                             2000             $3.55
                             2001             $4.41
                             2002             $5.18
                             2003             $5.70


6
<PAGE>

                                                          2003 Our Best Year Yet

ASSETS

      o     Total assets increased 24.2%, from $950.8 million to $1.2 billion.

      o     Deposits derived from the residents and businesses of the
            Communities we serve increased 9.4%, from $637.1 million to $697.0
            million, the highest level in the Company's history.

      o     Loans receivable increased 26.3%, from $555.5 million to $701.8
            million.

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

                                           (IN MILLIONS)

                             1999               $713
                             2000               $769
                             2001               $763
                             2002               $951
                             2003             $1,181

NON-PERFORMING ASSETS TO TOTAL ASSETS

      o     Non-performing assets to total assets increased from 0.48% to 0.77%.

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

                             1999             0.21%
                             2000             0.73%
                             2001             0.74%
                             2002             0.48%
                             2003             0.77%

ALLOWANCE FOR LOAN LOSSES TO NET LOANS

      o     Allowance for loan losses to net loans was at 1.40%.

      o     The Company had net loan charge-offs as a percentage of Average
            Loans of 0.11% in 2003.

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

                             1999             1.36%
                             2000             1.35%
                             2001             1.42%
                             2002             1.42%
                             2003             1.40%

Success in such key measures of performance are the product of the commitment,
dedication and aligned effort of a truly outstanding group of Associates who
share a passion for our QUEST FOR EXCELLENCE Operating Philosophy and Vision
2005 Plan. Our continuing trend of exceptional performance has been rewarded in
the financial markets by a 3,556% increase in the price of our shares since
becoming a public company in October of 1990, vs. 228% for the Standard & Poor's
500 Index over the same period.


                                                                               7
<PAGE>

2003 Our Best Year Yet

Over these thirteen years of public ownership, we have methodically focused our
individual and collective efforts on accomplishing Our Basic Corporate Objective
Of Maximizing The Value Of Our Shareholders' Investment by working diligently
toward the achievement of Our Long-Term Goal Of Being The Best Financial
Services Company In Our Marketplace.

In considering whether we have made real progress toward the attainment of Our
Basic Corporate Objective during this period, it is both informative and
illustrative to compare the share price performance of Coastal Financial
Corporation to the share price performance of other publicly traded financial
services companies operating within our marketplace, and to the financial
markets as a whole.

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

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

                                                                               8

                      13 Year Peer Group Price Performance



<TABLE>
<CAPTION>




DATE          CFCP        BAC         BBT          COOP        FFCH        SNV          TSFG        WB
<S>       <C>           <C>          <C>       <C>           <C>          <C>         <C>         <C>
Oct-90         100      100.00       100.00                  100.00       100.00      100.00      100.00

Oct-91         100      216.67       151.40         100      148.47       140.38      104.96      206.19

Oct-92    305.7667      268.12       191.67    293.7375      234.80       173.05      149.62      267.24

Oct-93    755.1197      270.30       231.96     421.875      363.55       216.36      177.10      287.60

Oct-94    854.8522      286.96       229.18    513.2813      363.55       220.68      180.15      318.56

Oct-95    875.1548      381.16       286.11      618.75      448.38       292.80      180.15      351.31

Oct-96    1472.617      546.38       384.73    527.3438      484.73       517.06      213.74      515.01

Oct-97    2197.232      693.48       604.87    942.1875      936.16       564.64      333.97      694.65

Oct-98    2368.642      666.67       794.44      731.25      933.11       902.96      352.10      821.18

Oct-99    1745.315      747.11       808.33     590.625      905.87       834.81      315.84      605.27

Oct-00    1511.879      557.25       708.33    541.4063      817.98       839.68      155.53      429.18

Oct-01    2008.639      683.94       713.33     646.875     1204.07       896.42      243.51      404.93

Oct-02    3090.712      809.28       805.56       787.5     1238.97       797.90      330.53      492.57

Oct-03    3656.134      904.81       798.00    1434.375     1464.86       973.13      382.14      583.18

</TABLE>

                                                                               9

<PAGE>

Our 2003 operating and share price performance results clearly put Coastal
Financial among the top performing financial services companies in the nation.
Thanks to our continuous focus on the Vision and Values established by our
founders, we enter 2004 well positioned to continue our journey toward our
Transformation From A Very Good Organization To An Exceptional Organization.

As indicated by the financial results shown above, our business has continued to
grow and prosper. But, as good as these results are, it's always the future that
we are most interested in, and it always leads to the question we're often
asked: "Can we keep it up?"

We continue to believe the answer is a resounding "Yes," as long as we remain
focused on our QUEST FOR EXCELLENCE Operating Philosophy and the goals
established in our Vision 2005 Plan.

                         CFCP Relative Price Performance


Monthly prices (Oct 1990 to Oct 2002)

       DATE         S&P 500 INDENASDAQ)     DOW JONES
                                            INDUSTRIAL
       Oct-90       304.0       329.8       2442.3

       Oct-91       392.5       543.0       3069.1

       Oct-92       418.7       605.2       3226.3

       Oct-93       467.8       779.3       3680.6

       Oct-94       472.4       777.5       3908.1


       Oct-95       581.5      1036.1       4755.5

       Oct-96       705.3      1221.5       6029.4

       Oct-97       914.6      1593.6       7442.1

       Oct-98      1098.7      1771.4       8592.1

       Oct-99      1362.9      2966.4      10729.9

       Oct-00      1429.4      3369.6      10971.1

       Oct-01      1059.8      1690.2       9075.1

       Oct-02      885.76     1329.75      8397.03

       Oct-03      995.97     1786.94      9275.06

                                                                              10
<PAGE>


                            Indexes
    DATE      S&P 500       NASDAQ   DOW JONES   INCFCPRIAL

   Oct-90          100         100         100          100

   Oct-91     129.0954    164.6392    125.6628          100

   Oct-92     137.7237    183.4961    132.0984     305.7667

   Oct-93     153.8914    236.2826    150.6999     755.1197

   Oct-94     155.3783    235.7459    160.0161     854.8522

   Oct-95     191.2829     314.148    194.7108     875.1548

   Oct-96     231.9967     370.379      246.87     1472.617

   Oct-97     300.8618     483.205    304.7123     2197.232

   Oct-98     361.4046    537.1104    351.7993     2368.642


                                                                              11
<PAGE>
                            Indexes
    DATE      S&P 500       NASDAQ   DOW JONES   INCFCPRIAL

   Oct-99     448.3322    899.4633    439.3305     1745.315

   Oct-00     470.1974    1021.719    449.2063     1511.879

   Oct-01     348.6118    512.4924    371.5771     2008.639

   Oct-02     291.3684    403.1989    343.8123     3090.712

   Oct-03     327.6217    541.8253    379.7628     3656.134


                                                                              15
<PAGE>

                                                                     A Look Back

In reflecting on our founders, I am reminded of the following quotation by an
anonymous author: "It has been said that the most powerful thing in life is
one's opportunity; it is also the most irretrievable. We must have clear vision,
courage, and a quiet mind if we are to see it and seize it as it hurries past us
on very quiet feet and disappears as completely as the day that has gone."

How easily our founders could have missed seeing that our Community needed an
organization like Coastal Federal if their minds had not been alert for this
opportunity. Because they were Community-focused individuals, they were prepared
when this opportunity came.

And because of this Community focus, they understood well that our future
success would be a function of Coastal Federal's Associates and their
Relationships with their Customers and their Communities.

Usually, the indications of the importance of an organization's People are found
encoded in the symbolism and heritage of its past. Those symbols are often
preserved, even without an organizational requirement for such, by those who see
and recognize the value of those symbols, much like the way that members of a
family somehow sense which parts of their heritage to pass along to the next
generation.

In thinking about the early symbolism and legacy of Coastal Federal, I reflect
back on having dinner at a small restaurant in Myrtle Beach, on the eve of my
joining the Bank as a teller, in February of 1974. Upon finishing my dinner and
proceeding to the check out, the cashier inquired as to what I was doing in
Myrtle Beach at that time of the year. I responded that I had moved here to
begin work for Coastal Federal. Her reply has stuck with me over the years as if
I had heard it only yesterday. She said, "those are the nicest people in town."

That response has reverberated in my head many times over the years and I have
sensed that the value expressed in that statement was that this attribute, this
symbolic part of our legacy, was to be saved and passed on to future
generations.

Therefore, it is not at all surprising that, in our planning initiatives after
our conversion to public ownership in the early nineties, we focused almost
exclusively on our Associates, our internal Customers, who serve our external
Customers. It was, and continues to be, our strong belief that each component
part of our organization; the character and competency of our Associates, our
Mission of Exceeding the Expectations of our Customers, our Guiding Principles
which are Safety and Soundness #1, Profitability #2 and Growth #3, and our
overriding focus on creating Shareholder value, is very important. Through our
continued work toward planning for our future, the relative significance of
each of these elements converged into the creation of our strategic focus which
is: We accomplish Our Basic Corporate Objective of Maximizing The Value Of Our
Shareholders' Investment by working diligently toward the achievement of Our
Long-Term Goal of Being The Best Financial Services Company In Our Marketplace.

This focus on our Associates, our Customers and our Communities ultimately lead
to the development of our QUEST FOR EXCELLENCE Operating Philosophy and our
Vision 2005 Plan. Those Vision and Values oriented instruments have enabled us
to develop and maintain a strong focus on the execution of strategies designed
to Exceed the Expectations of our Customers, by delivering our only product,
which is Service, in the only manner which adds value, as Trusted Financial
Advisors, through our only real competitive advantage, our exceptional
Associates.

                                     [PHOTO]

                Coastal Federal Bank's First Financial Statement


                                                                              12
<PAGE>

A Look Back


                                     [PHOTO]

                      Coastal Federal Bank's First Office.

                                     [PHOTO]

                                 Elinor Whitsett
                     Coastal Federal Bank's first Associate.

                                     [PHOTO]

     To serve a growing Community, Coastal Federal Bank utilized its mobile
                  office to provide added banking convenience.


                                                                              13
<PAGE>

                                                                   Looking Ahead

Our journey toward The Transformation From A Very Good Organization To An
Exceptional Organization is a very ambitious one which will require us to
develop an even sharper focus on our QUEST FOR EXCELLENCE Operating Philosophy
and our Vision 2005 Plan by continually refocusing on being Totally Committed To
Exceeding the Expectations of our Customers in a manner which can ensure that we
add value for all of our stakeholders.

What must we do to become an exceptional organization? Without question, it will
be much more difficult to Transform a Very Good Organization into an Exceptional
Organization than it was to Transform an Average Organization into a Very Good
Organization. Moving to the next level can only be accomplished through our
total focus on our Associates, the total focus of our Associates on our
Customers and our working together as a team to earn all of every Customer's
financial services related business by maintaining a laser-like focus on
exceptionally well-conceived and articulated strategies and by executing those
strategies with precision and alignment.

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

My sincere appreciation goes to our Board Of Directors, Leadership Group and
Associates for all they do for all of us on a daily basis. Our 2003 results
speak volumes about their commitment to Our Basic Corporate Objective Of
Maximizing The Value Of Our Shareholders' Investment by working diligently
toward the achievement of Our Long-Term Goal Of Being The Best Financial
Services Company In Our Marketplace.

During 2002 and 2003, both revenue and earnings reached record levels. In fact,
in these two years alone, our net income has increased over 20%, and in the last
five years, our net income has increased by more than 63%. Since becoming a
publicly owned Company in 1990, we have roughly doubled our earnings every 5
years.

As we embark on our 51st year, while we are pleased with our past achievements,
we look forward to even greater accomplishments in the years ahead. We have
great confidence that, with the advantages of our exceptional Associates, who
believe in who we are and what we are about, our great markets, our excellent
products and our ever-increasing ability to work together, as a team, toward
building even stronger relationships with our Customers and our Communities, The
Transformation From A Very Good Organization To An Exceptional Organization will
be accomplished and will enable us to continue to achieve superior returns for
our Shareholders in the future.

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


/s/ Michael C. Gerald

Michael C. Gerald
President and
Chief Executive Officer


COASTAL                  COASTAL                CP               [LOGO] CFU
FEDERAL                  INVESTOR             COASTAL            COASTAL FEDERAL
BANK                     SERVICES    RETIREMENT o ESTATE o TAX      UNIVERSITY
The right bank for you.                      PLANNERS


                                                                              14
<PAGE>

Independent Auditors' Report

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

We have audited the consolidated statements of financial condition of Coastal
Financial Corporation and subsidiaries (the "Company") as of September 30, 2002
and 2003, and the related consolidated statements of operations, stockholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended September 30, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
September 30, 2002 and 2003, and the results of its operations and its cash
flows for each of the years in the three-year period ended September 30, 2003,
in conformity with accounting principles generally accepted in the United States
of America.

Greenville, South Carolina
October 29, 2003

                                    KPMG LLP

                                                                              15
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 2002 and 2003

<TABLE>
<CAPTION>
                                                                            2002          2003
                                                                         ----------    ----------
                                                                          (Dollars in thousands)
<S>                                                                      <C>           <C>
                             ASSETS
Cash and amounts due from banks ......................................   $   25,802    $   18,605
Short-term interest-bearing deposits .................................           --         2,970
Investment securities available for sale .............................        2,014        15,909
Mortgage-backed securities available for sale ........................      331,808       383,324
Loans receivable (net of allowance for loan losses of $7,883
  at September 30, 2002 and $9,832 at September 30, 2003) ............      536,851       682,737
Loans receivable held for sale .......................................       18,694        19,096
Real estate acquired through foreclosure, net ........................        1,046         1,627
Office property and equipment, net ...................................       13,713        16,088
Federal Home Loan Bank (FHLB) stock, at cost .........................       10,559        13,991
Accrued interest receivable on loans .................................        2,232         2,258
Accrued interest receivable on securities ............................        2,019         2,074
Bank-owned life insurance ............................................           --        16,165
Other assets .........................................................        6,058         6,365
                                                                         ----------    ----------
                                                                         $  950,796    $1,181,209
                                                                         ==========    ==========
                LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Deposits ...........................................................      637,081       697,012
  Federal funds purchased and securities sold under
    agreements to repurchase .........................................       36,884       133,602
  Advances from FHLB .................................................      189,669       244,114
  Debt associated with trust preferred securities ....................           --        15,000
  Other borrowings ...................................................        2,069            81
  Drafts outstanding .................................................        2,517         2,644
  Advances by borrowers for property taxes and insurance .............        1,386         1,795
  Accrued interest payable ...........................................        1,473         1,263
  Other liabilities ..................................................       13,331        11,991
                                                                         ----------    ----------
    Total liabilities ................................................      884,410     1,107,502
                                                                         ----------    ----------
Stockholders' equity:
  Serial preferred stock, 1,000,000 shares authorized and unissued ...           --            --
  Common stock $.01 par value, 15,000,000 shares authorized;
    12,811,148 shares at September 30, 2002 and 12,921,298
    shares at September 30, 2003 issued and outstanding ..............          128           129
  Additional paid-in capital .........................................        9,922        10,235
  Retained earnings, restricted ......................................       54,954        63,030
  Treasury stock, at cost (430,082 shares at September 30,
    2002 and 334,508 shares at September 30, 2003) ...................       (4,376)       (3,375)
  Accumulated other comprehensive income, net of tax .................        5,758         3,688
                                                                         ----------    ----------
    Total stockholders' equity .......................................       66,386        73,707
                                                                         ----------    ----------
                                                                         $  950,796    $1,181,209
                                                                         ==========    ==========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                                                              16
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended September 30, 2001, 2002 and 2003

<TABLE>
<CAPTION>
                                                                    2001           2002           2003
                                                                -----------    -----------    -----------
                                                                    (In thousands, except share data)
<S>                                                             <C>                 <C>            <C>
Interest:
   Loans receivable .........................................   $    45,899         40,261         41,958
   Investment securities ....................................         2,479          2,030          1,840
   Mortgage-backed securities ...............................        11,261         11,348         15,279
   Other ....................................................           616            234            137
                                                                -----------    -----------    -----------
Total interest income .......................................        60,255         53,873         59,214
                                                                -----------    -----------    -----------
Interest expense:
   Deposits .................................................        19,380         13,750         11,999
   Securities sold under agreements to repurchase ...........         2,810            414          1,931
   Advances from FHLB .......................................        11,133          7,682          9,068
                                                                -----------    -----------    -----------
      Total interest expense ................................        33,323         21,846         22,998
                                                                -----------    -----------    -----------
      Net interest income ...................................        26,932         32,027         36,216
Provision for loan losses ...................................           955          1,235          2,655
                                                                -----------    -----------    -----------
   Net interest income after provision for loan losses ......        25,977         30,792         33,561
                                                                -----------    -----------    -----------
Other income:
   Fees and service charges on loans and deposit accounts ...         2,634          3,148          3,489
   Gain on sales of loans held for sale .....................         1,295          1,462          2,985
   Gain (loss) on sales of investment securities, net .......           (56)           102             --
   Gain on sales of mortgage-backed securities, net .........           727            238            469
   Loss from real estate acquired through foreclosure .......          (453)          (137)           (18)
   Income from sales of non-depository products .............         1,269          1,281          1,176
   Federal Home Loan Bank stock dividends ...................           750            463            453
   Other income .............................................         1,736          1,582          2,354
                                                                -----------    -----------    -----------
      Total other income ....................................         7,902          8,139         10,908
                                                                -----------    -----------    -----------
General and administrative expenses:
   Salaries and employee benefits ...........................        10,546         12,514         13,452
   Net occupancy, furniture and fixtures and
      data processing expense ...............................         4,029          5,044          5,917
   FDIC insurance premium ...................................            84             93            104
   FHLB prepayment penalties ................................         1,113          1,083          2,824
   Other expense ............................................         3,520          4,090          4,859
                                                                -----------    -----------    -----------
      Total general and administrative expense ..............        19,292         22,824         27,156
                                                                -----------    -----------    -----------
      Income before income taxes ............................        14,587         16,107         17,313
Income taxes ................................................         5,287          5,901          6,141
                                                                -----------    -----------    -----------
Net income ..................................................   $     9,300         10,206         11,172
                                                                ===========    ===========    ===========
Net income per common share
   Basic ....................................................   $      0.71           0.79           0.87
                                                                ===========    ===========    ===========
   Diluted ..................................................   $      0.70           0.77           0.83
                                                                ===========    ===========    ===========
Average common shares outstanding
   Basic ....................................................    13,126,000     12,844,000     12,853,000
                                                                ===========    ===========    ===========
   Diluted ..................................................    13,304,000     13,237,000     13,441,000
                                                                ===========    ===========    ===========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                                                              17
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
and Comprehensive Income
Years ended September 30, 2001, 2002 and 2003

<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                                                                                           Other
                                                                   Additional                          Comprehensive    Total
                                                        Common      Paid-in     Retained     Treasury      Income    Stockholders'
                                                        Stock       Capital     Earnings      Stock        (Loss)       Equity
                                                       --------     --------    --------     --------     --------     --------
                                                                                    (In thousands)
<S>                                                    <C>          <C>         <C>          <C>          <C>          <C>
Balance at September 30, 2000 .....................    $    131     $  9,722    $ 40,319     $ (1,702)    $ (1,525)    $ 46,945
Exercise of stock options .........................          --           --        (108)         214           --          106
Cash dividends ....................................          --           --      (2,015)          --           --       (2,015)
Net income ........................................          --           --       9,300           --           --        9,300
Other comprehensive income, net of tax:
Unrealized gains arising during period,
   net of taxes of $3,348 .........................          --           --          --           --        5,462           --
Less: reclassification adjustment for gains
   included in net income, net of taxes of $255 ...          --           --          --           --         (416)          --
                                                       --------     --------    --------     --------     --------     --------
Other comprehensive income ........................          --           --          --           --        5,046        5,046
                                                       --------     --------    --------     --------     --------     --------
Comprehensive income ..............................          --           --          --           --           --       14,346
                                                       --------     --------    --------     --------     --------     --------
Treasury stock repurchases ........................          (2)          --          --       (2,132)          --       (2,134)
                                                       --------     --------    --------     --------     --------     --------
Balance at September 30, 2001 .....................         129        9,722      47,496       (3,620)       3,521       57,248
Exercise of stock options .........................          --          200        (526)       1,529           --        1,203
Cash dividends ....................................          --           --      (2,222)          --           --       (2,222)
Net income ........................................          --           --      10,206           --           --       10,206
Other comprehensive income, net of tax:
Unrealized gains arising during period,
   net of taxes of $1,500 .........................          --           --          --           --        2,449           --
Less: reclassification adjustment for gains
   included in net income, net of taxes of $128 ...          --           --          --           --         (212)          --
                                                       --------     --------    --------     --------     --------     --------
Other comprehensive income ........................          --           --          --           --        2,237        2,237
                                                       --------     --------    --------     --------     --------     --------
Comprehensive income ..............................          --           --          --           --           --       12,443
                                                       --------     --------    --------     --------     --------     --------
Treasury stock repurchases ........................          (1)          --          --       (2,285)          --       (2,286)
                                                       --------     --------    --------     --------     --------     --------
Balance at September 30, 2002 .....................         128        9,922      54,954       (4,376)       5,758       66,386
Exercise of stock options .........................           1          313        (504)       1,343           --        1,153
Cash dividends ....................................          --           --      (2,592)          --           --       (2,592)
Net income ........................................          --           --      11,172           --           --       11,172
Other comprehensive income, net of tax:
Unrealized losses arising during period,
   net of taxes of $1,097 .........................          --           --          --           --       (1,779)          --
Less: reclassification adjustment for gains
   included in net income, net of taxes of $178 ...          --           --          --           --         (291)          --
                                                       --------     --------    --------     --------     --------     --------
Other comprehensive loss ..........................          --           --          --           --       (2,070)      (2,070)
                                                       --------     --------    --------     --------     --------     --------
Comprehensive income ..............................          --           --          --           --           --        9,102
                                                       --------     --------    --------     --------     --------     --------
Treasury stock repurchases ........................          --           --          --         (342)          --         (342)
                                                       --------     --------    --------     --------     --------     --------
Balance at September 30, 2003 .....................    $    129     $ 10,235    $ 63,030     $ (3,375)    $  3,688     $ 73,707
                                                       ========     ========    ========     ========     ========     ========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                                                              18
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 2001, 2002 and 2003

<TABLE>
<CAPTION>
                                                                                   2001         2002         2003
                                                                                ---------    ---------    ---------
                                                                                           (In thousands)

<S>                                                                             <C>           <C>          <C>
Cash flows from operating activities:
   Net income ...............................................................   $   9,300       10,206       11,172
   Adjustments to reconcile net income to net cash provided by (used in)
         operating activities:
      Depreciation ..........................................................       1,556        2,074        2,374
      Provision for loan losses .............................................         955        1,235        2,655
      Gain on sale of mortgage-backed securities available for sale .........        (727)        (238)        (469)
      (Gain) loss on sale of investment securities available or sale ........          56         (102)          --
      Origination of loans receivable held for sale .........................     (81,778)    (100,309)    (141,404)
      Proceeds from sales of loans receivable held for sale .................      28,541       13,907       45,367
      Gain on sale of real estate aquired through foreclosure ...............          --           --         (165)
      Loss on early extinguishment of debt ..................................       1,113        1,083        2,824
      (Increase) decrease in:
         Cash value of life insurance .......................................          --           --         (665)
         Other assets .......................................................      (1,019)      (2,006)        (157)
         Accrued interest receivable ........................................         548         (127)         (81)
      Increase (decrease) in:
         Accrued interest payable ...........................................      (1,347)         289         (210)
         Other liabilities ..................................................         428        2,176          (65)
                                                                                ---------    ---------    ---------
         Net cash used in operating activities ..............................     (42,374)     (71,812)     (78,824)
                                                                                ---------    ---------    ---------
Cash flows from investing activities:
   Proceeds from sales of investment securities available for sale ..........       5,125           --           --
   Proceeds from maturities of investment securities available for sale .....       1,595        1,995        2,000
   Purchases of investment securities available for sale ....................          --       (1,998)     (16,141)
   Purchases of loans receivable ............................................         (20)        (233)          --
   Proceeds from sales of mortgage-backed securities available for sale .....     164,919      128,169      135,413
   Purchases of mortgage-backed securities available for sale ...............    (158,004)    (254,494)    (328,245)
   Principal collected on mortgage-backed securities available for sale .....      47,566       72,990      234,321
   Origination of loans receivable, net .....................................    (214,296)    (317,899)    (628,172)
   Principal collected on loans receivable ..................................     233,653      268,120      477,676
   Purchase of bank-owned life insurance ....................................          --           --      (15,500)
   Proceeds from sales of real estate acquired through foreclosure ..........       1,159        1,997        1,539
   Purchases of office properties and equipment .............................      (3,188)      (2,637)      (4,749)
   Sales (purchases) of FHLB stock, net .....................................       4,275       (2,935)      (3,432)
                                                                                ---------    ---------    ---------
      Net cash provided by (used in) investing activities ...................      82,784     (106,925)    (145,290)
                                                                                ---------    ---------    ---------
Cash flows from financing activities:
   Increase in deposits .....................................................     124,147      106,717       59,931
   Increase (decrease) in securities sold under agreements to repurchase ....     (57,155)      18,181       96,718
   Proceeds from FHLB advances ..............................................     358,771      312,426      715,705
   Repayment of FHLB advances ...............................................    (443,959)    (262,793)    (661,260)
   Proceeds (repayments) from other borrowings, net .........................          --           --       (1,988)
   Issuance of debt associated with trust preferred securities ..............          --           --       15,000
   Cash payments for debt issuance costs ....................................          --           --         (150)
   Prepayment penalties on early extinguishment of debt .....................      (1,113)      (1,083)      (2,824)
   Increase (decrease) in advance payments by borrowers for property
      taxes and insurance ...................................................          (7)         136          409
   Increase (decrease) in drafts outstanding, net ...........................         102          (60)         127
   Repurchase of treasury stock, at cost ....................................      (2,134)      (2,286)        (342)
   Cash dividends to stockholders and cash for fractional shares ............      (2,015)      (2,222)      (2,592)
   Exercise of stock options ................................................         106        1,203        1,153
                                                                                ---------    ---------    ---------
      Net cash provided by (used in) financing activities ...................     (23,257)     170,219      219,887
                                                                                ---------    ---------    ---------
Net increase (decrease) in cash and cash equivalents ........................      17,153       (8,518)      (4,227)
                                                                                ---------    ---------    ---------
Cash and cash equivalents at beginning of year ..............................      17,167       34,320       25,802
                                                                                ---------    ---------    ---------
Cash and cash equivalents at end of year ....................................   $  34,320       25,802       21,575
                                                                                =========    =========    =========
Supplemental information:
   Interest paid ............................................................   $  34,670       21,557       23,208
                                                                                =========    =========    =========
   Income taxes paid ........................................................   $   5,249        5,726        5,325
                                                                                =========    =========    =========
Supplemental schedule of non-cash investing and financing transactions:
   Securitization of mortgage loans into mortgage-backed securities .........   $  47,157       83,982       95,635
                                                                                =========    =========    =========
   Transfer of mortgage loans to real estate acquired through foreclosure ...   $   2,655          680        1,955
                                                                                =========    =========    =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                                                              19
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

      (a) Principles of Consolidation

      The accompanying consolidated financial statements include the accounts of
Coastal Financial Corporation (the "Company"), and its wholly-owned
subsidiaries, Coastal Financial Capital Trust I, a statutory trust, Coastal
Investor Services, Inc., Coastal Federal Bank (the "Bank") (and the Bank's
wholly-owned subsidiaries, Coastal Federal Holding Company (and Coastal Federal
Holding Company's wholly-owned subsidiary, Coastal Real Estate Investment
Corporation), Coastal Planners Holding Corporation (and Coastal Planners Holding
Corporation's wholly-owned subsidiary, Coastal Retirement, Estate and Tax
Planners, Inc.), and Coastal Mortgage Bankers and Realty Co., Inc. (and Coastal
Mortgage Bankers and Realty Co. Inc.'s wholly-owned subsidiaries, Shady Forest
Development Corporation, Sherwood Development Corporation, Ridge Development
Corporation, 501 Development Corporation and North Beach Investments, Inc.). In
consolidation, all significant intercompany balances and transactions have been
eliminated. Coastal Financial Corporation is a unitary thrift holding company
organized under the laws of the state of Delaware.

      (b) Cash and Cash Equivalents

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

      (c) Investment and Mortgage-backed Securities

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

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

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

      (d) Loans Receivable Held for Sale

      Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are provided for in a valuation allowance by charges to
operations. At September 30, 2002 and 2003, the Company had approximately $18.7
million and $19.1 million in mortgage loans held for sale, respectively. Gains
or losses on sales of loans are recognized when control over these assets has
been surrendered in accordance with SFAS No. 140, "Accounting for Transfer and
Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No.
140").

      (e) Loans Receivable

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


                                                                              20
<PAGE>

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

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

      (e) Loans Receivable - CONTINUED

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

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

      (f) Loan Fees and Discounts

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

      (g) Allowance for Loan Losses

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

      (h) Concentration of Credit Risk

      The Company's primary market area includes northeastern South Carolina and
southeastern North Carolina predominately along the coastal regions. At
September 30, 2003, the majority of the total loan portfolio, as well as a
substantial portion of the commercial and real estate loan portfolios, were to
borrowers within this region. No areas of significant concentrations of credit
risk have been identified.

      (i) Loan Securitizations

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


                                                                              21
<PAGE>

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

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

      (j) Real Estate Owned

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

      (k) Office Properties and Equipment

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

      (l) Mortgage Servicing Rights

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

      (m) Income Taxes

      Deferred taxes are provided for differences in the financial reporting
basis for assets and liabilities as compared to their tax bases. A current tax
liability or asset is established for taxes presently payable or refundable and
a deferred tax liability or asset is established for future taxable or
deductible items.

      (n) Drafts Outstanding

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

      (o) Securities Sold Under Agreement to Repurchase

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

      (p) Stock Based Compensation

      At September 30, 2003, the Company has one stock option plan which is
described more fully in note 17.


                                                                              22
<PAGE>

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

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

      (p) Stock Based Compensation- Continued

      The Company applies the intrinsic value method of APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25) and related
interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized for its fixed stock option plans as all options granted
under those plans had an exercise price equal to or greater than the market
value of the underlying stock at the date of grant. Had compensation cost for
the Company's stock-based compensation plans been determined consistent with
SFAS Statement No. 123, "Accounting for Stock-Based Compensation", the Company's
net income and earnings per share would have been reduced to the proforma
amounts indicated below for the years ended September 30 (in thousands except
per share data):

                                                      2001       2002      2003
                                                    -------    -------   -------
        Net income                   As reported    $ 9,300    $10,206   $11,172
                                     Proforma         8,805      9,728    10,668

        Basic earnings per share     As reported    $  0.71    $  0.79   $  0.87
                                     Proforma          0.67       0.76      0.83

        Diluted earnings per share   As reported    $  0.70    $  0.77   $  0.83
                                     Proforma          0.66       0.74      0.79

      The weighted average fair value per share of options granted in 2001, 2002
and 2003 amounted to $2.46, $3.81 and $5.48, respectively. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 2001, 2002 and 2003, respectively: dividend yield of approximately
2.03%, 1.62% and 1.86%, expected volatility of approximately 42%, 51% and 47%,
risk-free interest rate of 5.60%, 4.60% and 3.96%, expected lives of 7.5 years
and a vesting period of 5 years. For purposes of the proforma calculation,
compensation expense is recognized on a straight line basis over 5 years.

      (q) Comprehensive Income

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

      (r) Disclosures Regarding Segments

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

      (s) Derivative Instruments and Hedging

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

                                                                              23
<PAGE>

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

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

      (t) Reclassification of Losses on Early Extinguishment of Debt

      The Company adopted SFAS No. 145 "Recissions of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS
No. 145") effective July 1, 2002. In connection with this adoption, the Company
reclassified losses on the early extinguishment of debt, which were incurred in
fiscal 2001 and 2002 and were $1.1 million in each year.

      (u) Reclassifications

      Certain amounts in the 2001 and 2002 consolidated financial statements
have been reclassified to conform with the 2003 presentation. Such
reclassifications did not change net income or equity as previously reported.

(2) INVESTMENT SECURITIES

      The amortized cost and market value of investment securities available for
sale at September 30, 2002 are summarized as follows:

<TABLE>
<CAPTION>
                                                                  2002
                                              ---------------------------------------------
                                                            Gross      Gross
                                              Amortized  Unrealized  Unrealized     Fair
                                                Cost        Gains      Losses       Value
                                              ---------   ---------   ---------   ---------
                                                              (In thousands)
<S>                                           <C>                <C>         <C>      <C>
   U.S. Government and agency obligations:
     Due after one but within five years ..   $      --          --          --          --
     Due after five years .................       1,998          16          --       2,014
                                              ---------   ---------   ---------   ---------
                                              $   1,998          16          --       2,014
                                              =========   =========   =========   =========
</TABLE>

      The amortized cost and market value of investment securities available for
sale at September 30, 2003 are summarized as follows:

<TABLE>
<CAPTION>
                                                                  2003
                                              ---------------------------------------------
                                                            Gross      Gross
                                              Amortized  Unrealized  Unrealized     Fair
                                                Cost        Gains      Losses       Value
                                              ---------   ---------   ---------   ---------
                                                              (In thousands)
<S>                                           <C>               <C>        <C>       <C>
   U.S. Government and agency obligations:
     Due after five years .................   $   1,998           9          --       2,007
   State and municipal obligations:
     Due after five years .................      14,141         136        (375)     13,902
                                              ---------   ---------   ---------   ---------
                                              $  16,139         145        (375)     15,909
                                              =========   =========   =========   =========
</TABLE>

      The Company had gross realized gains of $17,000 and gross realized losses
of $73,000 for the year ended September 30, 2001. For the year ended September
30, 2002, gross realized gains were $102,000 and there were no gross realized
losses. For the year ended September 30, 2003, there were no gross realized
gains or losses.

(3) MORTGAGE-BACKED SECURITIES

      Mortgage-backed securities available for sale at September 30, 2002
consisted of the following:

<TABLE>
<CAPTION>
                                                                  2002
                                              ---------------------------------------------
                                                            Gross      Gross
                                              Amortized  Unrealized  Unrealized     Fair
                                                Cost        Gains      Losses       Value
                                              ---------   ---------   ---------   ---------
                                                              (In thousands)
<S>                                           <C>             <C>           <C>     <C>
   Collateralized Mortgage Obligations ....   $  36,320         398         (18)     36,700
   FNMA ...................................     206,448       6,673          --     213,121
   GNMA ...................................      22,139         891          --      23,030
   FHLMC ..................................      57,628       1,332          (3)     58,957
                                              ---------   ---------   ---------   ---------
                                              $ 322,535       9,294         (21)    331,808
                                              =========   =========   =========   =========
</TABLE>


                                                                              24
<PAGE>

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

(3) MORTGAGE-BACKED SECURITIES - CONTINUED

      Mortgage-backed securities available for sale at September 30, 2003
consisted of the following:

<TABLE>
<CAPTION>
                                                                  2003
                                              ---------------------------------------------
                                                            Gross      Gross
                                              Amortized  Unrealized  Unrealized     Fair
                                                Cost        Gains      Losses       Value
                                              ---------   ---------   ---------   ---------
                                                              (In thousands)
<S>                                           <C>             <C>        <C>        <C>
   Collateralized Mortgage Obligations ....   $  11,617          12        (147)     11,482
   FNMA ...................................     205,200       5,483        (730)    209,953
   GNMA ...................................      26,659         827         (37)     27,449
   FHLMC ..................................     133,674       1,793      (1,027)    134,440
                                              ---------   ---------   ---------   ---------
                                              $ 377,150       8,115      (1,941)    383,324
                                              =========   =========   =========   =========
</TABLE>

      The Company had gross realized gains of $1.0 million and gross realized
losses of $312,000 for the year ended September 30, 2001. For the year ended
September 30, 2002, the Company had gross realized gains of $462,000 and gross
realized losses of $224,000. For the year ended September 30, 2003, the Company
had gross realized gains of $695,000 and gross realized losses of $226,000.

      Certain investment and mortgage-backed securities are pledged to secure
other borrowed money and customer deposits in excess of FDIC insurance coverage.
The carrying value of the securities pledged at September 30, 2003 was $248.5
million with a fair value of $256.4 million.

(4) LOANS RECEIVABLE, NET

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

                                                          2002           2003
                                                        ---------     ---------
                                                              (In thousands)
   First mortgage loans:
         Single family to 4 family units ...........    $ 242,602       289,197
         Other, primarily commercial real estate ...      202,117       263,688
         Residential construction loans ............       15,105        27,480
         Commercial construction loans .............       30,439        53,747
   Consumer and commercial loans:
         Installment consumer loans ................       12,882        16,571
         Mobile home loans .........................        3,446         4,607
         Savings account loans .....................        1,613         2,179
         Equity lines of credit ....................       24,273        26,639
         Commercial and other loans ................       18,377        24,475
                                                        ---------     ---------
                                                          550,854       708,583
   Less:
         Allowance for loan losses .................        7,883         9,832
         Deferred loan cost, net ...................         (245)         (556)
         Undisbursed portion of loans in process ...        6,365        16,570
                                                        ---------     ---------
                                                        $ 536,851       682,737
                                                        =========     =========

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

                                             2001          2002          2003
                                            -------       -------       -------
                                                      (In thousands)
   Beginning allowance ...............      $ 7,064         7,159         7,883
   Provision for loan losses .........          955         1,235         2,655
   Loan recoveries ...................           60            66           136
   Loan charge-offs ..................         (920)         (577)         (842)
                                            -------       -------       -------
                                            $ 7,159         7,883         9,832
                                            =======       =======       =======


22
<PAGE>

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

(4) LOANS RECEIVABLE, NET - Continued

      Non-accrual loans which were over ninety days delinquent totaled
approximately $3.5 million and $7.4 million at September 30, 2002 and 2003,
respectively. In fiscal years 2001, 2002 and 2003, interest income which would
have been recorded would have been approximately $377,000, $301,000 and
$623,000, respectively, had non-accruing loans been current in accordance with
their original terms.

      There were $3.2 million in impaired loans at September 30, 2002. At
September 30, 2003, impaired loans totaled $4.9 million. 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.

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

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

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

      Unfunded loan commitments and letters of credit at September 30, 2003 were
approximately $108.1 million and included the following (in thousands):

      Loan Commitments:
         Residential housing and land ............................ $ 39,314
         Home equity loans and consumer lines of credit ..........   41,968
         Commercial lines of credit ..............................   11,029
         Standby letters of credit ...............................    2,851
         Unused business and personal credit card lines ..........   12,918

      Loans serviced for the benefit of others amounted to approximately $143.3
million, $192.1 million and $219.8 million at September 30, 2001, 2002 and 2003,
respectively.

      During fiscal 2003, the Company securitized $95.6 million of mortgage
loans and concurrently sold these mortgage-backed securities to outside third
parties and recognized a net gain on sale of $1.7 million, which included $1.3
million related to mortgage servicing rights. The gain is included in gains on
sales of loans held for sale in the consolidated statement of operations. The
proceeds from sale are included in proceeds from sales of mortgage-backed
securities available for sale in the consolidated statement of cash flows.

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


                                                                              25
<PAGE>

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

(4) LOANS RECEIVABLE, NET - Continued

      The Bank offers mortgage and consumer loans to its directors, and
Associates for the financing of their personal residences and for other personal
purposes. The Bank also offers commercial loans to companies affiliated with
directors. These loans are made in the ordinary course of business and, in
management's opinion, are made on substantially the same terms, including
interest rates and collateral, prevailing at the time for comparable
transactions with other persons and companies. Management does not believe these
loans involve more than the normal risk of collectibility or present other
unfavorable features. At September 30, 2003, such loans were current with
respect to their payment terms.

      The following is a summary of the activity of loans outstanding to certain
executive officers, directors and their affiliates for the year ended September
30, 2003 (in thousands):

         Balance at September 30, 2002 ......................   $ 1,119
         New loans ..........................................       682
         Repayments .........................................      (725)
                                                                -------
         Balance at September 30, 2003 ......................   $ 1,076
                                                                =======

(5) MORTGAGE SERVICING RIGHTS

      Mortgage servicing rights, net of the valuation allowance, are included in
other assets and totaled $2.2 million and $2.8 million at September 30, 2002 and
2003, respectively. Amortization expense for MSRs totaled $217,000, $505,000 and
$1.3 million for the years ended September 30, 2001, 2002 and 2003,
respectively. The estimated amortization expense for MSRs held as of September
30, 2003, is $971,000, $859,000, $762,000, $451,000 and $262,000 for fiscal
2004, 2005, 2006, 2007 and 2008 respectively. The estimated amortization expense
is based on current information regarding loan payments and prepayments.
Amortization expense could change in future periods based on changes in the
volume of prepayments and various economic factors.

                                                         2002        2003
                                                       -------      -------
                                                          (In thousands)
       Balance at beginning of year ..............     $ 1,310        2,203
       MSRs capitalized ..........................       1,398        1,912
       MSRs amortized ............................        (505)        (811)
       Valuation allowance .......................          --         (461)
                                                       -------      -------
       Balance at end of year ....................     $ 2,203        2,843
                                                       =======      =======

(6) OFFICE PROPERTY AND EQUIPMENT, NET

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

                                                         2002        2003
                                                       -------      -------
                                                          (In thousands)
       Land ......................................     $ 3,143        5,532
       Building and improvements .................      10,127       10,532
       Furniture, fixtures and equipment .........      14,297       15,864
                                                       -------      -------
                                                        27,567       31,928
       Less accumulated depreciation .............      13,854       15,840
                                                       -------      -------
                                                       $13,713       16,088
                                                       =======      =======

      The Company leases office space and various equipment. Total rental
expense for the years ended September 30, 2001, 2002 and 2003 was approximately
$291,000, $288,000 and $259,000 respectively.


                                                                              26
<PAGE>

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

(6) OFFICE PROPERTY AND EQUIPMENT, NET - CONTINUED

      Future minimum rental payments for operating leases having remaining
noncancelable lease terms in excess of one year at September 30, 2003 are as
follows (in thousands):

                2004 .............................   $ 159
                2005 .............................     157
                2006 .............................     122
                2007 .............................      42
                2008 .............................      20
             Thereafter ..........................     212
                                                     -----
                                                     $ 712
                                                     =====

(7) INVESTMENT REQUIRED BY LAW

      The Bank, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount equal to the
greater of (i) $500 (ii) 1.0% of the aggregate outstanding principal amount of
home mortgage loans, home purchase contracts and similar obligations at the end
of each calendar year, or (iii) 5% of its advances (borrowings) from the FHLB of
Atlanta at the end of each calendar year. The Bank is in compliance with this
requirement with an investment in FHLB stock of $14.0 million at September 30,
2003. No ready market exists for this stock and it has no quoted market value.
However, redemption of this stock has historically been at par value.

(8) DEPOSITS

      Deposits at September 30 consisted of the following:

<TABLE>
<CAPTION>
                                                         2002                    2003
                                                 --------------------    --------------------
                                                             Weighted                Weighted
                                                  Amount       Rate       Amount       Rate
                                                 --------    --------    --------    --------
                                                            (Dollars in thousands)
<S>                                              <C>             <C>      <C>            <C>
        Transaction accounts:
           Noninterest bearing ...............   $ 63,003          --%     86,258          --%
           NOW ...............................     67,381        0.38      98,171        0.54
           Money market checking .............    212,924        2.16     206,010        1.34
                                                 --------    --------    --------    --------
                Total transaction accounts ...    343,308        1.41     390,439        0.84
                                                 --------    --------    --------    --------
        Passbook accounts:
           Regular passbooks .................     37,905        1.09      44,919        0.79
           Money market ......................      1,187        1.95       1,317        1.00
                                                 --------    --------    --------    --------
                Total passbook accounts ......     39,092        1.12      46,236        0.80
                                                 --------    --------    --------    --------
        Certificate accounts:
           0.00-1.99% ........................      1,489                  87,396
           2.00-3.99% ........................    202,676                 149,678
           4.00-5.99% ........................     50,024                  19,569
           6.00-7.99% ........................          8                   3,161
           8.00-10.00% .......................        484                     533
                                                 --------    --------    --------    --------
                Total certificate accounts ...    254,681        3.46     260,337        2.67
                                                 --------    --------    --------    --------
                                                 $637,081        2.21%    697,012        1.52%
                                                 ========    ========    ========    ========
</TABLE>


                                                                              27
<PAGE>

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

(8) DEPOSITS - CONTINUED

      The aggregate amount of all deposit accounts with a minimum denomination
of $100,000 or more was $245.4 million and $287.9 million at September 30, 2002
and 2003, respectively. Included in certificate accounts were $2.4 million at
September 30, 2002 originated by brokers for a fee.

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

                                                            2002          2003
                                                          --------      --------
                                                              (In thousands)
Within 1 year ......................................      $201,370       198,723
After 1 but within 2 years .........................        27,484        50,596
After 2 but within 3 years .........................        20,358         7,461
Thereafter .........................................         5,469         3,557
                                                          --------      --------
                                                          $254,681       260,337
                                                          ========      ========

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

                                                 2001         2002         2003
                                               -------      -------      -------
                                                        (In thousands)
Transaction accounts ....................      $ 7,404        4,524        3,925
Passbook accounts .......................          741          459          427
Certificate accounts ....................       11,235        8,767        7,647
                                               -------      -------      -------
                                               $19,380       13,750       11,999
                                               =======      =======      =======

(9) ADVANCES FROM FHLB

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

                                            2002                   2003
                                    --------------------    --------------------
                                                Weighted                Weighted
                                     Amount       Rate       Amount       Rate
                                    --------    --------    --------    --------
                                               (Dollars in thousands)
Fiscal Year Maturity
2003 ...........................    $ 32,350       2.14%    $     --         --%
2004 ...........................      11,235       2.34       34,435       1.32
2005 ...........................      25,500       6.24       13,500       5.17
2006 ...........................       3,270       4.98        5,686       2.81
2007 ...........................       6,223       3.39        5,132       3.00
2008 ...........................      10,000       4.92        4,633       3.28
2009 or greater ................     101,091       5.27      180,728       4.35
                                    --------     ------     --------     ------
                                    $189,669       4.61%    $244,114       3.89%
                                    ========     ======     ========     ======

      Stock in the FHLB of Atlanta and specific first mortgage loans and
mortgage-backed securities of approximately $219.8 million and $275.8 million at
September 30, 2002 and 2003, respectively, are pledged as collateral for these
advances. The Bank has adopted the policy of pledging excess collateral to
facilitate future advances. At September 30, 2003, the excess first mortgage
loan collateral pledged to the FHLB will support additional borrowings of
approximately $31.6 million. At September 30, 2003, included in the one, three,
four and five year maturities were $155.0 million subject to call provisions.
Call provisions are more likely to be exercised by the FHLB when rates rise.

      During fiscal 2001, the Company prepaid approximately $37.7 million of
advances from FHLB and incurred gross penalties of approximately $1.1 million.
During fiscal 2002, the Company prepaid approximately $59.3 million of advances
from FHLB and incurred gross penalties of approximately $1.1 million. During
fiscal 2003, the Company prepaid approximately $54.6 million of advances and
incurred gross penalties of approximately $2.8 million. Prepayment penalties
are included in general and administrative expenses in the statement of
operations. Also see note 1 (t).


26
<PAGE>

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

(10) REPURCHASE AGREEMENTS

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

<TABLE>
<CAPTION>
                                                                             At September 30,
                                                                  ----------------------------------------
                                                                    2001            2002            2003
                                                                  -------         -------         --------
                                                                           (Dollars in thousands)
<S>                                                               <C>             <C>             <C>
Outstanding balance:
   Securities sold under agreements to repurchase:
       Customer ..........................................        $ 3,703         $ 4,070         $  7,703
       Broker ............................................         15,000          30,000          125,899

Weighted average rate (at month end) paid on:
   Securities sold under agreements to repurchase:
       Customer ..........................................           3.36%           1.37%            0.81%
       Broker ............................................           2.97            1.84             1.64

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

Approximate average outstanding with respect to:
   Securities sold under agreements to repurchase:
       Customer ..........................................        $ 2,361         $ 3,600         $  4,812
       Broker ............................................         45,461          15,007           92,476

Weighted average rate (year to date) paid on:
   Securities sold under agreements to repurchase:
       Customer ..........................................           3.73%           1.58%            1.02%
       Broker ............................................           5.65            2.39             2.04
</TABLE>

      Securities sold under agreements to repurchase represent borrowings by the
Company with maturities ranging from 1 to 28 months collateralized by securities
of the United States government or its agencies, which have been delivered to a
third party custodian for safekeeping. Assets pledged to collateralize
securities sold under agreements to repurchase had a fair value of $141.4
million at September 30, 2003 and are included in mortgage-backed securities
available for sale in the consolidated balance sheet.

(11) DEBT ASSOCIATED WITH TRUST PREFERRED SECURITIES

      On July 3, 2003, Coastal Financial Capital Trust I (the "Trust"), a
statutory trust formed by the Company, issued and sold floating rate securities
having an aggregate liquidation amount of $15.0 million (the "Capital
Securities") to institutional buyers in a pooled trust preferred issue. The
Capital Securities generated gross proceeds of $15.0 million. The Trust invested
these proceeds in an equivalent amount of junior subordinated debentures of the
Company and the Company used the proceeds for general corporate purposes.
Issuance costs from the July 3, 2003 sale totaled $150,000.

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

      The Capital Securities accrue and pay distributions semi-annually at a
rate per annum equal to 90-day LIBOR plus 305 basis points. At September 30,
2003, the distribution rate on the Capital Securities was 4.16%. The
distributions payable on the Capital Securities are cumulative and payable
quarterly in arrears. The Company has the right, subject to events of default,
to defer payments of interest on the Capital Securities for a period not to
exceed 20 consecutive quarters. The Company has no current intention to exercise
its right to defer payment of interest on the Capital Securities.


                                                                              28
<PAGE>

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

(11) DEBT ASSOCIATED WITH TRUST PREFERRED SECURITIES - CONTINUED

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

(12) INCOME TAXES

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

<TABLE>
<CAPTION>
                                              Current         Deferred       Total
                                              -------         --------       -----
                                                           (In thousands)
<S>                                           <C>                <C>         <C>
2001:
    Federal ...............................   $ 4,792            196         4,988
    State .................................       308             (9)          299
                                              -------          -----         -----
                                              $ 5,100            187         5,287
                                              =======          =====         =====
2002:
    Federal ...............................   $ 5,407            (13)        5,394
    State .................................       507             --           507
                                              -------          -----         -----
                                              $ 5,914            (13)        5,901
                                              =======          =====         =====
2003:
    Federal ...............................   $ 4,946            507         5,453
    State .................................       693             (5)          688
                                              -------          -----         -----
                                              $ 5,639            502         6,141
                                              =======          =====         =====
</TABLE>

      The tax effect of the Company's temporary differences between the
financial statement carrying amounts and tax basis of assets and liabilities
that give rise to the net deferred tax asset (liability) at September 30, 2002
and 2003 relate to the following:

<TABLE>
<CAPTION>
                                                                                             2002                  2003
                                                                                           -------                -----
                                                                                                   (In thousands)
<S>                                                                                        <C>                    <C>
Deferred tax assets:
     Allowance for loan losses ......................................................      $ 2,900                3,605
     Accrued medical reserves .......................................................           94                   91
     Other real estate reserves and deferred gains on other real estate .............          101                  102
     Net operating loss carryforwards ...............................................           21                   21
     Other ..........................................................................          276                  282
                                                                                           -------               ------
Total deferred tax assets ...........................................................        3,392                4,101
Less valuation allowance ............................................................          (21)                 (21)
                                                                                           -------               ------
Net deferred tax assets .............................................................        3,371                4,080
                                                                                           -------               ------

Deferred tax liabilities:
     Tax bad debt reserve in excess of base year amount .............................          193                   97
     Property and equipment principally due to differences in depreciation ..........          310                  527
     FHLB stock, due to stock dividends not recognized for tax purposes .............          207                   67
     Deferred loan fees .............................................................          565                  537
     Book over tax basis in investment in unconsolidated subsidiary .................        2,953                4,009
     Unrealized gain on securities available for sale ...............................        3,500                2,225
     Mortgage servicing rights ......................................................          833                1,075
     Other ..........................................................................          236                  196
                                                                                           -------               ------
Total deferred tax liabilities ......................................................        8,797                8,733
                                                                                           -------               ------
Net deferred tax liability ..........................................................      $(5,426)              (4,653)
                                                                                           =======               ======
</TABLE>


                                                                              29
<PAGE>

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

(12) INCOME TAXES - CONTINUED

      The valuation allowance for deferred tax assets as of September 30, 2002
and 2003 was $21,000. The net change in the total valuation allowance for the
years ended September 30, 2002 and 2003 was a decrease of $114,000 and zero,
respectively. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. In order
to fully realize the deferred tax asset, the company will need to generate
future taxable income prior to the expiration of the deferred tax assets
governed by the tax code. Based upon the level of historical taxable income and
projections for future taxable income over the periods, which the deferred tax
assets are deductible, management believes it more likely than not the Company
will realize the benefits of these deductible differences, net of the existing
valuation allowances at September 30, 2003. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.

      The net deferred tax liability is included in other liabilities in the
consolidated financial statements. The valuation allowance relates to the state
loss carryforwards which may not be ultimately realized to reduce taxes of the
Company. A portion of the change in the net deferred tax liability relates to
unrealized gains and losses on securities available for sale. A current period
deferred tax benefit of $1.3 million for the unrealized gains on securities
available for sale has been recorded directly to stockholders' equity. The
balance of the change in the deferred tax liability results from the current
period deferred tax expense of $502,000. Income taxes of the Company
attributable to income before income taxes differ from the amounts computed by
applying the Federal income tax rate of 34% for the years ended September 30 to
earnings before income taxes as follows:

<TABLE>
<CAPTION>
                                                               2001         2002         2003
                                                              ------       -----         -----
                                                                       (In thousands)
<S>                                                           <C>          <C>           <C>
            Computed federal income taxes ............        $4,960       5,476         5,886
            State tax, net of federal benefit ........           197         335           454
            Bank-owned life insurance ................            --          --          (226)
            Other, net ...............................           130          90            27
                                                              ------       -----         -----
            Total income tax expense .................        $5,287       5,901         6,141
                                                              ======       =====         =====
</TABLE>

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

      Retained earnings at September 30, 2003 includes approximately $5.2
million representing pre-1988 tax bad debt base year reserve amounts for which
no deferred income tax liability has been provided since these reserves are not
expected to reverse until indefinite future periods and may never reverse.
Circumstances that would require an accrual of a portion or all of this
unrecorded tax liability are a reduction in qualifying loan levels relative to
the end of 1987, failure to meet the tax definition of a savings bank, dividend
payments in excess of current year or accumulated tax earnings and profits, or
other distributions in dissolution, liquidation or redemption of the Bank's
stock.

(13) BENEFIT PLANS

      The Company has a defined contribution plan covering substantially all
Associates. The Company matches Associate contributions based upon the Company
meeting certain return on equity operating results. Matching contribution
expense was approximately $245,000, $384,000 and $340,000 for fiscal years 2001,
2002 and 2003, respectively.


                                                                              30
<PAGE>

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

(14) REGULATORY MATTERS

      At September 30, 2003, the Bank's loans-to-one borrower limit was
approximately $13.9 million. At September 30, 2003, the Bank is in compliance
with the core, tangible and risk-based capital requirements and loans-to-one
borrower limits.

      To be categorized as "Well Capitalized" under the prompt corrective action
regulations adopted by the Federal Banking Agencies, the Bank must maintain a
total risk-based capital ratio as set forth in the following table and not be
subject to a capital directive order.

      As of September 30, 2003, the most recent notification from federal
banking agencies categorized the Bank as "well capitalized" under the regulatory
framework. To be categorized as "well capitalized," the Bank must maintain
minimum total risk-based capital, tier 1 capital, and tier 1 leverage ratios as
set forth in the table. Since September 30, 2003, there have been no events or
conditions that management believes have changed the Bank's categories. (Dollars
in thousands)

<TABLE>
<CAPTION>
                                                                                                           Amount to be
                                                                                For Capital               Categorized as
                                                       Actual                Adequacy Purposes          "Well Capitalized"
                                                 -------------------       ----------------------      --------------------
                                                 Amount        Ratio       Amount           Ratio      Amount         Ratio
                                                 ------        -----       ------           -----      ------         -----
<S>                                             <C>            <C>         <C>               <C>       <C>            <C>
      As of September 30, 2003:
           Total Capital: ....................  $92,847        13.17%      $56,388           8.00%     $70,485        10.00%
              (To Risk Weighted Assets)
           Tier 1 Capital: ...................  $84,153        11.94%          N/A            N/A      $42,291         6.00%
              (To Risk Weighted Assets)
           Tier 1 Capital: ...................  $84,153         7.14%      $35,358           3.00%     $58,929         5.00%
              (To Adjusted Total Assets)
           Tangible Capital: .................  $84,153         7.14%      $17,679           1.50%         N/A          N/A
              (To Adjusted Total Assets)

      As of September 30, 2002:
           Total Capital: ....................  $68,417        12.74%      $42,965           8.00%     $53,706        10.00%
              (To Risk Weighted Assets)
           Tier 1 Capital: ...................  $62,028        11.55%          N/A            N/A      $32,223         6.00%
              (To Risk Weighted Assets)
           Tier 1 Capital: ...................  $62,028         6.57%      $37,785           4.00%     $47,231         5.00%
              (To Adjusted Total Assets)
           Tangible Capital: .................  $62,028         6.57%      $14,170           1.50%         N/A          N/A
              (To Adjusted Total Assets)
</TABLE>

(15) LIQUIDATION ACCOUNT

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


30
<PAGE>

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

(15) LIQUIDATION ACCOUNT - CONTINUED

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

(16) EARNINGS PER SHARE

      Basic earnings per share are computed by dividing net income by the
weighted-average number of common shares outstanding. Diluted earnings per share
are computed by dividing net income by the weighted average number of common
shares and potential common shares outstanding. Potential common shares consist
of dilutive stock options determined using the treasury stock method and the
average market price of common stock. All share and per share data have been
retroactively restated for all common stock dividends. The Company has no
antidilutive securities at September 30, 2003.

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

<TABLE>
<CAPTION>
                                                             2001                      2002                     2003
                                                   -----------------------   -----------------------   -----------------------
                                                      Basic       Diluted       Basic       Diluted      Basic       Diluted
                                                   ----------   ----------   ----------   ----------   ----------   ----------
<S>                                                <C>          <C>          <C>          <C>          <C>          <C>
      Weighted average shares outstanding          13,126,000   13,126,000   12,844,000   12,844,000   12,853,000   12,853,000
      Effective of dilutive securities:
       Stock options                                       --      178,000           --      393,000           --      588,000
                                                   ----------   ----------   ----------   ----------   ----------   ----------
      Average shares outstanding                   13,126,000   13,304,000   12,844,000   13,237,000   12,853,000   13,441,000
                                                   ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>

(17) STOCK OPTION PLAN

      The Company's stock option plan provides for stock options to be granted
primarily to directors, officers and other key Associates. Options granted under
the stock option plan may be incentive stock options or non-incentive stock
options. Options vest ratably over a five year period and expire after ten years
from the date of grant. The remaining shares of stock reserved for the stock
option plan at September 30, 2003 amounted to approximately 303,000 shares. All
outstanding options have been retroactively restated to reflect the effects of
the common stock dividends. At September 30, 2003, the Company had the following
options outstanding:

<TABLE>
<CAPTION>
                                                                    Weighted
                                                                     Average     Weighted               Weighted
                                                     Number         Remaining     Average     Number     Average
       Fiscal                                       Options        Contractual   Exercise    Options    Exercise
        Year        Range of exercise prices:     Outstanding          Life        Price   Exercisable    Price
       ------       -------------------------     -----------      -----------   --------  -----------  --------
<S>                 <C>                           <C>               <C>           <C>        <C>         <C>
        1995        $2.95 - $3.27 ..............     93,977         1.8 Years     $ 3.15      93,977     $ 3.15
        1996        $3.48 - $3.83 ..............      9,374         2.1 Years     $ 3.48       9,374     $ 3.48
        1997        $5.31 - $5.50 ..............    142,290         3.2 Years     $ 5.39     142,290     $ 5.39
        1998        $7.74 - $11.81 .............    264,753         4.2 Years     $ 8.77     264,753     $ 8.77
        1999        $7.85 - $9.30 ..............    197,980         5.1 Years     $ 8.66     158,384     $ 8.66
        2000        $5.23 - $6.01 ..............    186,699         6.2 Years     $ 6.21     112,019     $ 6.21
        2001        $5.03 - $7.85 ..............    221,782         7.1 Years     $ 5.14      88,713     $ 5.14
        2002        $7.52 - $12.35 .............    209,567         8.1 Years     $ 7.64      41,913     $ 7.64
        2003        $10.00 - $14.00 ............    253,589         9.2 Years     $11.96          --        N/A
                                                  ---------         ---------     ------     -------     ------
                    $2.95 - $14.00 .............  1,580,011         6.2 Years     $ 7.64     911,423     $ 6.87
                                                  =========         =========     ======     =======     ======
</TABLE>


                                                                              31
<PAGE>

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

(17) STOCK OPTION PLAN - CONTINUED

      The following is a summary of the activity of the stock option plans for
the years 2001, 2002, and 2003.

<TABLE>
<CAPTION>
                                                             2001                        2002                        2003
                                                   -----------------------      ----------------------      -----------------------
                                                                  Weighted                    Weighted                     Weighted
                                                                   Average                     Average                      Average
                                                                  Exercise                    Exercise                     Exercise
                                                    Shares          Price        Shares         Price        Shares          Price
                                                   ---------       -------      ---------       ------      ---------       -------
<S>                                                <C>             <C>          <C>             <C>         <C>             <C>
      Outstanding, October 1 ...............       1,277,591       $  7.81      1,469,550       $ 6.47      1,493,391       $  6.76
      Granted ..............................         258,150          5.18        221,764         7.64        261,735         11.90
      Cancelled ............................         (28,865)         6.55        (13,150)        7.06        (11,920)         9.13
      Exercised ............................         (37,326)         3.87       (184,773)        5.47       (163,195)         6.37
                                                   ---------       -------      ---------       ------      ---------       -------
      Outstanding, September 30 ............       1,469,550       $  6.47      1,493,391       $ 6.76      1,580,011       $  7.64
                                                   =========       =======      =========       ======      =========       =======
</TABLE>

(18) COMMON STOCK DIVIDENDS

      On July 31, 2001, the Company declared a 3 for 2 stock split in the form
of a 50% stock dividend aggregating approximately 3,579,000 shares. On May 27,
2003, the Company declared a 10% stock dividend aggregating approximately
1,065,000 shares. On August 28, 2003, the Company declared a 10% stock dividend
aggregating approximately 1,174,000 shares. All share and per share data has
been retroactively restated to give effect to the common stock dividends.

(19) CASH DIVIDENDS

      On each of December 29, 2000 and March 21, 2001 the Company declared
quarterly cash dividends of $.036 per share. On each of June 27, 2001, September
26, 2001, December 19, 2001 and March 20, 2002 the Company declared quarterly
cash dividends of $.041 per share. On each of June 19, 2002, September 18, 2002,
December 18, 2002 and March 26, 2003, the Company declared quarterly cash
dividends of $0.045 per share. On each of June 24, 2003 and September 24, 2003,
the Company declared quarterly cash dividends of $0.055 per share.

(20) LEGAL MATTERS

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

(21) QUARTERLY FINANCIAL DATA (UNAUDITED)

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

<TABLE>
<CAPTION>
                                                            First            Second          Third           Fourth
                                                           Quarter          Quarter         Quarter         Quarter
                                                         -----------      ----------      ----------      ----------
<S>                                                      <C>                  <C>             <C>             <C>
    2002:
      Total interest income ...........................  $    13,368          12,987          13,498          14,020
      Total interest expense ..........................        5,662           5,153           5,278           5,753
                                                         -----------      ----------      ----------      ----------
      Net interest income .............................        7,706           7,834           8,220           8,267
      Provision for loan losses .......................          250             255             350             380
                                                         -----------      ----------      ----------      ----------
      Net interest income after provision for
         loan losses ..................................        7,456           7,579           7,870           7,887
      Other income ....................................        2,173           1,703           1,876           2,387
      General and administrative expenses .............        5,730           5,422           5,640           6,032
                                                         -----------      ----------      ----------      ----------
      Income before income taxes ......................        3,899           3,860           4,106           4,242
      Income taxes ....................................        1,439           1,393           1,513           1,556
                                                         -----------      ----------      ----------      ----------
      Net income ......................................  $     2,460           2,467           2,593           2,686
                                                         ===========      ==========      ==========      ==========
      Net income per common share - diluted ...........  $       .19             .19             .20             .20
                                                         ===========      ==========      ==========      ==========
      Weighted average shares outstanding-diluted .....   13,222,000      13,099,000      13,139,000      13,436,000
                                                         ===========      ==========      ==========      ==========
</TABLE>


32
<PAGE>

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

(21) QUARTERLY FINANCIAL DATA (UNAUDITED) - CONTINUED

<TABLE>
<CAPTION>
                                                              First            Second         Third           Fourth
                                                             Quarter          Quarter        Quarter         Quarter
                                                           -----------      ----------      ----------      ----------
<S>                                                        <C>                  <C>             <C>             <C>
   2003:
      Total interest income ............................   $    14,740          14,743          14,790          14,941
      Total interest expense ...........................         5,807           5,625           5,779           5,787
                                                           -----------      ----------      ----------      ----------
      Net interest income ..............................         8,933           9,118           9,011           9,154
      Provision for loan losses ........................           435             870             750             600
                                                           -----------      ----------      ----------      ----------
      Net interest income after provision for
         loan losses ...................................         8,498           8,248           8,261           8,554
      Other income .....................................         2,667           2,715           2,945           2,581
      General and administrative expenses ..............         6,864           6,683           6,851           6,758
                                                           -----------      ----------      ----------      ----------
      Income before income taxes .......................         4,301           4,280           4,355           4,377
      Income taxes .....................................         1,551           1,526           1,575           1,489
                                                           -----------      ----------      ----------      ----------
      Net income .......................................   $     2,750           2,754           2,780           2,888
                                                           ===========      ==========      ==========      ==========
      Net income per common share - diluted ............   $       .20             .21             .21             .21
                                                           ===========      ==========      ==========      ==========
      Weighted average shares outstanding-diluted ......    13,433,000      13,373,000      13,386,000      13,577,000
                                                           ===========      ==========      ==========      ==========
</TABLE>

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

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

                         Coastal Financial Corporation
                            Condensed Balance Sheets
                          September 30, 2002 and 2003

<TABLE>
<CAPTION>
                                                                    2002          2003
                                                                  -------        ------
<S>                                                               <C>            <C>
      Assets
      Cash ....................................................   $   738           773
      Investment in subsidiaries ..............................    67,946        88,088
      Deferred tax asset ......................................       326           441
      Other assets ............................................        71           246
                                                                  -------        ------
            Total assets ......................................   $69,081        89,548
                                                                  =======        ======

      Liabilities and Stockholders' Equity
      Accounts payable (principally dividends) ................       626           760
      Note payable ............................................     2,069            81
      Debt associated with trust preferred securities                  --        15,000
      Total stockholders' equity ..............................    66,386        73,707
                                                                  -------        ------
            Total liabilities and stockholders' equity ........   $69,081        89,548
                                                                  =======        ======
</TABLE>


                                                                              33
<PAGE>

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

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

                         Coastal Financial Corporation
                       Condensed Statements of Operations
                 Years ended September 30, 2001, 2002 and 2003

<TABLE>
<CAPTION>
                                                                               2001            2002            2003
                                                                             -------         -------         -------
<S>                                                                          <C>              <C>             <C>
      Income:
         Interest income ............................................        $     3               1               1
         Management fees ............................................            300             300             300
         Dividends from subsidiary ..................................          4,600           3,470           1,221
         Equity in undistributed earnings of subsidiaries ...........          4,732           6,751          10,087
                                                                             -------         -------         -------
               Total income .........................................          9,635          10,522          11,609
                                                                             -------         -------         -------
      Expenses:
         Professional fees ..........................................             80              79              20
         Supplies and printing ......................................             39              58              12
         Interest expense ...........................................            152              84             213
         Other expenses .............................................             91              96             277
         Income tax benefit .........................................            (27)             (1)            (85)
                                                                             -------         -------         -------
               Total expenses .......................................            335             316             437
                                                                             -------         -------         -------
         Net income .................................................        $ 9,300          10,206          11,172
                                                                             =======         =======         =======
</TABLE>

                          Coastal Financial Corporation
                        Condensed Statement of Cash Flows
                  Years ended September 30, 2001, 2002 and 2003

<TABLE>
<CAPTION>
                                                                               2001            2002           2003
                                                                             -------         -------         -------
<S>                                                                          <C>              <C>            <C>
      Operating activities:
         Net income .................................................        $ 9,300          10,206          11,172
         Adjustments to reconcile net income to net cash provided by:
            Equity in undistributed net income of subsidiary ........         (4,732)         (6,751)        (10,087)
            (Increase) decrease in other assets .....................           (747)            548            (290)
            Increase (decrease) in other liabilities ................           (108)           (104)            134
                                                                             -------         -------         -------
               Total cash provided by operating activities ..........          3,713           3,899             929
                                                                             -------         -------         -------
      Financing activities:
         Cash dividends to shareholders .............................         (2,015)         (2,222)         (2,592)
         Treasury stock repurchases .................................         (2,134)         (2,286)           (342)
         Proceeds from stock options ................................            106           1,203           1,153
         Proceeds from trust preferred ..............................             --              --          15,000
         Repayment on line of credit ................................             --              --          (1,988)
         Capital contribution to subsidiary .........................             --              --         (12,125)
         Other financing activities, net ............................             (1)              3              --
                                                                             -------         -------         -------
               Total cash used by financing activities ..............         (4,044)         (3,302)           (894)
                                                                             -------         -------         -------
      Net increase (decrease) in cash and cash equivalents ..........           (331)            597              35

      Cash and cash equivalents at beginning of the year ............            472             141             738
                                                                             -------         -------         -------
      Cash and cash equivalents at end of the years .................        $   141             738             773
                                                                             =======         =======         =======
</TABLE>


34
<PAGE>

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

(23) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

      The carrying amounts and fair value of financial instruments as of
September 30, 2002 and 2003 are summarized below:

<TABLE>
<CAPTION>
                                                                                  2002                           2003
                                                                         ------------------------       -----------------------
                                                                         Carrying      Estimated        Carrying      Estimated
                                                                          Amount       Fair Value        Amount      Fair Value
                                                                         --------      ----------       -------      ----------
                                                                                              (In thousands)
<S>                                                                      <C>             <C>            <C>            <C>
      Financial Assets
         Cash and cash equivalents ..............................        $ 25,802         25,802         21,575         21,575
         Investment securities ..................................           2,014          2,014         15,909         15,909
         Mortgage-backed securities .............................         331,808        331,808        383,324        383,324
         Loans receivable held for sale .........................          18,694         19,199         19,096         19,556
         Loans receivable, net ..................................         536,851        541,697        682,737        704,171
         FHLB stock .............................................          10,559         10,559         13,991         13,991

      Financial Liabilities
         Deposits:
            Demand accounts .....................................         382,400        382,400        436,675        436,675
            Certificate accounts ................................         254,681        258,509        260,337        263,743
         Advances from Federal Home Loan Bank ...................         189,669        197,918        244,114        252,271
         Securities sold under agreements to repurchase .........          36,884         36,884        133,602        133,602
         Debt associated with trust preferred securities ........              --             --         15,000         15,000
         Other borrowings .......................................           2,069          2,069             81             81
</TABLE>

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

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

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

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

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

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


                                                                              35
<PAGE>

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

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

      The Company had $108.1 million of off-balance sheet financial commitments
as of September 30, 2003, which are commitments to originate loans, unused
consumer lines of credit and undisbursed portion of loans in process. Since
these obligations are based on current market rates, the carrying amount is
considered to be a reasonable estimate of fair value.

      The Company originates certain fixed rate residential loans with the
intention of selling these loans. Between the time that the Company enters into
an interest rate lock or a commitment to originate a fixed rate residential loan
with a potential borrower and the time the closed loan is sold, the Company is
subject to variability in the market prices related to these commitments. The
Company believes that it is prudent to limit the variability of expected
proceeds from the sales through forward sales of "to be issued" mortgage backed
securities and loans ("forward sales commitments"). The commitment to originate
fixed rate residential loans and forward sales commitments are freestanding
derivative instruments. They do not generally qualify for hedge accounting
treatment so their fair value adjustments are recorded through the income
statement in net gains on sale of loans. The commitments to originate fixed rate
conforming loans totaled $8.2 million at September, 30 2003. The fair value of
these commitments was an asset of approximately $123,000 at September 30, 2003,
and is reflected in gain on sales of loans held for sale in the consolidated
statements of operations. The forward sales commitments totaled $17.0 million at
September 30, 2003. The fair value of these commitments was a liability of
approximately $257,000 at September 30, 2003, and is reflected in gain on sales
of loans held for sale in the consolidated statements of operations.

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

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

(24) COMMITMENTS AND CONTINGENCIES

      The Company has a $16.0 million outstanding line of credit with a
commercial bank at a variable rate of LIBOR plus two percent. The line of credit
is secured by 100% of the stock of the Bank. At September 30, 2003, the
outstanding balance was approximately $81,000.


36
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Managements' Discussion and Analysis

Forward Looking Statements

      This report may contain certain "forward-looking statements" within the
meaning of Section 27A of the Securities Exchange Act of 1934, as amended, that
represent Coastal Financial Corporation's (the Company) expectations or beliefs
concerning future events. Such forward-looking statements are about matters that
are inherently subject to risks and uncertainties. Factors that could influence
the matters discussed in certain forward-looking statements include the timing
and amount of revenues that may be recognized by the Company, continuation of
current revenue and expense trends (including trends affecting charge-offs and
provisions for loan losses), unforeseen changes in the Company's markets, legal
and regulatory changes, and general changes in the economy (particularly in the
markets served by the Company). Because of the risks and uncertainties inherent
in forward looking statements, readers are cautioned not to place undue reliance
on them, whether included in this report or made elsewhere from time to time by
the Company or on its behalf. Except as may be required by applicable law or
regulation, the Company assumes no obligation to update any forward looking
statements.

Critical Accounting Policies

      The Company's significant accounting policies are set forth in Note 1 of
the Notes to Consolidated Financial Statements. Of these policies, the Company
considers its policy regarding the allowance for loan losses to be its most
critical accounting policy, because it requires many of management's most
subjective and complex judgments. The Company has developed appropriate policies
and procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Company's assessments may be impacted in
future periods by changes in economic conditions, the impact of regulatory
examinations and the discovery of information with respect to borrowers which
were not known by management at the time of the issuance of the consolidated
financial statements. For additional discussion concerning the Company's
allowance for loan losses and related matters, see "Allowance for Loan Losses".

General

      The Company reported $11.2 million in net income for the year ended
September 30, 2003, compared to $10.2 million for the year ended September 30,
2002. Net interest income increased $4.2 million as a result of increased
interest income of $5.3 million offset by an increase of $1.2 million in
interest expense. Provision for loan losses increased from $1.2 million for the
year ended September 30, 2002, to $2.7 million for the year ended September 30,
2003. Other income increased from $8.1 million in fiscal 2002, to $10.9 million
in 2003. General and administrative expenses increased $4.3 million or 19.0%,
for fiscal 2003, as compared to fiscal 2002.

      Total assets increased from $950.8 million at September 30, 2002 to $1.2
billion at September 30, 2003, or 24.2%. Liquid assets, consisting of cash,
interest-bearing deposits, and securities, increased from $359.6 million at
September 30, 2002, to $420.8 million at September 30, 2003. Loans receivable
increased 27.2% from $536.9 million at September 30, 2002, to $682.7 million at
September 30, 2003. Total loan originations for fiscal 2003 were $769.6 million
as compared to $418.2 million for fiscal 2002.

      The growth in liquid assets was funded by increased deposits of $59.9
million, increased advances from the Federal Home Loan Bank ("FHLB") of Atlanta
of $54.4 million and securities sold under agreements to repurchase of $96.7
million. As a result of increased Banking Centers and a strong emphasis on
growing local deposits during fiscal 2003, deposits increased 9.4% from $637.1
million at September 30, 2002, to $697.0 million at September 30, 2003. During
this same period, transaction deposits (defined as noninterest bearing checking
accounts and NOW accounts) increased $54.0 million, money market checking
accounts decreased $6.9 million, passbook accounts increased $7.1 million and
certificate accounts increased $5.7 million.

      As a result of $11.2 million in net earnings, less the cash dividends paid
to shareholders of approximately $2.6 million, treasury stock repurchases of
approximately $342,000, and the net change in unrealized gain (loss) on
securities available for sale, net of income tax of $2.1 million, stockholders'
equity increased from $66.4 million at September 30, 2002 to $73.7 million at
September 30, 2003.

Liquidity and Capital Resources

      Historically, the Company has maintained its liquidity at levels believed
by management to be adequate to meet requirements of normal operations,
potential deposit outflows and strong loan demand and still allow for optimal
investment of funds and return on assets. The following table summarizes future
contractual obligations as of September 30, 2003.


                                                                              37
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                Payment Due by Period
                                                       -----------------------------------------------------------------------
                                                                      Less than           1-3            4-5           After 5
                                                         Total          1 Year           Years          Years           Years
                                                       --------       ---------        --------        -------        --------
                                                                                     (Dollars in thousands)
<S>                                                    <C>             <C>             <C>             <C>            <C>
      Contractual Obligations
      Time deposits ...........................        $260,337        $198,723        $ 58,057        $ 3,238        $    319
      Short-term borrowings ...................         118,037         118,037              --             --              --
      Long-term debt ..........................         274,760              --          69,186          9,846         195,728
      Operating leases ........................             712             159             279             62             212
                                                       --------        --------        --------        -------        --------
         Total contractual cash obligations ...        $653,846        $316,919        $127,522        $13,146        $196,259
                                                       ========        ========        ========        =======        ========
</TABLE>

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

      The principal use of cash flows is the origination of loans receivable.
The Company originated loans receivable of $296.1 million, $418.2 million and
$769.6 million for the years ended September 30, 2001, 2002 and 2003,
respectively. A large portion of these loan originations were financed through
loan principal repayments which amounted to $233.7 million, $268.1 million and
$477.7 million for the years ended September 30, 2001, 2002 and 2003,
respectively. In addition, the Company has generally sold conforming fixed rate
mortgage loans to correspondent financial institutions in the secondary market
to finance future loan originations. For the years ended September 30, 2001,
2002 and 2003, the Company sold loans amounting to $28.5 million, $13.9 million
and $45.4 million, respectively.

      During fiscal 2003, the Company securitized $95.6 million of mortgage
loans and concurrently sold these mortgage-backed securities to outside third
parties and recognized a net gain on sale of $1.7 million, which included $1.3
million related to mortgage servicing rights. The gain is included in gains on
sales of loans held for sale in the consolidated statement of operations. The
proceeds from sale are included in proceeds from sales of mortgage-backed
securities available for sale in the consolidated statement of cash flows. The
Company has no retained interest in the securities that were sold other than the
servicing rights.

      In fiscal 2003 deposits increased from $637.1 million at September 30,
2002, to $697.0 million at September 30, 2003. During fiscal 2003, the Company
prepaid approximately $54.6 million of advances from FHLB and incurred gross
penalties of approximately $2.8 million which were included in general and
administrative expenses in the statement of operations. As a result of this and
the repayment of other short-term advances, the weighted average rate on FHLB
advances decreased to 3.89% at September 30, 2003, compared to 4.61% at
September 30, 2002.

      At September 30, 2003, the Company had commitments to originate $39.3
million in loans and $68.8 million in unused lines of credit, which the Company
expects to fund from normal operations. Traditionally, a significant portion of
the unused lines of credit may never be used by the Customer.

      At September 30, 2003, the Company had $198.7 million of certificates of
deposit which were due to mature within one year. Based upon previous
experience, the Company believes that a major portion of these certificates will
be redeposited. At September 30, 2003, the Company had excess collateral pledged
to the FHLB which would support additional FHLB advance borrowings of $31.6
million. Additionally, at September 30, 2003, the Company had repurchase
agreement lines of credit and available collateral consisting of investment
securities and mortgage-backed securities of $118.9 million as well as federal
funds lines available of $20.0 million.

      As a condition of deposit insurance, current FDIC regulations require that
the Bank calculate and maintain a minimum regulatory capital requirement on a
quarterly basis and satisfy such requirement at the calculation date and
throughout the ensuing quarter. The Bank's tangible and core capital
approximated $84.2 million at September 30, 2003, exceeding the Bank's tangible
and core requirements by $66.4 million and $48.8 million, respectively. At
September 30, 2003, the Bank's capital exceeded its current risk-based minimum
capital requirement by $36.5 million. The risk-based capital requirement may
increase in the future. Also see Note 14 of the Notes to Consolidated Financial
Statements.


38
<PAGE>

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

Results of Operations

Comparison of the Years Ended September 30, 2002 and 2003

General

      Net earnings were $11.2 million ($0.83 per diluted share) for the year
ended September 30, 2003, an increase of 9.5% compared to $10.2 million ($0.77
per diluted share) for the year ended September 30, 2002. As a result of
increased net earnings, diluted earnings per share increased 7.8%. Net interest
income increased $4.2 million primarily as a result of an increase in interest
income of $5.3 million which was partially offset by an increase in interest
expense of $1.2 million.

Interest Income

      Interest income for the year ended September 30, 2003, increased 9.9% to
$59.2 million as compared to $53.9 million for the year ended September 30,
2002. The yield on interest-earning assets for the year ended September 30, 2002
was 7.10% compared to 6.00% for the year ended September 30, 2003. The average
yield on loans receivable for fiscal year 2003 was 6.67% compared to 7.58% in
2002. The yield on investments which includes Investments, Mortgage-Backed
Securities, Overnight Funds and Federal Funds, decreased to 4.88% for the fiscal
year 2003 from 6.15% for fiscal year 2002. Total interest-earning assets for
fiscal year 2003 averaged $987.5 million compared to $765.8 million for the year
ended September 30, 2002. The increase in average interest-earning assets is
primarily due to an increase in average loans receivable of approximately $98.6
million and average mortgage-backed and investment securities of approximately
$133.4 million.

Interest Expense

      Interest expense on interest-bearing liabilities was $23.0 million for the
year ended September 30, 2003, as compared to $21.8 million in fiscal 2002. The
cost of interest-bearing liabilities was 2.35% for the year ended September 30,
2003, compared to 2.96% in fiscal year 2002. The average cost of deposits for
the year ended September 30, 2003, was 1.79% compared to 2.42% for the year
ended September 30, 2002. The cost of FHLB advances and reverse repurchase
agreements for fiscal 2003 was 4.27% and 2.04%, respectively, compared to 5.11%
and 2.39%, respectively, for fiscal 2002. Total average interest-bearing
liabilities increased 32.6% from $738.1 million at September 30, 2002, to $978.9
million at September 30, 2003. The increase in average interest-bearing
liabilities is due to an increase in average deposits of approximately $99.9
million, average FHLB advances of $62.3 million and average reverse repurchase
agreements of $77.5 million.

Net Interest Income

      Net interest income was $36.2 million for the year ended September 30,
2003, an increase of $4.2 million, compared to $32.0 million for the year ended
September 30, 2002. The net interest margin decreased to 3.65% for fiscal 2003
compared to 4.14% for fiscal 2002. Average interest-earning assets increased
$221.7 million while average interest-bearing liabilities increased $240.8
million. During fiscal 2003, interest rates have decreased. At September 30,
2002 and September 30, 2003, the prime rate of interest was 4.75% and 4.00%,
respectively. With the reduction in interest rates, resulting from the Federal
Reserve Board's decision to reduce the prime rate by 75 basis points throughout
fiscal 2003, the Company's interest-earning assets repriced more quickly than
its interest-bearing liabilities. For fiscal 2003, the Company's average balance
of core deposits (checking, statement savings and money market) was $412.3
million with an average cost of 1.06%. This compares to average core deposits of
$346.7 million at 1.44% in fiscal 2002. As the Federal Reserve has continued to
reduce the discount rate, core deposits are not repricing at the same ratio as
the Company's interest-earning assets. Should, as a result of continued rate,
reductions, refinancing of loans at lower rates and repricing of loans tied to
prime or treasury rates outpace the repricing of deposits and borrowings, the
Company could experience a significantly reduced net interest margin in the
future.

Provision for Loan Losses

      As a result of growth in loans receivable and credit risk associated with
problem loans, the Company's provision for loan losses increased from $1.2
million for fiscal 2002 to $2.7 million for fiscal 2003. The allowance for loan
losses as a percentage of loans was 1.40% at September 30, 2003 compared to
1.42% at September 30, 2002. This is due to the nature and the risk of the
delinquent loans at September 30, 2003 as compared to September 30, 2002. Loans
delinquent 90 days or more were $7.4 million or 1.06% of total loans at
September 30, 2003, compared to $3.5 million or 0.63% at September 30, 2002. The
allowance for loan losses was 132% of loans delinquent more than 90 days at


                                                                              39
<PAGE>

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

September 30, 2003, compared to 224% at September 30, 2002. Although the Company
experienced an increase in loans delinquent 90 days or more, there was not a
corresponding increase in the required allowance for loan loss based on the
Company's model. Management believes that the current level of the allowance for
loan losses is adequate considering the composition of the loan portfolio, the
portfolio's loss experience, delinquency trends, current regional and local
economic conditions and other factors. Also see "Nonperforming Assets" and
"Allowance for Loan Losses."

Other Income

      In fiscal 2003, total other income increased from $8.1 million for the
period ended September 30, 2002, to $10.9 million for the period ended September
30, 2003. As a result of increased transaction deposit accounts, fees and
service charges on loans and deposit accounts was $3.5 million for fiscal 2003,
compared to $3.1 million for fiscal 2002. Due to a decreased long-term interest
rate environment which has resulted in increased fixed-rate mortgage
originations, gain on sale of loans was $3.0 million for the year ended
September 30, 2003, compared to $1.5 million for the year ended September 30,
2002. Gain on sale of mortgage-backed securities, net was $469,000 for fiscal
2003, compared to $238,000 for fiscal 2002. Other income increased from $1.6
million for the year ended September 30, 2002, to $2.4 million for the year
ended September 30, 2003. This is primarily due to $665,000 of income on
bank-owned life insurance purchased in December 2002.

Other Expense

      General and administrative expenses were $27.2 million for fiscal 2003 as
compared to $22.8 million for fiscal 2002. Salaries and employee benefits
increased to $13.5 million for fiscal 2003 as compared to $12.5 million for
fiscal 2002, or 7.5%, primarily due to normal increases, increased incentives as
a result of increased loan production, and the costs of staffing for a new
office. During fiscal 2003, Coastal Federal Bank added an office in Shallotte,
North Carolina. Net occupancy, furniture and fixtures and data processing
expense increased $873,000 for fiscal 2003, as compared to fiscal 2002. Other
expenses increased from $4.1 million in fiscal 2002 to $4.9 million in fiscal
2003. Other expenses included $461,000 of mortgage servicing rights impairment
for fiscal 2003.

Income Taxes

      Income taxes increased from $5.9 million in fiscal 2002 to $6.1 million in
fiscal 2003 as a result of increased earnings before income taxes.

      The effective income tax rate as a percentage of pretax income was 35.5%
in fiscal 2003 and 36.6% in fiscal 2002. The effective income tax rate declined
in connection with an increase in investment interest income generated by
bank-owned life insurance and municipal securities that are exempt from federal
and certain state taxes.

      The Company's effective income tax rates take into consideration certain
assumptions and estimates made by management. No assurance can be given that
either the tax returns submitted by management or the income tax reported on the
consolidated financial statements will not be adjusted by either adverse rulings
by the U.S. Tax court, changes in the tax code, or assessments made by the
Internal Revenue Service. The Company is subject to potential adverse
adjustments, including but not limited to: an increase in the statutory federal
or state income tax rates, the permanent nondeductibility of amounts currently
considered deductible either now or in future periods, and the dependency on the
generation of future taxable income, in order to ultimately realize deferred
income tax assets. Income tax returns for 2000 and subsequent years are exposed
to examination by taxing authorities.

Results of Operations

Comparison of the Years Ended September 30, 2001 and 2002

General

      Net earnings were $10.2 million ($0.77 per diluted share) for the year
ended September 30, 2002, an increase of 9.7% compared to $9.3 million ($0.70
per diluted share) for the year ended September 30, 2001. As a result of share
repurchases and the increase in net earnings, diluted earnings per share
increased 10.0%. Net interest income increased $5.1 million primarily as a
result of a decrease in interest income of $6.4 million which was accompanied by
a decrease in interest expense of $11.5 million.


40
<PAGE>

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

Interest Income

      Interest income for the year ended September 30, 2002, decreased 10.6% to
$53.9 million as compared to $60.3 million for the year ended September 30,
2001. The yield on interest-earning assets for the year ended September 30, 2001
was 8.26% compared to 7.10% for the year ended September 30, 2002. The average
yield on loans receivable for fiscal year 2002 was 7.58% compared to 8.80% in
2001. The yield on investments which includes Investments, Mortgage-Backed
Securities, Overnight Funds and Federal Funds, decreased to 6.15% for the fiscal
year 2002 from 7.00% for fiscal year 2001. Total interest-earning assets for
fiscal year 2002 averaged $765.8 million compared to $738.5 million for the year
ended September 30, 2001. The increase in average interest-earning assets is
primarily due to an increase in average loans receivable of approximately $9.7
million and average mortgage-backed and investment securities of approximately
$21.3 million.

Interest Expense

      Interest expense on interest-bearing liabilities was $21.8 million for the
year ended September 30, 2002, as compared to $33.3 million in fiscal 2001. The
cost of interest-bearing liabilities was 2.96% for the year ended September 30,
2002, compared to 4.64% in fiscal year 2001. The average cost of deposits for
the year ended September 30, 2002, was 2.42% compared to 4.03% for the year
ended September 30, 2001. The cost of FHLB advances and reverse repurchase
agreements for fiscal 2002 was 5.11% and 2.39%, respectively, compared to 5.90%
and 5.99%, respectively, for fiscal 2001. Total average interest-bearing
liabilities increased 2.8% from $717.9 million at September 30, 2001, to $738.1
million at September 30, 2002. The increase in average interest-bearing
liabilities is due to an increase in average deposits of approximately $87.8
million. This was offset by a decrease in average FHLB advances of $38.4 million
and average reverse repurchase agreements of $30.5 million.

Net Interest Income

      Net interest income was $32.0 million for the year ended September 30,
2002, an increase of $5.1 million, compared to $26.9 million for the year ended
September 30, 2001. The net interest margin increased to 4.14% for fiscal 2002
compared to 3.62% for fiscal 2001. Average interest-earning assets increased
$27.3 million while average interest-bearing liabilities increased $20.2
million. During fiscal 2002, interest rates have decreased. At September 30,
2001 and September 30, 2002, the prime rate of interest was 6.0% and 4.75%,
respectively. With the reduction in interest rates, resulting from the Federal
Reserve Board's decision to reduce the prime rate by 125 basis points, it is
expected that the Company's yield on interest earning assets and cost of
deposits and borrowing will decline in fiscal 2003. Consequently, it is expected
that a substantial portion of the Company's loan portfolio will be subject to
refinancing at lower rates. Should, as a result of continued rate reductions by
the Federal Reserve, refinancing of loans at lower rates and repricing of loans
tied to prime or treasury rates outpace the repricing of deposits and
borrowings, the Company could experience a significantly reduced net interest
margin in the future.

Provision for Loan Losses

      As a result of growth in loans receivable, the Company's provision for
loan losses increased from $955,000 for fiscal 2001 to $1.2 million for fiscal
2002. The allowance for loan losses as a percentage of loans was 1.42% at
September 30, 2002 and 2001. Loans delinquent 90 days or more were .63% of total
loans at September 30, 2002, compared to .64% at September 30, 2001. The
allowance for loan losses was 224% of loans delinquent more than 90 days at
September 30, 2002, compared to 220% at September 30, 2001. Management believes
that the current level of the allowance for loan losses is adequate considering
the composition of the loan portfolio, the portfolio's loss experience,
delinquency trends, current regional and local economic conditions and other
factors. Also see "Nonperforming Assets" and "Allowance for Loan Losses."

Other Income

      In fiscal 2001, total other income increased slightly from $7.9 million
for the period ended September 30, 2001, to $8.1 million for the period ended
September 30, 2002. As a result of increased transaction deposit accounts, fees
and service charges on loans and deposit accounts was $3.1 million for fiscal
2002, compared to $2.6 million for fiscal 2001. Due to a decreased long-term
interest rate environment which has resulted in increased fixed-rate mortgage
originations, gain on sale of loans was $1.5 million for the year ended
September 30, 2002, compared to $1.3 million for the year ended September 30,
2001. Gain on sale of mortgage-backed securities, net was $238,000 for fiscal
2002, compared to $727,000 for fiscal 2001. Other income decreased from $1.7
million for the year ended September 30, 2001, to $1.6 million for the year
ended September 30, 2002.


                                                                              41
<PAGE>

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

Other Expense

      General and administrative expenses were $22.8 million for fiscal 2002 as
compared to $19.3 million for fiscal 2001. Salaries and employee benefits
increased to $12.5 million for fiscal 2002 as compared to $10.5 million for
fiscal 2001, or 18.7%, primarily due to normal increases and the costs of
staffing for new offices. During fiscal 2002, Coastal Federal Bank added offices
in Loris and Pawleys Island, South Carolina. Also as a result of the office
additions, net occupancy, furniture and fixtures and data processing expense
increased $1.0 million for fiscal 2002, as compared to fiscal 2001. Other
expenses increased from $3.5 million in fiscal 2001 to $4.1 million in fiscal
2002. The increase is primarily due to increased expenses related to the
servicing of deposit accounts.

Income Taxes

      Income taxes increased from $5.3 million in fiscal 2001 to $5.9 million in
fiscal 2002 as a result of increased earnings before income taxes.

Non-performing Assets

      Non-performing assets were $9.1 million at September 30, 2003 compared to
$4.6 million at September 30, 2002. Loans past due 90 days or more increased
from $3.5 million at September 30, 2002, to $7.4 million at September 30, 2003.
Real estate acquired through foreclosure increased from $1.0 million at
September 30, 2002, to $1.6 million at September 30, 2003.

      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.

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

Allowance for Loan Losses

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

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

      Certain 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.


42
<PAGE>

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

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

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

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

      The Company established provisions for loan losses for the years ended
September 30, 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, respectively. At September 30,
2003, the Company had an allowance for loan losses of $9.8 million, which was
1.40% of net loans.

Off-Balance Sheet Arrangements

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

      The Company's off-balance sheet arrangements, which principally include
lending commitments and derivatives are described below. At September 30, 2002
and 2003, the Company had no interests in non-consolidated special purpose
entities.

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

      Loan commitments for residential housing and land totaled $39.3 million.
For retail Customers, loan commitments are generally lines of credit secured by
residential property. At September 30, 2003 retail loan commitments totaled
$42.0 million. Standby letters of credit are conditional commitments to
guarantee performance, typically contract or financial integrity, of a Customer
to a third party and totaled $2.9 million at September 30, 2003. Commercial
lines of credit and unused business and personal credit card lines, which
totaled $23.9 million at September 30, 2003, are generally for short-term
borrowings.

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

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


                                                                              43
<PAGE>

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

      At September 30, 2003, the fair value of derivative assets and liabilities
totaled $123,000 and $257,000 respectively. The related notional amounts, which
are not recorded on the consolidated balance sheet, totaled $8.2 million for the
derivative assets and $17.0 million for the derivative liabilities.

Interest Rate Risk Disclosure

      The Bank's Asset Liability Management Committee ("ALCO") monitors and
considers methods of managing exposure to interest rate risk. The ALCO consists
of members of the Board of Directors and Senior Leadership of the Company and
meets quarterly. The Bank's exposure to interest rate risk is reviewed on at
least a quarterly basis by the ALCO. Interest rate risk exposure is measured
using interest rate sensitivity analysis to determine the Bank's change in net
portfolio value in the event of hypothetical changes in interest rates. The ALCO
is charged with the responsibility to maintain the level of sensitivity of the
Bank's net portfolio value within Board approved limits.

      Net portfolio value (NPV) represents the market value of portfolio equity
and is equal to the market value of assets minus the market value of
liabilities, with adjustments made for off-balance sheet items over a range of
assumed changes in market interest rates. The Bank's Board of Directors has
adopted an interest rate risk policy which establishes maximum allowable
decreases in NPV in the event of a sudden and sustained one hundred to four
hundred basis point increase or decrease in market interest rates. The following
table presents the Bank's projected change in NPV as computed by the OTS for the
various rate shock levels as of September 30, 2003.

<TABLE>
<CAPTION>
                            Board Limit    Board Limit     Market Value     Market Value
                            Minimum NPV      Maximum         Of Assets    Portfolio Equity     NPV
Change in Interest Rates        Ratio     Decline in NPV      9/30/03          9/30/03        Ratio
------------------------    -----------   --------------   ------------   ----------------    -----
<S>                             <C>          <C>            <C>               <C>             <C>
300 basis point rise            5.00%        400 BPS        $1,169,090        $ 100,277        8.58%
200 basis point rise            6.00%        300 BPS        $1,190,866        $ 111,628        9.37%
100 basis point rise            6.00%        250 BPS        $1,212,853        $ 121,364       10.01%
No Change                       6.00%                       $1,231,968        $ 126,363       10.26%
100 basis point decline         6.00%        250 BPS        $1,242,347        $ 125,123       10.07%
200 basis point decline         6.00%        300 BPS               N/A              N/A         N/A
300 basis point decline         6.00%        350 BPS               N/A              N/A         N/A
</TABLE>

      The preceding table indicates that at September 30, 2003, in the event of
a sudden and sustained increase in prevailing market interest rates, the Bank's
NPV would be expected to decrease, and that in the event of a sudden decrease in
prevailing market interest rates, the Bank's NPV would be expected to change
minimally. Values for the 200 and 300 basis point decline are not indicated due
to the current level of interest rates. At September 30, 2003, the Bank's
estimated changes in NPV were within the limits established by the Board of
Directors.

      Computation of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the ALCO could undertake in response to sudden changes in interest
rates.

      The Bank also uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities. Interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within the same time period. A gap is
considered positive when the amount of interest-rate-sensitive assets exceeds
the amount of interest-rate-sensitive liabilities. Generally, during a period of
rising rates, a positive gap would result in an increase in net interest income.
Conversely, during a period of falling interest rates, a positive gap would
result in a decrease in net interest income. It is ALCO's goal to maintain
reasonable balance between exposure to interest rate fluctuations and earnings.

Impact of New Accounting Pronouncements

      In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 (Statement 146), "Accounting for Costs Associated with Exit or Disposal
Activities," which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs


44
<PAGE>

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

Incurred in a Restructuring)." This Statement applies to costs associated with
an exit activity that does not involve an entity newly acquired in a business
combination or with a disposal activity covered by FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Those costs
include, but are not limited to, the following: a) termination benefits provided
to current employees that are involuntarily terminated under the terms of a
benefit arrangement that, in substance, is not an ongoing benefit arrangement or
an individual deferred compensation contract (hereinafter referred to as
one-time termination benefits), b) costs to terminate a contract that is not a
capital lease and c) costs to consolidate facilities or relocate employees. This
Statement does not apply to costs associated with the retirement of a long-lived
asset covered by FASB Statement No. 143, "Accounting for Asset Retirement
Obligations." A liability for a cost associated with an exit or disposal
activity shall be recognized and measured initially at its fair value in the
period in which the liability is incurred. A liability for a cost associated
with an exit or disposal activity is incurred when the definition of a liability
is met. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company adopted SFAS 146 on October 1, 2002 and its adoption did
not have a material effect on the Company's consolidated financial statements.

      In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (Statement 148), "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123".
Statement 148 amends FASB Statement 123, "Accounting for Stock-Based
Compensation" (Statement 123) to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, Statement 148 amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.

      Effective January 1, 2003, the Company adopted the initial recognition and
initial measurement provisions of Financial Accounting Standards Board
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
The Company adopted the disclosure requirements effective as of December 31,
2002. FIN 45 elaborates on the disclosure to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that is has issued. FIN 45 clarifies that a guarantor is required to
disclose (a) the nature of the guarantee; (b) the maximum potential amount of
future payments under the guarantee; (c) the carrying amount of the liability;
and (d) the nature and extent of any recourse provisions or available collateral
that would enable the guarantor to recover the amounts paid under the guarantee.
FIN 45 also clarifies that a guarantor is required to recognize, at inception of
a guarantee, a liability for the obligations it has undertaken in issuing the
guarantee at its inception.

      In January 2003, the FASB issued Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
which addresses consolidation by business enterprises of variable interest
entities. Under FIN 46, an enterprise that holds significant variable interest
in a variable interest entity but is not the primary beneficiary is required to
disclose the nature, purpose, size and activities of the variable interest
entity, its exposure to loss as a result of the variable interest holder's
involvement with the entity, and the nature of its involvement with the entity
and date when the involvement began. The primary beneficiary of a variable
interest entity is required to disclose the nature, purpose, size, and
activities of the variable interest entity, the carrying amount and
classification of consolidated assets that are collateral for the variable
interest entity's obligations, and any lack of recourse by creditors (or
beneficial interest holders) of a consolidated variable interest entity to the
general creditors (or beneficial interest holders). FIN 46 is effective for the
first fiscal year or interim period beginning after June 15, 2003.

      On October 31, 2003, the FASB proposed a modification and interpretation
of FIN 46. Evaluation of the impact of FIN 46 and SFAS No. 150, ("SFAS 150"),
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," on the treatment of debt associated with trust
preferred securities is in process. The Company currently consolidates the
trust, which issued the Company's trust preferred securities, in its
consolidated financial statements and reports the related debt instruments,
referred to as debt associated with trust preferred securities, as a liability
on its consolidated balance sheet. Under one potential interpretation of FIN 46,
the Company's trust, which issued the Company's trust preferred securities,
would no longer be included in the Company's consolidated financial statements.
Conversely, SFAS 150 requires the consolidation of these subsidiaries and the
presentation of the related debt instruments as a liability.

      Effective July 1, 2003, the Company adopted SFAS No. 149, (Statement 149),
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities,"
which amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to


                                                                              45
<PAGE>

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

as derivatives) and for hedging activities under SFAS No 133, "Accounting for
Derivative Instruments and Hedging Activities." Statement 149 clarifies under
what circumstances a contract with an initial net investment meets the
characteristics of a derivative, clarifies when a derivative contains a
financing component, amends the definition of an underlying to conform it to
language used in FIN 45, and amends certain other existing pronouncements. Those
changes will result in more consistent reporting of contracts as either
derivatives or hybrid instruments. Management does not believe the provisions of
this standard will have a material impact on the results of future operations.

      Effective July 1, 2003, the Company adopted SFAS 150, which establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS 150
requires an issuer to classify certain financial instruments that include
certain obligations, such as mandatory redemption, repurchase of the issuer's
equity, or settlement by issuing equity, as liabilities or assets in some
circumstances. Forward contracts to repurchase an issuer's equity shares that
require physical settlement in exchange for cash are initially measured at the
fair value of the shares at inception, adjusted for any consideration or
unstated rights or privileges, which is the same as the amount that would be
paid under the conditions specified in the contract if settlement occurred
immediately. Those contracts and mandatory redeemable financial instruments are
subsequently measured at the present value at the amount to be paid at
settlement, if both the amount of cash and the settlement date are fixed, or
otherwise, at the amount that would be paid under the conditions specified in
the contract if settlement occurred at the reporting date. Other financial
instrument are initially and subsequently measured at fair value, unless
required by SFAS 150 or other generally accepted accounting principles to be
measured differently. The Company had no impact upon adoption since it had no
financial instruments, which it considers to be included within the scope of
SFAS 150.

Capital Standards and Regulatory Matters

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

Effects of Inflation and Changing Prices

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


46
<PAGE>

Board of Directors

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

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

          James T. Clemmons                            James T. Clemmons                       Jerry L. Rexroad, CPA
          Chairman                                     Chairman                                Chief Financial Officer
          Coastal Financial Corporation                Coastal Federal Bank                    Coastal Planners Holding Corporation

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

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

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

          Frank A. Thompson, II                        Frank A. Thompson, II
          President                                    President
          Peoples Underwriters, Inc.                   Peoples Underwriters, Inc.
</TABLE>


                                                                              47
<PAGE>

COASTAL FINANCIAL CORPORATION
Leadership Group

<TABLE>
<S>                                           <C>                                    <C>
          Sherri J. Adams                     Shonda C. Chestnut                     Andrew D. Gable
          Personal Banking Leader             Assistant Vice President               Assistant Vice President
          N. Myrtle Beach                     Banking Center Leader                  Closing and Construction
                                              Surfside                               Leader
          Ginger Allen
          Assistant Vice President            Susan J. Cooke                         William A. Gehman, III, CPA
          Senior Underwriter                  Senior Vice President                  Senior Vice President
                                              Administrative Services Leader         Corporate Controller
          Anthony Ambuhl                      Corporate Secretary
          Assistant Vice President                                                   Mary L. Geist
          Commercial Banking Officer          Teresa L. Cotney                       Vice President
                                              Personal Banking Leader                Data Services Leader
          Donna P. Bailey                     Murrells Inlet
          Assistant Vice President                                                   Michael C. Gerald
          Delivery Systems Resource           Patricia A. Coveno                     President and Chief Executive
          Administrator                       Assistant Vice President               Officer
                                              Banking Resources Leader
          James R. Baker, MCSE                                                       Kenan D. Godwin
          Assistant Vice President            Jerry J. Cox, Jr.                      Assistant Vice President
          Systems Engineer                    Vice President                         Commercial Banking Officer
                                              Community Banking Leader
          Harry G. Bates, IV                  Loris Community                        Amy M. Gore
          Assistant Vice President                                                   Personal Banking Leader
          Banking Center Leader               John L. Creamer                        Wilmington-Oleander
          Oak Street                          Vice President
                                              Coastal Investor Services Group        Jimmy R. Graham
          Jeffrey A. Benjamin                                                        Executive Vice President
          Senior Vice President               Robert D. Douglas                      Chief Information Officer
          Credit Administration               Executive Vice President
          Leader                              Human Resources Leader                 Don C. Hamilton
                                                                                     Vice President
          Jill L. Bone                        Trina S. Dusenbury                     Residential Banking Leader
          Personal Banking Leader             Vice President
          Pawleys Island                      Residential Loan Administration        E. Haden Hamilton Jr.
                                              Leader                                 President
          Edna C. Bryant                                                             Coastal Investor Services Group
          Personal Banking Leader             Michael L. Evans
          Bi-Lo Socastee                      Vice President                         Lauren E. Henson
                                              Loan Review Leader                     Vice President
          Cynthia L. Buffington                                                      Dean of Coastal Federal University
          Assistant Vice President            Rita E. Fecteau
          Item Processing Leader              Vice President                         John Michael Hill
                                              Accounting Leader                      Vice President
          Ronnie L. Burbank                                                          Coastal Investor Services Group
          Vice President                      J. Daniel Fogle
          Senior Banking Leader               Vice President                         Debra Hinson
          Wilmington CBD                      Residential Banking Leader             Assistant Vice President
                                              Carolina Forest/                       Coastal Investor Services Group
          Glenn T. Butler, MCSE, CCNA         Waccamaw/ Conway
          Vice President                                                             Glenn D. Humbert
          Network Services Leader             Joel P. Foster                         Vice President
                                              Senior Vice President                  Community Banking Leader
          Anne R. Caldwell                    Area Banking Leader                    Sunset Beach Community
          Assistant Vice President            Myrtle Beach Community
          Deposit Servicing Leader                                                   Lisa B. James
                                                                                     Vice President
                                                                                     Account Servicing Leader
</TABLE>


48
<PAGE>

COASTAL FINANCIAL CORPORATION
Leadership Group - Continued

<TABLE>
<S>                                           <C>                                    <C>
          Ruth S. Kearns                     Janice B. Metz                          Douglas E. Shaffer
          Senior Vice President              Assistant Vice President                Senior Vice President
          Customer Recognition Officer       Advertising Officer                     Area Leader
                                                                                     North and West Communities
          Kara S. Kessinger, CPA/PES         Abigail E. Mishoe
          President                          Assistant Vice President                Steven J. Sherry
          Coastal Retirement                 Residential Banking Officer             Executive Vice President
          Estate & Tax                                                               Chief Marketing Officer
          Planners, Inc.                     Lynn T. Murray
                                             Senior Vice President                   Joseph Shumbo
          L. Eric Keys                       Customer Relationship Leader            Assistant Vice President
          Vice President                                                             Residential Banking Leader
          Community Banking Leader           Deborah J. Myers
          South Horry Community              Assistant Vice President                J. Marcus Smith, Jr.
                                             Electronic Banking Leader               Senior Vice President
          James Louis LaBruce                                                        Internal Audit Outsource
          Vice President                     Ronald A. Nolan
          Commercial Banking Leader          Assistant Vice President                Carolyn A. Specht
          Central Horry Community            Security Officer                        Purchasing Leader

          Scott W. Lander                    Deborah A. Orobello                     Phillip G. Stalvey
          Senior Vice President              Personal Banking Leader                 Executive Vice President
          Area Leader                        Little River                            Banking Leader
          North Carolina Region
                                             Charles S. Page                         H. Delan Stevens
          William H. Langfitt                Vice President                          Vice President
          Personal Banking Leader            Banking Center Leader                   Community Banking Leader
          Dunes                                                                      West Community
                                             Orit Perez
          Justin M. Lee                      Personal Banking Leader                 Sandra J. Szarek
          Personal Banking Leader            38th Avenue Bi-Lo                       Residential Loan Servicing Leader
          Socastee
                                             Derick R. Powers                        Theresa Z. Tierney
          Edward L. Loehr, Jr.               Banking Center Leader                   Assistant Vice President
          Vice President                     Southport                               Commercial Banking Officer
          Budgeting and Treasury
                                             Jerry L. Rexroad, CPA                   Matthew J. Towns
          Kathleen M. Lutes                  Executive Vice President                Vice President
          Assistant Vice President           Chief Financial Officer                 Credit Administration
          Conforming Underwriter Leader
                                             David L. Roe                            Douglas W. Walters
          Richard M. Marsh                   Senior Vice President                   Vice President
          Personal Banking Leader            Small Business Banking Leader           Residential Banking Leader
          Loris                                                                      North Myrtle Beach
                                             Stacy M. Sansbury
          Michael C. Mauney                  Personal Banking Leader                 Sandra R. Zanfini
          Assistant Vice President           Conway                                  Assistant Vice President
          Collections Leader                                                         Assistant Corporate Secretary
                                             Eulette W. Sauls                        Corporate Support Leader
          Amy E. McLaurin                    Customer Account Relationship
          Assistant Vice President           System Leader
          Personal Banking Leader
          Sunset Beach                       Sherry G. Schoolfield, CRCM
                                             Assistant Vice President
          Brenda S. Meier                    Compliance Officer
          Office Services Leader
</TABLE>


                                                                              49
<PAGE>

Locations

<TABLE>
<CAPTION>
          Coastal Federal Bank                                                        Coastal Planners Holding Corporation
<S>                                           <C>                                     <C>
          Oak Street Banking Center           Socastee Banking Center                 Susan J. Cooke
          2619 Oak Street                     4801 Socastee Boulevard                 Corporate Secretary
          Myrtle Beach, SC 29577-3129         Myrtle Beach, SC 29575                  843.205.2000
          843.205.2000                        843.205.2007
                                                                                      Michael C. Gerald
          Carolina Forest Banking Center      Socastee Banking Center (BI-LO)         President and Chief Executive Officer
          3894 Renee Drive                    5020 Dick Pond Road                     843.205.2000
          Myrtle Beach, SC 29579              Myrtle Beach, SC 29588
          843.205.2016                        843.205.2042                            Jerry L. Rexroad
                                                                                      Executive Vice President,
          Conway Banking Center               Southport Banking Center                Chief Financial Officer and Treasurer
          310 Wright Boulevard                4956-1 Long Beach Road SE               843.205.2000
          Conway, SC 29526                    Southport, NC 28461
          843.205.2005                        843.205.2032
                                              910.454.4173
          Dunes Banking Center
          7500 North Kings Highway            Sunset Beach Banking Center
          Myrtle Beach, SC 29572              1625 Seaside Road S.W.
          843.205.2001                        Sunset Beach, NC 28468
                                              843.205.2012
          Little River Banking Center         910.579.8160
          1602 Highway 17
          Little River, SC 29566              Surfside Banking Center
          843.205.2014                        112 Highway 17 South
                                              & Glenns Bay Road
          Loris Banking Center                Surfside Beach, SC 29575
          4262 Main Street                    843.205.2003
          Loris, SC 29569
          843.756.4455                        Waccamaw Medical Park Banking Center
                                              112 Waccamaw Medical Park Drive
          Murrells Inlet Banking Center       Conway, SC 29526
          3348 Highway 17 South               843.205.2009
          & Inlet Crossing
          Murrells Inlet, SC 29576            38th Avenue Banking Center (BI-LO)
          843.205.2008                        1245 38th Avenue North
                                              Myrtle Beach, SC 29577
          North Myrtle Beach Banking Center   843.205.2041
          521 Main Street
          North Myrtle Beach, SC 29582        Wilmington Banking Center
          843.205.2002                        5710 Oleander Drive, Suite 209
                                              Wilmington, NC 28403
          Pawleys Island Banking Center       843.205.2031
          Coastal Federal Town Center         910.313.1161
          11403 Ocean Highway
          Pawleys Island, SC 29585            Wilmington Downtown Banking Center
          843.205.2020                        109 Market Street
                                              Wilmington, NC 28401
          Shallotte Banking Center            843.205.2033
          200 Smith Avenue                    910.763.2372
          Shallotte, NC 28459
          910.754.6187
</TABLE>


50
<PAGE>

Corporate Information

Common Stock and Dividend Information

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

As of November 28, 2003, the Corporation had 1,042 shareholders and 12,933,355
shares of Common Stock outstanding. This does not reflect the number of persons
or entities who hold stock in nominee or "street name."

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

Market Price of Common Stock

The table below reflects the high and low bid stock prices published by Nasdaq
for each quarter. The prices have been adjusted retroactive to reflect stock
dividends.

                               HIGH           LOW          CASH
                                BID           BID        DIVIDEND

Fiscal Year 2003:
   First Quarter              $15.37        $12.31        $0.045
   Second Quarter              14.19         11.65         0.045
   Third Quarter               13.49         11.70         0.055
   Fourth Quarter              15.91         12.44         0.055

Fiscal Year 2002:
   First Quarter              $ 8.18        $ 7.36        $0.041
   Second Quarter               7.94          7.65         0.041
   Third Quarter               12.43          7.55         0.045
   Fourth Quarter              12.77         10.74         0.045

Form 10-K

A copy of Coastal Financial Corporation's Annual Report on Form 10-K, as filed
with the Securities Exchange Commission for the year ended September 30, 2003,
may be obtained without a charge by writing to the Shareholder Relations Officer
at the Corporate Address.

Annual Meeting of Shareholders

The Annual Meeting of Shareholders of Coastal Financial Corporation will be held
at the Ocean Reef Resort (formerly Myrtle Beach Martinique), 7100 North Ocean
Boulevard, Myrtle Beach, South Carolina, on Tuesday, January 27, 2004 at 2:00
p.m., Eastern Standard Time.

Additional Information

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

Corporate Offices

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

Transfer Agent and Registrar

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

Independent Certified Public Accountants

KPMG LLP
55 Beattie Place, Suite 900
Greenville, South Carolina 29601

Special Counsel

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

Shareholder Relations Officer

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

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

<TABLE>
<S>                   <C>           <C>                          <C>       <C>                                  <C>
COASTAL                   [LOGO]             [LOGO]            * COASTAL                                        Securities are
FEDERAL               EQUAL HOUSING          COASTAL             INVESTOR          RAYMOND JAMES                offered exclusively
BANK                      LENDER    RETIREMENT o ESTATE o TAX    SERVICES        FINANCIAL SERVICES             through Raymond
The right bank for you.   MEMBER            PLANNERS                              MEMBER NASD/SIPC              James Financial
                           FDIC                                            Committed to your financial future.  Services, Inc.,
                                                                                                                member NASD/SIPC, an
                                                                                                                independent
                                                                                                                broker/dealer, and
                                                                                                                are not insured by
                                                                                                                the FDIC or any
                                                                                                                other bank
                                                                                                                insurance, are not
                                                                                                                deposits or
                                                                                                                obligations of the
                                                                                                                bank, are not
                                                                                                                guaranteed by the
                                                                                                                bank, and are
                                                                                                                subject to risk,
                                                                                                                including the
                                                                                                                possible loss of
                                                                                                                principal.
</TABLE>


                                                                              51
<PAGE>

                        (Page left blank intentionally)


52
<PAGE>

NOTICE CONCERNING QUARTERLY SHAREHOLDER REPORTS

With the rising costs of publishing and mailing quarterly reports and concurrent
timeliness of providing these via the Internet on our website at
www.coastalfederal.com, we will be sending printed versions of our quarterly
shareholder reports only to shareholders who request them. All shareholders will
continue to receive the annual report and proxy statement in printed form.

Shareholders and other interested parties can obtain quarterly reports and our
President's letter from the previous year annual report through Coastal Federal
Bank's home page. In addition, our revised website will enable you to learn more
about our products and services.

For your convenience, we are providing this business reply card, which should be
completed and returned to us if you wish to be placed on our quarterly report
mailing list. We urge you to help us lower our costs by using the more efficient
electronic method of accessing this information.

|X|   I wish to continue to receive Coastal Financial Corporation's Quarterly
      Shareholders Reports

      (Please print clearly)

________________________________________________________________________________
First Name                          MI       Last

________________________________________________________________________________
Address

________________________________________________________________________________
City                                                 State     Zip

<PAGE>

Notice
Concerning
Quarterly
Shareholder
Reports

                                                                           PLACE
                                                                           STAMP
                                                                           HERE

ATTN: SUSAN COOKE
COASTAL FINANCIAL CORPORATION
2619 OAK STREET
MYRTLE BEACH, SC 29577-3129
























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