COASTAL FINANCIAL CORPORATION




                                                                            2002
                                                                   ANNUAL REPORT

<PAGE>

--------------------------------------------------------------------------------
                                 ~ DEDICATION ~
--------------------------------------------------------------------------------

                             A QUEST FOR EXCELLENCE
    THANKS TO OUR PEOPLE, OUR MISSION, OUR VALUES AND OUR GUIDING PRINCIPLES
          U.S.BANKER MAGAZINE HAS RANKED COASTAL FINANCIAL CORPORATION
                    #1 IN THE CAROLINAS AND #3 IN THE NATION


Over the twelve  years since  becoming a publicly  owned  company,  all of us at
Coastal Financial  Corporation have worked diligently toward achieving our Basic
Corporate  Objective of Maximizing The Value Of Our Shareholders'  Investment by
focusing on our Long-Term Goal of Being The Best Financial  Services  Company In
Our  Marketplace.  And, over that period of time,  we have  received  continuing
evidence of progress in those quests.

Related to our Basic Corporate Objective Of Maximizing The Value Of Our
Shareholders' Investment:


     -    The January 3, 1994 edition of  INVESTORS  BUSINESS  DAILY  recognized
                                          --------------------------
          Coastal  Financial  Corporation's  shares as having the largest  price
          increase of any bank stock listed on the New York,  American or Nasdaq
          stock markets during the year ended December 31, 1993.

     -    Coastal Financial Corporation was listed as #1 in Return on Equity for
          all publicly-held  financial  institutions in North and South Carolina
          in the  1998/1999  edition  of  CORPORATE  CAROLINA  published  by the
                                          -------------------
          editors of BUSINESS NORTH CAROLINA.
                     ------------------------

     -    In its November 17, 1998  edition,  THE STATE  newspaper  published an
                                              ---------
          article  titled  "Myrtle  Beach  bank leads  US,"  describing  Coastal
          Financial  Corporation  as the nation's  best savings bank  investment
          this decade.

     -    In its November 14, 1999  edition,  THE STATE  newspaper  published an
                                              ---------
          article titled "Myrtle Beach-based company is a financial pacesetter -
          Coastal Financial is the fastest growing new public financial services
          company of the 1990s."

     -    Coastal Financial Corporation was listed as #1 in Return on Equity for
          all publicly-held  financial  institutions in North and South Carolina
          in the  1999/2000  edition  of  CORPORATE  CAROLINA  published  by the
                                          -------------------
          editors of BUSINESS NORTH CAROLINA.
                     ------------------------

     -    U.S.  Banker,  in its July  2000  edition,  listed  Coastal  Financial
          -------------
          Corporation  #1 in the  Carolinas  and #16 in the  nation  in terms of
          earnings  per share  growth and  return on  equity,  based on the past
          three years averaged.

     -    Coastal Financial  Corporation received national attention in the July
          2001 edition of U.S.  Banker  Magazine.  This  publication  featured a
                          -----------------------
          listing of the Community  Banking  companies in the United States with
          assets between $673 million and $1.12 billion,  ranked in order, based
          upon return on equity and growth in per share  earnings  over the past
          five years.  Coastal  Financial  placed 1st in the  Carolinas  and 5th
          nationally in these measures.

     -    The July 2002 edition of U.S.  Banker  Magazine  featured a listing of
                                   ----------------------
          the  Community  Banks in the United  States with less than one billion
          dollars in assets,  ranked in order,  based upon return on equity over
          the past three years. Coastal Financial  Corporation placed 1st in the
          Carolinas and 3rd nationally in these measures.

     -    Coastal Financial Corporation was added to the Russell 2000 Index, and
          the broader Russell 3000 Index, effective as of July 1, 2002.

Related to our Long-Term Goal Of Being The Best Financial Services Company In
Our Marketplace:


     -    The 1997  SHESHUNOFF  MARKET SHARE REPORT ranked Coastal  Federal Bank
                    -------------------------------
          the leader in  deposit  market  share for Horry  County for the twelve
          months ended June 30, 1996.

     -    The 1998  SHESHUNOFF  MARKET SHARE REPORT ranked Coastal  Federal Bank
                    -------------------------------
          the leader in  deposit  market  share for Horry  County for the twelve
          months ended June 30, 1997.

     -    Coastal  Federal  Bank  placed 1st in voting by the readers of the SUN
                                                                             ---
          NEWS in the  Financial  Institutions  category of the SUN NEWS Best Of
          ----                                                  --------
          The Beach Competition for 1998.

     -    Coastal  Federal  Bank  placed 1st in voting by the readers of the SUN
                                                                             ---
          NEWS in the  Financial  Institutions  category of the SUN NEWS Best Of
          ----                                                  --------
          The Beach Competition for 1999.

     -    Coastal  Federal  Bank  placed 1st in voting by the readers of the SUN
                                                                             ---
          NEWS in the  Financial  Institutions  category of the SUN NEWS Best Of
          ----                                                  --------
          The Beach Competition for 2000.

                                       2
<PAGE>



     -    Coastal  Federal  Bank  placed 1st in voting by the readers of the SUN
                                                                             ---
          NEWS in the  Financial  Institutions  category of the SUN NEWS Best Of
          ----                                                  --------
          The Beach Competition for 2001.

     -    The 2002  SHESHUNOFF  MARKET SHARE REPORT ranked Coastal  Federal Bank
                    -------------------------------
          the leader in  deposit  market  share for Horry  County for the twelve
          months ended June 30, 2001.

     -    The 2002 FDIC/OTS  SUMMARY OF DEPOSITS  REPORT ranked Coastal  Federal
                   -------------------------------------
          Bank the  leader in  deposit  market  share for Horry  County  for the
          twelve months ended June 30, 2002.

     -    Coastal  Federal  Bank  placed 1st in voting by the readers of the SUN
                                                                             ---
          NEWS in the Financial Institutions and Mortgage Company categories and
          ----
          Coastal Investor Services, Inc.,* placed 1st in the Financial Planning
          category of the SUN NEWS Best Of The Beach Competition for 2002.


How does an organization create such superior long-term results? We believe that
our ever-increasing focus on our People, our Mission, our Values and our Guiding
Principles has enabled these results.

Our overriding commitment to 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 insure that our
best years are yet to come.



                  [GRAPHIC - CHART - SHARE PRICE PERFORMANCE]



The price of Coastal Financial  Corporation's common stock increased 37.6% since
September  30,  2001 and has grown at a compound  annual  rate of over 32% since
1990.  The foregoing  reflects  historical  results and may not be indicative of
future performance.



                                        3

<PAGE>

FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
                                                                       At or for Years Ended September 30,
                                                             --------------------------------------------------------
                                                                 1998      1999        2000       2001       2002
                                                              ---------   --------    -------    -------   --------
                                                                   (Dollars in thousands, except per share data)
<S>                                                          <C>          <C>       <C>        <C>        <C>
Financial Condition Data:
Total assets. . . . . . . . . . . . . . . . . . . . . . . .  $  643,560   $713,013  $ 768,838  $ 763,214  $ 950,796
Loans receivable, net . . . . . . . . . . . . . . . . . . .     414,264    455,351    511,701    488,754    536,851
Mortgage-backed securities . . . . . . . . . . . . . . . . .    170,181    182,115    189,239    190,553    331,808
Cash, interest-bearing deposits and investment securities. .     25,507     30,296     25,715     36,320     27,816
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . .     386,321    399,673    406,217    530,364    637,081
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . .    210,560    262,541    303,151    160,808    228,622
Stockholder's equity . . . . . . . . . . . . . . . . . . . .     37,851     41,237     46,945     57,248     66,386
Operating Data:
Interest income . . . . . . . . . . . . . . . . . . . . . .  $   43,894   $ 49,559   $ 58,079   $ 60,255   $ 53,873
Interest expense . . . . . . . . . . . . . . . . . . . . . .     24,451     26,991     33,636     33,323     21,846
                                                              ---------   --------    -------    -------   --------
Net interest income . . . . . . . . . . . . . . . . . . . .      19,443     22,568     24,443     26,932     32,027
Provision for loan losses . . . . . . . . . . . . . . . . .         865        750        978        955      1,235
                                                              ---------   --------    -------    -------   --------
Net interest income after provision for loan losses . . . .      18,578     21,818     23,465     25,977     30,792
                                                              ---------   --------    -------    -------   --------

Other Income:
Fees and service charges on loans and deposit accounts . . .      1,639      2,025      2,126      2,634      3,148
Gain on sales of loans held for sale . . . . . . . . . . . .      1,579        979        631      1,295      1,462
Gain (loss) on sales of investment securities. . . . . . . .         96         73        (17)       (56)       102
Gain (loss) on sales of mortgage-backed securities, net. . .        521        191     (1,554)       727        238
Real estate operations . . . . . . . . . . . . . . . . . . .        149        (29)       (64)      (453)      (137)
Other income . . . . . . . . . . . . . . . . . . . . . . . .      1,895      2,334      4,759      3,755      3,326
                                                              ---------   --------    -------    -------   --------
Total other income . . . . . . . . . . . . . . . . . . . . .      5,879      5,573      5,881      7,902      8,139
Total general and administrative expense . . . . . . . . . .     13,618     15,286     16,191     19,292     22,824
                                                              ---------   --------    -------    -------   --------
Earnings before income taxes . . . . . . . . . . . . . . . .     10,839     12,105     13,155     14,587     16,107
Income taxes . . . . . . . . . . . . . . . . . . . . . . . .      3,987      4,390      4,698      5,287      5,901
                                                              ---------   --------    -------    -------   --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . .  $   6,852   $  7,715    $ 8,457    $ 9,300   $ 10,206
                                                              =========   ========    =======    =======   ========
Net earnings per common diluted share . . . . . . . . . . .   $     .60   $    .68    $   .75    $   .85   $    .93
                                                              =========   ========    =======    =======   ========
Cash dividends per common share . . . . . . . . . . . . . .   $     .17   $    .17    $   .17    $   .19   $    .21
                                                              =========   ========    =======    =======   ========
Weighted average shares outstanding diluted . . . . . . . .      11,408     11,378     11,216     10,995     10,940
                                                              =========   ========    =======    =======   ========
</TABLE>


All share and per share data have been  restated  to  reflect  two 4 for 3 stock
dividends  declared  on April  30,  1997 and May 6,  1998,  a 5% stock  dividend
declared on November 10, 1999, a 10% stock dividend  declared on March 14, 2000,
and a 3 for 2 stock dividend declared on July 31, 2001.

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,
                                                                --------------------------------------------------
                                                                   1998      1999      2000      2001      2002
                                                                ---------  --------  -------   -------   --------
<S>                                                             <C>       <C>       <C>       <C>       <C>
Other Data:
Return on assets (net income divided by average assets) . .        1.13%     1.14%     1.13%     1.20%     1.23%
Return on average equity (net income divided by average           19.52%    19.30%    19.52%    17.75%    16.92%
equity)
Average equity to average assets . . . . . . . . . . . . . .       6.05%     5.93%     5.80%     6.59%     7.29%
Book value per share . . . . . . . . . . . . . . . . . . . .    $  3.49   $  3.70   $  4.29   $  5.34   $  6.27
Dividend payout ratio  . . . . . . . . . . . . . . . . . . .      25.14%    23.28%    22.61%    21.58%    21.77%
Interest rate spread (difference between average yield on
interest-earning
assets and average cost of interest-bearing liabilities) . .       3.51%     3.55%     3.50%     3.64%     4.14%
Net interest margin (net interest income as a percentage of
average
interest-earning assets)  . . . . . . . . . . . . . . . . .        3.64%     3.67%     3.57%     3.77%     4.24%
Allowance for loan losses to total loans at end of period .        1.33%     1.36%     1.35%     1.42%     1.42%
Ratio of non-performing assets to total assets (1) . . . . .       0.36%     0.21%     0.73%     0.74%     0.48%
Tangible capital ratio . . . . . . . . . . . . . . . . . . .       6.10%     6.29%     6.56%     7.28%     6.57%
Core capital ratio  . . . . . . . . . . . . . . . . . . . .        6.10%     6.29%     6.56%     7.28%     6.57%
Risk-based capital ratio . . . . . . . . . . . . . . . . . .      12.67%    12.64%    12.45%    13.30%    12.74%
Number of:
Real estate loans outstanding  . . . . . . . . . . . . . . .      6,666     6,637     6,748     6,745     6,666
Deposit accounts . . . . . . . . . . . . . . . . . . . . . .     43,720    41,608    40,788    43,560    46,564
Full service offices . . . . . . . . . . . . . . . . . . . .         10        10        12        16        18

</TABLE>

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

4

<PAGE>

DEAR FRIENDS

Approximately ten years ago, when we adopted our QUEST FOR EXCELLENCE  Operating
Philosophy,  we could  not have  possibly  envisioned  the power  that  could be
created by an  organization of exceptional  People,  who were united by a shared
sense of  purpose  and  mission  and who felt a strong  bond with our Values and
Guiding  Principles.  This solid  foundation  has served to focus our  undivided
attention  on the  development  of  broad  and  durable  relationships  with our
Customers  and  Communities  and has lead to  positive  results  and  impressive
returns on a number of different measures.

Over that same ten year period, many cultural,  economic and social changes have
occurred.  And,  during  the  course  of the past two years  particularly,  many
significant  events have taken place which have shaken our nation and the world.
At Coastal  Financial  Corporation,  we have had the same  QUEST FOR  EXCELLENCE
Operating Philosophy over that ten year horizon,  because we operate our Company
from a  long-term  perspective  and  focus on doing  the  right  things  for our
Associates,  our  Customers  and our  Communities.  It is our  strong  view that
constancy  of purpose  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 continued  focus on our People,  our Mission,  our Values and
our Guiding  Principles  is a culture  which has continued to thrive and prosper
despite the volatility of the environment in which we operate. And, I'm happy to
report that,  despite the very difficult  circumstances  for our country and the
world, 2002 was another year of growth and progress that has enabled us to enter
2003 in a position of strength.

Our  never-ending  focus on our QUEST FOR  EXCELLENCE  Operating  Philosophy and
Vision 2005 Plan has continued to guide Coastal  Financial  Corporation  through
this sea of ever-increasing  change and has produced another year of exceptional
financial results.

Coastal  Financial  Corporation's  net income for 2002  totaled  $10.2  million,
compared  to $9.3  million in 2001.  On a fully  diluted  basis,  these  results
equated to a 9.4%  increase,  from $0.85 per share in 2001 to $0.93 per share in
2002.

The changes in our balance sheet during 2002 continued to reflect healthy growth
with deposits  derived from the residents and  businesses of the  Communities we
serve  increasing  by  approximately  $107 million,  or 20%, and loan  portfolio
growth of 10%.  The  primary  component  of the  gains in our  loans  receivable
portfolio was the  significant  increase in commercial  loans which has resulted
from our strong focus on the Business Banking element of our operations. Despite
the very challenging business environment  resulting from the varied and complex
dynamics  of this  year,  asset  quality  remained  excellent  compared  to both
industry standards and historical norms.

In addition to our  excellent  operating  results for 2002,  which again met our
high  expectations,  the market price of Coastal  Financial's  common stock,  at
September  30, 2002,  was 37.6%  higher than the market  price at September  30,
2001.

Equally as impressive is the fact that, since 1990, our operating  earnings have
increased at a compound annualized rate in excess of 17%.

Since becoming a publicly owned company in 1990, Coastal Financial Corporation's
stock  has  grown at a  compound  annual  rate of over 32%,  taking  our  market
capitalization from $4.6 million in October 1990, to $143.4 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 $294,000 at September 30, 2002.

One of the best indicators of performance is Return On Shareholders' Equity, and
this  measure  for  2002  was,  again,   outstanding.   Our  Return  On  Average
Shareholders'  Equity  of  16.9%  ranks us among  the top  performing  financial
services companies in America.

In  addition  to our own sense of  satisfaction  with these  financial  results,
during 2002,  we  continued to receive  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 received national attention in the July
          2002 edition of U.S.  Banker  Magazine.  This  publication  featured a
                          -----------------------
          listing of the Community  Banking  companies in the United States with
          assets  less than $1  billion,  ranked in order,  based upon return on
          equity over the past three years. Coastal Financial Corporation placed
          1st in the Carolinas and 3rd nationally in these measures.

     o    Coastal Financial Corporation was added to the Russell 2000 Index, and
          the broader Russell 3000 Index, effective as of July 1, 2002.

     o    Coastal Federal Bank, for the fifth  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 2002.

     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 2002.

     o    Coastal Investor Services, Inc. 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 2002.

     o    The 2002  SHESHUNOFF  MARKET SHARE REPORT ranked Coastal  Federal Bank
                    -------------------------------
          the leader in  deposit  market  share for Horry  County for the twelve
          months ended June 30, 2001.

     o    The 2002 FDIC/OTS  SUMMARY OF DEPOSITS  REPORT ranked Coastal  Federal
                   -------------------------------------
          Bank the  leader in  deposit  market  share for Horry  County  for the
          twelve months ended June 30, 2002.

We are extremely  proud of these forms of  recognition  because each, in its own
way, represents tangible evidence that our focus on our People, our Mission, our
Values and our Guiding  Principles has been effective in delivering value to all
of our stakeholders.

                                                                               5
<PAGE>

2002 OUR BEST YEAR

The results we experienced  during 2002 would have been  impressive  even in the
best of market  conditions.  But following a year marked by national  crisis and
consternation,  these success stories have special meaning in affirming what can
be achieved through the aligned effort of individuals who are united by a shared
sense of purpose and mission. Just over two weeks after the tragedy of September
11,  2001,  we began our  fiscal  2002 year and,  despite  almost  unprecedented
economic  uncertainties,   achieved  another  year  of  significant  growth  and
development.  The passion our People have for following the Mission,  Values and
Guiding Principles of our QUEST FOR EXCELLENCE  Operating Philosophy has enabled
the  financial  performance  during  fiscal  2002  which,  again,  met our  high
expectations and well positions us to aggressively pursue future  opportunities.


                 Noteworthy Financial Results for Fiscal 2002:


                               [GRAPHIC - CHART]

EARNINGS PER SHARE


     o    Net income for 2002 totaled $10.2 million, compared to $9.3 million in
          2001.  On a fully  diluted  basis,  these  results  equated  to a 9.4%
          increase, from $0.85 per share in 2001 to $0.93 per share in 2002.

     o    Shareholders' equity advanced 16.0% to $66.4 million.





                               [GRAPHIC - CHART]


BOOK VALUE PER SHARE


     o    Book value per share grew 17.4% to $6.27



6

<PAGE>

2002 OUR BEST YEAR


                               [GRAPHIC - CHART]


ASSETS

     o    Deposits  derived from the residents and businesses of the Communities
          we serve increased 20.1%,  from $530.4 million to $637.1 million,  the
          highest level in the Company's history.

     o    Loans  receivable  increased  10.0%,  from  $505.0  million  to $555.5
          million.

     o    Total assets increased 24.6%, from $763.2 million to $950.8 million.



                               [GRAPHIC - CHART]


NON-PERFORMING ASSETS TO TOTAL ASSETS

     o    Non-performing Assets to Total Assets declined from 0.74% to 0.48%.




                               [GRAPHIC - CHART]



ALLOWANCE FOR LOAN LOSSES TO NET LOANS

     o    Allowance for Loan Losses to Net Loans remained the same at 1.42%.

     o    The Company had Net Loan Charge Offs as a percentage  of Average Loans
          of 0.10% in 2002.

Results such as these are possible only through the  commitment,  dedication and
aligned  effort of a great team. Our tradition of  exceptional  performance  has
been rewarded in the financial  markets by a 3,091% increase in the price of our
shares  since  becoming a public  company in October of 1990,  vs.  291% for the
Standard & Poors 500 Index over the same period.



                                                                               7

<PAGE>

Since becoming publicly owned twelve years ago, we have methodically focused our
individual  and  collective  efforts on the  attainment  of Our Basic  Corporate
Objective Of  Maximizing  The Value Of Our  Shareholders'  Investment  by making
continual  progress  toward  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 informative 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 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 and First Union  banks,  which are
being merged, (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. Their historical results may not be indicative of future stock
price performance.

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,



                      12 Year Peer Group Price Performance

                               [GRAPHIC - CHART]


as well as the Nasdaq,  S&P 500 and Dow  Indices.

We're very pleased with our  performance  from the past year. Our 2002 operating
and share price performance  results clearly put Coastal Financial among the top
performing  financial services companies in the nation.  Thanks to our long-term
focus on our People,  our Mission,  our Values and our Guiding  Principles,  our
business has continued to prosper and our Associates  have  flourished,  growing
both  personally  and  professionally  as never  before.  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 most often asked: "Can we keep it up?"

We continue to believe the answer is an unequivocal  "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

                               [GRAPHIC - CHART]

8

<PAGE>

A LOOK BACK

There is a far eastern adage which is one of my  favorites.  It is attributed to
the ancient Chinese  philosopher  Lao-Tzu and it reads,  "Give a man a fish, you
feed him for a day; teach him how to fish, and you feed him for a lifetime."

Over  the past  ten  years,  our  philosophy  of  viewing  change  and  constant
improvement  as essential to the  achievement  of our long-term  objectives  has
continuously   focused  our  attention  and  efforts  on  building  a  workplace
environment  which could enable our  Leadership  Group and  Associates  to learn
those principles which support the practices we employ in serving our Customers.
This  philosophy,  which has been the essence of our  educational  curriculum at
Coastal Federal University,  and which has been cultivated and sustained through
Leadership example, has served as the cornerstone for enabling our Associates to
grow,  both personally and  professionally,  toward the attainment of their full
potential and has further leveraged our ever-increasing ability to work together
as a team toward  Exceeding the  Expectations of our Customers.  We believe this
approach has been both  fundamental and essential to assuring that our best days
are yet to come.

In looking  back at our  progress  over these  years,  one might ask why we have
remained so confident that Coastal  Financial  Corporation  would be prepared to
capitalize on future  opportunities?  We have long believed that to achieve true
success in our industry an organization  had to have  competitive  advantages in
several key areas: education,  corporate culture, geographic location, products,
distribution channels, sales culture, brand image and, most importantly, people.

Education:  During  2002,  we  continued  to allocate  significant  resources to
Coastal  Federal  University  in order to ensure that we continue to advance our
philosophy of becoming a learning organization.

Some time ago, we asked  ourselves  the  following  question . . . Why should we
build a learning  organization?  Why commit  ourselves to a lifelong  attempt to
understand and shift the ways we think and behave?

The answer was self evident . . . because we want superior performance!

Knowing  that Our Basic  Corporate  Objective  is To  Maximize  The Value Of Our
Shareholders' Investment and that our Long-Term Goal is To Be The Best Financial
Services Company In Our  Marketplace,  it is easy to understand that the primary
goal of our  educational  initiatives at Coastal  Federal  University must be to
achieve the proper  balance  between the  personal and  professional  growth and
development of our Associates and the economic  performance of our organization.
The two can never be separated because they are innately linked.

The reason  that we at Coastal  Financial  Corporation  have  achieved  superior
performance,  relative to our Community  Banking peers,  is due to our QUEST FOR
EXCELLENCE Operating Philosophy.  Most organizations believe that the essence of
"management"  is to  extract  ideas  from the heads of the  "managers"  of their
organization  and  place  them  into  the  hands  of the  "employees"  of  their
organization.

Our Operating Philosophy has, at its core, the goal of marrying the personal and
professional  development  of  every  Associate  in our  organization  with  the
superior economic performance of our Company.

It has been our very  strong  belief  that,  if we could  genuinely  Exceed  The
Expectations  of our Customers by providing  exceptional  service and becoming a
valued  financial and business  partner and, at the same time be a real resource
to our  Associates  and the  Communities  we serve,  then we could all feel good
about the future of our organization.

In the long run, the only sustainable source of competitive advantage we have is
our ability,  as an  organization,  to learn faster than our  competitors and to
replace incomplete or obsolete paradigms with new paradigms which can enable us,
both as individuals  and as an  organization,  to reach our full  potential.  No
outside force can take the momentum of that advantage away from us.

Without learning about our business,  as well as their own tasks, our Associates
cannot make the contributions of which they are capable.  This requires dramatic
learning efforts,  both for our Associates who must learn to act in the interest
of the whole  enterprise and for our Leadership Group members who must learn how
to extend mastery and self-determination throughout the organization.

If there is one single thing a learning  organization  does well,  it is helping
people embrace change. People in learning  organizations react more quickly when
their environment  changes because they know how to anticipate  changes that are
going to occur (which is far different  than trying to predict the future),  and
how to create the kinds of  changes  they want.  We are firmly  convinced  that,
while change and learning may not exactly be synonymous,  they are  inextricably
linked.

During 2002, Coastal Federal University's Dean of Associate Development and each
of the members of our outstanding  faculty have maintained a strong focus on the
effective execution of our Coastal Federal University Vision 2005 Plan, which is
designed to ensure the continued diversification and expansion of our curriculum
in order to keep it truly distinctive to our Associates and our Community.

We:

     o    made available to our Associates, on a 24/7 basis, 170 courses through
          an E-Training and development  website addition to the Coastal Federal
          Bank intranet channel;

     o    introduced the Bank Team Service Plus development program;



                                                                               9
<PAGE>

A LOOK BACK

     o    implemented  The Account  Servicing  Degree Of  Excellence  curriculum
          offering;

     o    in cooperation  with the Covey Institute For Learning,  added the What
          Matters Most course to our curriculum;

     o    delivered over 3,500 credit hours of instruction;

     o    passed  the  milestone  of having  in excess of 70% of our  Associates
          recorded as graduates of our Pledge To Excellence program; and

     o    hosted, at Coastal Federal  University's  Conference Center,  fourteen
          Community  seminars  featuring  a variety  of topics  from  Financial,
          Estate and Tax Planning to a lecture by a nationally renowned Melanoma
          Cancer research physician.

CORPORATE  CULTURE:  Our success at making  continual  progress toward Our Basic
Corporate  Objective Of Maximizing The Value Of Our Shareholders'  Investment by
striving to achieve our Long-Term Goal of Being The Best  Financial  Services In
Our  Marketplace is largely a function of maintaining a laser-like  focus on Who
We Are and What We Are About . . . that is, having all of our Associates clearly
understand our Character and our Competency.  Maintaining the necessary  balance
of  Character  and  Competency   enables  our   organization  to  be  viewed  as
Trustworthy,  and,  therefore,  properly positioned to develop broad and durable
relationships with our Customers.

All of us at  Coastal  Financial  are  unwavering  in the  values  which are the
foundation of our QUEST FOR EXCELLENCE  Operating Philosophy and our Vision 2005
Strategic Plan. Our Values are: Commitment,  Leadership,  Integrity and Quality.
We do not view these as mere platitudes  hanging on our walls.  Rather,  we view
them as our Character.  We absolutely will not compromise these values under any
circumstances.

Our goal is to create an organization  which our Associates  believe is the best
possible  place for enabling them to reach their full personal and  professional
potential.  Our Associates  deserve a workplace  environment  which is inviting,
engaging and challenging,  while being a haven from  discrimination,  harassment
and manipulation. Through Leadership example and curriculum offerings at Coastal
Federal  University,  our  Associates are assured of our commitment to providing
the resources and support needed to further develop their skills and enable them
to reach their full potential. Maintaining an inviting, engaging and challenging
environment requires continuous effort and will remain a major focus for 2003.

Our  Mission  Statement  reads:  We  are  Totally  Committed  To  Exceeding  The
Expectations Of Our Customer. We believe that responsive and consistent Customer
service is essential to the attainment of our long-term  goals and take personal
pride in assuring that our Customers receive nothing less than our best possible
service.  In  working  toward  continually  raising  that  bar,  during  2002 we
introduced the Bank Team Service Plus development program. This Customer-centric
program is an outgrowth of our Mission of Exceeding The Expectations Of Our

Customer and has been the largest and most formal Customer  Service program ever
introduced. Also, during this past year, we reached a milestone in that, for the
first time ever,  over seventy  percent of our  Associates  have  completed  our
Pledge To Excellence  curriculum  offering at Coastal Federal  University.  This
intense  eight week course  fully  defines,  illustrates  and builds  individual
support for the type of service organization we aspire to be. The Associates who
have completed this course feel a sense of ownership and personal responsibility
for providing exceptional service to our Customers.

GEOGRAPHIC  LOCATION:  We  simply  could  not ask for a  better  location  to do
business.  The four counties in which we distribute  financial services products
through our Banking Centers and ATMs include Horry County, South Carolina, which
is the second  fastest  growing  real estate  market in the nation,  New Hanover
County, North Carolina,  which is ranked fourth in that measure, and the rapidly
growing  counties  of  Georgetown  in  South  Carolina  and  Brunswick  in North
Carolina.  We are first in share of  banking  deposits  in Horry  County,  South
Carolina.

PRODUCTS:  Our  business  lines and wide  array of  financial  services  product
offerings makes us much more than a bank. We are a rapidly  growing  diversified
financial services company.

We offer a full line of Business Banking, Personal Banking,  Residential Banking
and  Investment  Services.  And we  continue  to add the  expertise  of  outside
financial  services  professionals in an ongoing effort to provide our Customers
with seamless delivery of a full range of financial products and services.

Coastal Financial Corporation, through Coastal Federal Bank and Coastal Investor
Services, Inc., offers our Customers a comprehensive array of financial services
products,  including Financial  Planning,  Business Banking,  Investments,  Life
Insurance,  Trust  Services,  Commercial  Mortgage Loans,  Residential  Mortgage
Loans, Home Equity Lines of Credit,  Consumer Loans,  Commercial Loans,  Venture
Capital and Capital Markets Transactions.

DISTRIBUTION CHANNELS:  While products are important,  they can easily be copied
by  competitors.  Real  Customer  value  is  created  in the way  that  they are
distributed.  We have the best locations and most extensive  distribution system
in our marketplace.

Through our financial services  distribution  channels, we offer a full range of
financial services products to each of the Communities we serve. During 2002, we
added Banking Centers in Loris and Pawleys Island, South Carolina,  bringing our
total  number of full  service  Banking  Centers to  sixteen.  In  addition,  we
currently have two BI-LO Grocery Store Banking Centers offering extended weekday
and Saturday  banking  hours,  and twenty two ATMs.  Our Bank By Phone  delivery
channel  last year handled  more than  442,000  calls and our  Internet  Banking
facility handled more than 500,000 Internet banking sessions last year, almost 1
1/2 times the previous year.


10

<PAGE>

                                                                   LOOKING AHEAD

SALES  CULTURE:  In the  Financial  Institution  category  of the  2002 SUN NEWS
                                                                        --------
Readers' Poll, for  the fifth  consecutive  year, our Customers  voted  us "Best
of the Beach."

The 2002 FDIC/OTS  SUMMARY OF DEPOSITS  REPORT ranked  Coastal  Federal Bank the
         -------------------------------------
leader in deposit market share for Horry County for the twelve months ended June
30, 2002.

These   measures   indicate  some  degree  of  success  in  our  quest  for  the
transformation  of Coastal Federal Bank and Coastal Investor  Services,  Inc. to
Sales Organizations which are focused on needs-based selling.

This early indication of positive results from the  Transformational  Element of
our Vision 2005 Plan,  which has huge  potential,  will get much  stronger  over
time. Our definition of selling is worlds away from the  stereotypical  image of
high-pressure  "forced" selling.  Rather, we use the term Sales  Organization to
describe our vision of Coastal  Financial  Corporation as an organization  which
has such strong  relationships  with its Customers  that its financial  services
offerings are always in alignment with its Mission of Being Totally Committed to
Exceeding The  Expectations Of Its Customer.  Our approach is both proactive and
in the spirit of partnership  with our Customers.  Our interest is in matching a
Customer's needs with the right products and services through the development of
broad  and  durable  relationships  which  allow  us to  better  enable  them to
understand  and address their  financial  services needs at every stage of their
lives. Our philosophy reflects on the financial services needs of our Customers,
not about "specials of the month" marketing campaigns which probably bear little
relevance to their legitimate needs.

BRAND IDENTITY: At almost fifty years of age, it has stood the test of time. Our
brand,  COASTAL  FEDERAL BANK, is one of the most widely  recognized  symbols of
Trust and  expertise in the  delivery of  financial  services in one of the best
markets in America. Our brand stands for Commitment,  Leadership,  Integrity and
Quality in Exceeding The  Expectations  Of Our Customer.  In other words,  being
totally committed to our Associates, our Customers and our Communities.

OUR PEOPLE: While all these competitive advantages are very important,  they are
meaningless without talented team members, who believe in Who We Are and What We
Are About,  and who truly care about their  Customers.  Our brand does not serve
Customers. Our People serve Customers.  Coastal Financial team members put their
Customers first.  Products and technology can be duplicated,  but we believe our
people  are  more   talented,   more  motivated  and  more  energized  than  our
competitors.  They care about each other, they care about their Customers,  they
care about their  Communities and they care about their Company.  It is our firm
belief  that  it  is  our  People  who  give  Coastal  Financial  Corporation  a
competitive  edge.  We will  continue to invest in  attracting,  developing  and
retaining  the very best People who share a passion for our Mission,  our Values
and our Guiding Principles.

LOOKING AHEAD:  The success we have enjoyed over the past twelve years is not by
chance.  While we are very fortunate to be located in one of the best markets in
America,  all of the success that Coastal  Financial has achieved has come about
because of the hard work and  mental  focus of our  Associates.  And we have the
best team imaginable.

I just  can't  thank our Board Of  Directors,  Leadership  Group and  Associates
enough for all they do for all of us on a daily basis.  Our 2002  results  speak
volumes about their  commitment to our Basic  Corporate  Objective of Maximizing
The Value Of Our Shareholders' Investment by being focused on Our Long-Term Goal
Of Being The Best Financial Services Company In Our Marketplace.

Our Coastal  Financial  Leadership  Group,  which has created and reinforced the
culture  that has  enabled our success and  our QUEST  FOR EXCELLENCE  Operating
Philosophy and Vision 2005 Plan,  which are reflective of our long-term focus on
our People, our Mission, our Values and our Guiding Principles,  are the primary
ingredients and the essential components for ensuring a great future.

During 2001 and 2002, both revenue and earnings reached record levels.  In fact,
in these two years alone,  our net income has surged over 20%.  And, as a result
of this level of earnings,  combined with our share repurchase program, earnings
per share has increased 24% over the last two years.

And we still have  significant  potential  for further  gains.  In the last five
years,  our net income has increased by more than 76%. Since becoming a publicly
owned Company in 1990, we have roughly doubled our earnings every five years.

Everyone in the Coastal Financial family is very proud of these achievements and
looks forward to even greater  accomplishments in the years ahead. And, although
we do not have a crystal  ball to predict the future,  we do take comfort in the
fact that we have  exceptional  Associates who believe in who we are and what we
are about, great markets, excellent products, tremendous momentum and unshakable
confidence  in our  ability,  as a team,  to  continue  to focus our  efforts on
building even stronger  relationships with our Customers and our Communities and
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


                                                                              11
<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, 2001
and 2002, 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, 2002. 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,  2001 and 2002,  and the results of its  operations  and its cash
flows for each of the years in the three-year  period ended  September 30, 2002,
in conformity with accounting principles generally accepted in the United States
of America.


                                                        /s/ KPMG LLP
                                                        ---------------
                                                        KPMG LLP


Greenville, South Carolina October 28, 2002



12

<PAGE>

<TABLE>
<CAPTION>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 2001 and 2002
                                                                                        2001          2002
                                                                                        ----          ----
                                                                                      (Dollars in thousands)
<S>                                                                                  <C>             <C>
ASSETS
Cash and amounts due from banks . . . . . . . . . . . . . . . . . . . . . . . . . .  $ 24,966        25,802
Short-term interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . .    9,354            --
Investment securities available for sale . . . . . . . . . . . . . . . . . . . . . .    2,000         2,014
Mortgage-backed securities available for sale . . . . . . . . . . . . . . . . . . .   190,553       331,808
Loans receivable (net of allowance for loan losses of $7,159 . . . . . . . . . . . .
at September 30, 2001 and $7,883 at September 30, 2002) . . . . . . . . . . . . . .   488,754       536,851
Loans receivable held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . .   16,274        18,694
Real estate acquired through foreclosure, net . . . . . . . . . . . . . . . . . . .     2,363         1,046
Office property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . .   13,150        13,713
Federal Home Loan Bank (FHLB) stock, at cost . . . . . . . . . . . . . . . . . . . .    7,624        10,559
Accrued interest receivable on loans . . . . . . . . . . . . . . . . . . . . . . . .    2,783         2,232
Accrued interest receivable on securities.. . . . . . . . . . . . . . . . . . . . .     1,341         2,019
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     4,052         6,058
                                                                                     --------      --------
                                                                                     $763,214      $950,796
                                                                                     ========      ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  530,364       637,081
Federal funds purchased and securities sold under agreements to repurchase . . . . .   18,703        36,884
Advances from FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  140,036       189,669
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    2,069         2,069
Drafts outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    2,577         2,517
Advances by borrowers for property taxes and insurance. . . . . . . . . . . . . . .     1,250         1,386
Accrued interest payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     1,184         1,473
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    9,783        13,331
                                                                                     --------      --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   705,966       884,410
                                                                                     --------      --------

Stockholders' equity:
Serial preferred stock, 1,000,000 shares authorized and unissued . . . . . . . . . .       --            --
Common stock $.01 par value, 15,000,000 shares authorized;
10,693,325 shares at September 30, 2001 and 10,587,726
shares at September 30, 2002 issued and outstanding . . . . . . . . . . . . . . . .       107           106
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    9,744         9,944
Retained earnings, restricted . . . . . . . . . . . . . . . . . . . . . . . . . . .    47,496        54,954
Treasury stock, at cost (324,483 shares at September 30, . . . . . . . . . . . . . .
2001 and 430,082 shares at September 30, 2002) . . . . . . . . . . . . . . . . . . .   (3,620)       (4,376)
Accumulated other comprehensive income, net of tax . . . . . . . . . . . . . . . . .    3,521         5,758
                                                                                     --------      --------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   57,248        66,386
                                                                                     --------      --------
                                                                                     $763,214      $950,796
                                                                                     ========      ========

</TABLE>

          See accompanying notes to consolidated financial statements.



                                                                              13

<PAGE>

<TABLE>
<CAPTION>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended September 30, 2000, 2001 and 2002
                                                                                  2000         2001          2002
                                                                              ----------  ----------    ----------
                                                                                 (In thousands, except share data)
<S>                                                                            <C>            <C>           <C>
Interest:
   Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $  44,005      45,899        40,261
   Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . .     2,484       2,479         2,030
   Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . .     10,987      11,261        11,348
   Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       603         616           234
                                                                              ----------  ----------    ----------
 Total interest income. . . . . . . . . . . . . . . . . . . . . . . . . . .       58,079      60,255        53,873
                                                                              ----------  ----------    ----------

Interest expense:
   Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     15,769      19,380        13,750
   Securities sold under agreements to repurchase . . . . . . . . . . . . . . .    6,993       2,810           414
   Advances from FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . .     10,874      11,133         7,682
                                                                              ----------  ----------    ----------
   Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . .     33,636      33,323        21,846
                                                                              ----------  ----------    ----------
   Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .    24,443      26,932        32,027
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . .          978         955         1,235
                                                                              ----------  ----------    ----------
   Net interest income after provision for loan losses . . . . . . . . . . . .    23,465      25,977        30,792
                                                                              ----------  ----------    ----------

Other income:
   Fees and service charges on loans and deposit accounts . . . . . . . . .        2,126       2,634         3,148
   Gain on sales of loans held for sale . . . . . . . . . . . . . . . . . . .        631       1,295         1,462
   Gain (loss) on sales of investment securities, net . . . . . . . . . . . .        (17)        (56)          102
   Gain (loss) on sales of mortgage-backed securities, net . . . . . . . . . .    (1,554)        727           238
   Gain on sale of deposits . . . . . . . . . . . . . . . . . . . . . . . . .      1,746          --            --
   Loss from real estate acquired through foreclosure . . . . . . . . . . . . .      (64)       (453)         (137)
   Income from sales of non-depository products . . . . . . . . . . . . . . . .      834       1,269         1,281
   Federal Home Loan Bank stock dividends . . . . . . . . . . . . . . . . . .        711         750           463
   Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      1,468       1,736         1,582
                                                                              ----------  ----------    ----------
   Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . .      5,881       7,902         8,139
                                                                              ----------  ----------    ----------

General and administrative expenses:
   Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . .      9,149      10,546        12,514
   Net occupancy, furniture and fixtures and data processing expense . .           3,946       4,029         5,044
   FDIC insurance premium . . . . . . . . . . . . . . . . . . . . . . . . . .        121          84            93
   FHLB prepayment penalties . . . . . . . . . . . . . . . . . . . . . . . . .        --       1,113         1,083
   Other expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      2,975       3,520         4,090
                                                                              ----------  ----------    ----------
   Total general and administrative expense. . . . . . . . . . . . . . . . . .    16,191      19,292        22,824
                                                                              ----------  ----------    ----------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .    13,155      14,587        16,107
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    4,698       5,287         5,901
                                                                              ----------  ----------    ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,457       9,300        10,206
                                                                              ==========  ==========    ==========
Earnings per common share
   Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $  0.76        0.86          0.96
                                                                              ==========  ==========    ==========
   Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $  0.75        0.85          0.93
                                                                              ==========  ==========    ==========

Average common shares outstanding
   Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11,078,000  10,848,000    10,615,000
                                                                              ==========  ==========    ==========
   Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11,216,000  10,995,000    10,940,000
                                                                              ==========  ==========    ==========
</TABLE>

          See accompanying notes to consolidated financial statements.

14
<PAGE>



<PAGE>

<TABLE>
<CAPTION>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
and Comprehensive Income
Years ended September 30, 2000, 2001 and 2002
                                                                                                 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, 1999 . . . . . . . . . . . .   $110    $9,277     $34,288     $  (356)     $(2,082)    $41,237
Exercise of stock options . . . . . . . . . . . . . . .   --       467        (514)        617           --         570
Cash dividends . . . . . . . . . . . . . . . . . . . .    --        --      (1,912)         --           --      (1,912)
Net income . . . . . . . . . . . . . . . . . . . . . .    --        --       8,457          --           --       8,457
Other comprehensive income, net of tax:
Unrealized losses arising during period,
  net of taxes of $255 . . . . . . . . . . . . . . . . . .--        --          --          --         (417)         --
Less: reclassification adjustment for losses
  included in net income, net of taxes of $597 . .        --        --          --          --          974          --
                                                        ----    ------     -------     -------      -------     -------
Other comprehensive income . . . . . . . . . . . . . .    --        --          --          --          557         557
                                                        ----    ------     -------     -------      -------     -------
Comprehensive income . . . . . . . . . . . . . . . . . .  --        --          --          --           --       9,014
                                                        ----    ------     -------     -------      -------     -------
Treasury stock repurchases . . . . . . . . . . . . . .    (1)       --          --      (1,963)          --      (1,964)
                                                        ----    ------     -------     -------      -------     -------
Balance at September 30, 2000 . . . . . . . . . . . .    109     9,744      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 . . . . . . . . . . . .    107     9,744      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 . . . . . . . . . . . .   $106    $9,944     $54,954     $(4,376)     $ 5,758     $66,386
                                                        ====    ======     =======     =======      =======     =======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                                                              15
<PAGE>

<TABLE>
<CAPTION>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 2000, 2001 and 2002
                                                                                        2000        2001         2002
                                                                                      --------   --------     --------
                                                                                                (In thousands)
<S>                                                                                    <C>          <C>         <C>
Cash flows from operating activities:
  Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $ 8,457      9,300       10,206
  Adjustments to reconcile net income to net cash provided by operating activities:
    Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     1,419      1,556        2,074
    Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .      978        955        1,235
    (Gain) loss on sale of mortgage-backed securities available for sale . . . .         1,554       (727)        (238)
    (Gain) loss on sale of investment securities available or sale . . . . . . . . .        17         56         (102)
    Origination of loans receivable held for sale . . . . . . . . . . . . . . . . . .  (27,253)   (81,778)    (100,309)
    Proceeds from sales of loans receivable held for sale . . . . . . . . . . . . . .   33,695     28,541       13,907
    Loss on early extinguishment of debt. . . . . . . . . . . . . . . . . . . . . . .       --      1,113        1,083
    (Increase) decrease in:
      Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,855     (1,019)      (2,006)
      Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .   (478)       548         (127)
    Increase (decrease) in:
      Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,375     (1,347)         289
      Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    243        428        2,176
                                                                                      --------   --------     --------
       Net cash provided by (used in) operating activities . . . . . . . . . . . .      21,862    (42,374)     (71,812)
                                                                                      --------   --------     --------

Cash flows from investing activities:
    Proceeds from sales of investment securities available for sale. . . . . . . . . .  10,266      5,125           --
    Proceeds from maturities of investment securities available for sale . . . . . .        --      1,595        1,995
    Purchases of investment securities available for sale . . . . . . . . . . . . . .  (12,737)        --       (1,998)
    Purchases of loans receivable. . . . . . . . . . . . . . . . . . . . . . . . . .    (4,027)       (20)        (233)
    Proceeds from sales of mortgage-backed securities available for sale. . . . . .    106,367    164,919      128,169
    Purchases of mortgage-backed securities available for sale . . . . . . . . . . . .(124,502)  (158,004)    (254,494)
    Principal collected on mortgage-backed securities available for sale . . . . . .    25,219     47,566       72,990
    Origination of loans receivable, net . . . . . . . . . . . . . . . . . . . . . .  (219,943)  (214,296)    (317,899)
    Principal collected on loans receivable. . . . . . . . . . . . . . . . . . . . .   139,900    233,653      268,120
    Disposition of Florence office assets and liabilities, net. . . . . . . . . . . .  (13,265)        --           --
    Proceeds from sales of real estate acquired through foreclosure . . . . . . . . .      180      1,159        1,997
    Purchases of office properties and equipment . . . . . . . . . . . . . . . . . .    (2,392)    (3,188)      (2,637)
    Sales (purchases) of FHLB stock, net . . . . . . . . . . . . . . . . . . . . . .    (3,698)     4,275       (2,935)
                                                                                      --------   --------     --------
       Net cash provided by (used in) investing activities . . . . . . . . . . . .     (98,632)    82,784     (106,925)
                                                                                      --------   --------     --------
    Cash flows from financing activities:
    Increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    31,397    124,147      106,717
    Increase (decrease) in securities sold under agreements to repurchase . . . .      (21,090)   (57,155)      18,181
    Proceeds from FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . .  890,404    358,771      312,426
    Repayment of FHLB advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . (829,204)  (443,959)    (262,793)
    Proceeds (repayments) from other borrowings, net . . . . . . . . . . . . . . . . .     500         --           --
    Prepayment penalties on early extinguishment of debt . . . . . . . . . . . . . .        --     (1,113)      (1,083)
    Increase (decrease) in advance payments by borrowers for property
    taxes and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      (89)        (7)         136
    Increase (decrease) in drafts outstanding, net. . . . . . . . . . . . . . . . . .    1,092        102          (60)
    Repurchase of treasury stock, at cost. . . . . . . . . . . . . . . . . . . . . .    (1,964)    (2,134)      (2,286)
    Cash dividends to stockholders and cash for fractional shares . . . . . . . . . .   (1,912)    (2,015)      (2,222)
    Exercise of stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . .       570        106        1,203
                                                                                      --------   --------     --------
       Net cash provided by (used in) financing activities . . . . . . . . . . . .      69,704    (23,257)     170,219
                                                                                      --------   --------     --------
    Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . .    (7,066)    17,153       (8,518)
                                                                                      --------   --------     --------
    Cash and cash equivalents at beginning of year. . . . . . . . . . . . . . . . . .   24,233     17,167       34,320
                                                                                      --------   --------     --------
    Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . .  $ 17,167     34,320       25,802
                                                                                      ========   ========     ========
    Supplemental information:. . . . . . . . . . . . . . . . . . . . . . . . . . . .
      Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $ 32,261     34,670       21,557
                                                                                      ========   ========     ========
      Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $  3,789      5,249        5,726
                                                                                      ========   ========     ========
  Supplemental schedule of non-cash investing and financing transactions:
    Securitization of mortgage loans into mortgage-backed securities. . . . . . . .   $ 14,894     47,157       83,982
                                                                                      ========   ========     ========
    Transfer of mortgage loans to real estate acquired through foreclosure . . . .    $    951      2,655          680
                                                                                      ========   ========     ========
</TABLE>


          See accompanying notes to consolidated financial statements.

16
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

     (a) Principles of Consolidation

     The accompanying  consolidated financial statements include the accounts of
Coastal   Financial   Corporation   (the   "Company"),   and  its   wholly-owned
subsidiaries,  Coastal Federal Mortgage,  Inc., Coastal Investor Services,  Inc.
and 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) 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, 2001 and 2002, the Company had approximately $16.3
million and $18.7 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.


                                                                              17
<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 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 (if unsecured) or written-down  (if secured) 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 Company provides for loan losses on the allowance method.  Accordingly,
all loan losses are charged to the allowance and all  recoveries are credited to
the  allowance.  Additions  to the  allowance  for loan  losses are  provided by
charges to operations based on various factors which, in management's  judgment,
deserve current  recognition in estimating  losses.  Such factors  considered by
management  include the market value of the  underlying  collateral,  growth and
composition of the loan 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,  2002,  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 loan receivables as securities to investors.
These  transactions  are recorded as sales in accordance  with SFAS No. 140 when
control over these assets has been surrendered.


18

<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.

     (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

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

19

<PAGE>

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

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -Continued

     (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

     SFAS  No.  133,   "Accounting   for  Derivative   Instruments  and  Hedging
Activities," and SFAS No. 138 "Accounting for Certain Derivative Instruments and
Certain  Hedging   Activities,   an  Amendment  of  SFAS  No.  133"  establishes
comprehensive  accounting and reporting standards for derivative instruments and
hedging activities. It requires an entity to recognize all derivatives as either
assets or  liabilities in the balance  sheet,  and measure 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.

     (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 totaled $1.1 million for both years.


     (u) Reclassifications

     Certain amounts in the 2000 and 2001 consolidated financial statements have
been reclassified to conform with the 2002 presentation.  Such reclassifications
did not change net income or equity as previously reported.

(2) INVESTMENT SECURITIES

     The amortized  cost and fair value of investment  securities  available for
sale at September 30, 2001 are summarized as follows:

<TABLE>
<CAPTION>

                                                                       2001
                                                  ----------------------------------------------
                                                                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       . . . . . . . . . . .     1,893       107           --        2,000
                                                    --------      ----         ----        -----
                                                    $  1,893       107           --        2,000
                                                    ========      ====         ====        =====
</TABLE>

20

<PAGE>

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

(2) INVESTMENT SECURITIES - CONTINUED

     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 Company had gross realized  gains of $8,000 and gross  realized  losses
were $25,000 for the year ended September 30, 2000. For the year ended September
30,  2001,  gross  realized  gains were $17,000 and gross  realized  losses were
$73,000.  For the year ended  September  30,  2002,  gross  realized  gains were
$102,000 and there were no gross realized losses.

     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, 2002 was $127.9
million with a fair value of $132.8 million.

(3) MORTGAGE-BACKED SECURITIES

     Mortgage-backed  securities  available  for  sale  at  September  30,  2001
consisted of the following:

<TABLE>
<CAPTION>

                                                                            2001
                                                     ---------------------------------------------------
                                                                     Gross        Gross
                                                     Amortized     Unrealized   Unrealized      Fair
                                                       Cost          Gains        Losses        Value
                                                       ----          -----        ------        -----
                                                                       (In thousands)

<S>                                                  <C>            <C>            <C>         <C>
Collateralized Mortgage Obligations. . . . . . . .   $ 28,856          859          --          29,715
FNMA . . . . . . . . . . . . . . . . . . . . . . .    123,271        3,899          (6)        127,164
GNMA . . . . . . . . . . . . . . . . . . . . . . .     20,630          507          --          21,137
FHLMC  . . . . . . . . . . . . . . . . . . . . . .     12,223          314          --          12,537
                                                      -------        -----        -----        -------
                                                     $184,980        5,579          (6)        190,553
                                                     ========        =====        =====        =======
</TABLE>



     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>


     The Company had gross realized gains of $370,000 and gross realized  losses
of $1.9  million  for the year  ended  September  30,  2000.  For the year ended
September  30, 2001,  the Company had gross  realized  gains of $1.0 million and
gross realized  losses of $312,000.  For the year ended  September 30, 2002, the
Company  had gross  realized  gains of  $462,000  and gross  realized  losses of
$224,000.


                                                                              21
<PAGE>

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

(4) LOANS RECEIVABLE, NET
Loans receivable, net at September 30 consisted of the following:

<TABLE>
<CAPTION>

                                                                     2001         2002
                                                                     ----         ----
                                                                      (In thousands)
<S>                                                              <C>            <C>
First mortgage loans:
  Single family to 4 family units . . . . . . . . . . . . . . . .$ 252,396      242,602
  Other, primarily commercial real estate . . . . . . . . . . . .  137,282      202,117
  Residential construction loans . . . . . . . . . . . . . . . .    16,798       15,105
  Commercial construction loans . . . . . . . . . . . . . . . . .   43,967       30,439
Consumer and commercial loans:
  Installment consumer loans . . . . . . . . . . . . . . . . . .    14,539       12,882
  Mobile home loans . . . . . . . . . . . . . . . . . . . . . . ..   2,056        3,446
  Savings account loans . . . . . . . . . . . . . . . . . . . . .    1,221        1,613
  Equity lines of credit . . . . . . . . . . . . . . . . . . . .    22,379       24,273
  Commercial and other loans . . . . . . . . . . . . . . . . . .    18,886       18,377
                                                                 ---------      -------
                                                                   509,524      550,854
Less:
  Allowance for loan losses . . . . . . . . . . . . . . . . . . .    7,159        7,883
  Deferred loan cost, net . . . . . . . . . . . . . . . . . . . .     (372)        (245)
  Undisbursed portion of loans in process . . . . . . . . . . . .   13,983        6,365
                                                                 ---------      -------
                                                                 $ 488,754      536,851
                                                                 =========      =======
</TABLE>


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

<TABLE>
<CAPTION>

                                               2000           2001          2002
                                               ----           ----          ----
                                                         (In thousands)
     <S>                                   <C>               <C>            <C>
     Beginning allowance . . . . . . . . . $   6,430         7,064          7,159
     Provision for loan losses . . . . . .       978           955          1,235
     Allowance recorded on acquired loans.        50            --             --
     Disposition of Florence office loans .      (75)           --             --
     Loan recoveries . . . . . . . . . . .        77            60             66
     Loan charge-offs . . . . . . . . . . .     (396)         (920)          (577)
                                           ---------         -----          -----
                                           $   7,064         7,159          7,883
                                           =========         =====          =====
</TABLE>



     Non-accrual   loans  which  were  over  ninety  days   delinquent   totaled
approximately  $3.3  million and $3.5  million at  September  30, 2001 and 2002,
respectively.  In fiscal years 2000, 2001 and 2002,  interest income which would
have  been  recorded  would  have  been  approximately  $220,000,  $377,000  and
$301,000,  respectively,  had non-accruing loans been current in accordance with
their original terms.

     There  were $3.4  million in  impaired  loans at  September  30,  2001.  At
September  30,  2002,  impaired  loans  totaled  $3.2  million.  Included in the
allowance for loan losses at September 30, 2001 was $281,000 related to impaired
loans  compared  to  $194,000  at  September  30,  2002.  The  average  recorded
investment  in  impaired  loans for the year ended  September  30, 2001 was $3.6
million compared to $3.1 million for the year ended September 30, 2002. Interest
income recognized on impaired loans in fiscal 2001 was $120,000. Interest income
recognized on impaired loans in fiscal 2002 was $36,000.

     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.


22

<PAGE>

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

(4) LOANS RECEIVABLE, NET -Continued

     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, 2002 were
approximately $82.6 million and included the following (in thousands):

Loan Commitments:
 Residential housing and land . . . . . . . . . . . . . . . . . . .  $  28,750
 Home equity loans and consumer lines of credit . . . . . . . . .       37,182
 Commercial lines of credit . . . . . . . . . . . . . . . . . . . .      1,286
 Standby letters of credit . . . . . . . . . . . . . . . . . . . . .     3,952
 Unused business and personal credit card lines . . . . . . . . . .     11,437

     Loans serviced for the benefit of others amounted to  approximately  $106.1
million, $143.3 million and $192.1 million at September 30, 2000, 2001 and 2002,
respectively.

     During fiscal 2002, the Company securitized $84.0 million of mortgage loans
and reclassed them to securities available for sale. In accordance with SFAS No.
140,  no  gain  was  recognized  related  to the  securitization,  and  mortgage
servicing  rights of  approximately  $1.4  million  were  recorded.  The Company
subsequently sold $81.2 million of these  mortgage-backed  securities to outside
third  parties  and  recognized  a gain on sale of  $1.1  million.  The  gain is
included  in gains on sales of loans  held for sale in the  consolidated  income
statement.  The  Company has no retained  interest in the  securities  that were
sold.

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

     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,  2002,  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, 2002 (in thousands):


     Balance at September 30, 2001. . . . . . . . . . . . . . .  $  1,178
     New loans . . . . . . . . . . . . . . . . . . . . . . . . .      399
     Repayments . . . . . . . . . . . . . . . . . . . . . . . .       458
                                                                 --------
     Balance at September 30, 2002. . . . . . . . . . . . . . .  $  1,119
                                                                 ========


                                                                              23

<PAGE>

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

(5) MORTGAGE SERVICING RIGHTS

     MSRs which are  included  in other  assets  totaled  $1.3  million and $2.2
million at September 30, 2001 and 2002,  respectively.  Amortization expense for
MSRs totaled  $217,000 and $505,000 for the years ended  September  30, 2001 and
2002,  respectively.  The  estimated  amortization  expense  for MSRs held as of
September 30, 2002, is $622,000,  $606,000,  $494,000,  $396,000 and $85,000 for
fiscal 2003, 2004, 2005, 2006 and 2007 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.

                                                        2001         2002
                                                        ----         ----
                                                         (In thousands)

Balance at beginning of year . . . . . . . . . . . .  $   677        1,310
MSRs capitalized      . . . . . . . . . . . . . . . .     850        1,398
MSRs amortized . . . . . . . . . . . . . . . . . . .     (217)        (505)
                                                      --------       -----
Balance at end of year. . . . . . . . . . . . . . . . $  1,310       2,203
                                                      ========       =====



(6) OFFICE PROPERTY AND EQUIPMENT, NET

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



                                           2001       2002
                                           ----       ----
                                           (In thousands)

Land. . . .. . . . . . . . . . . . . . . $ 3,120      3,143
Building and improvements. . . . . . . .   9,320     10,127
Furniture, fixtures and equipment .  .    12,606     14,297
                                        --------     ------

                                          25,046     27,567
Less accumulated depreciation. .  . . .   11,896     13,854
                                        --------     ------

                                        $ 13,150     13,713
                                        ========     ======

     The Company leases office space and various equipment. Total rental expense
for the  years  ended  September  30,  2000,  2001 and  2002  was  approximately
$213,000, $291,000 and $288,000 respectively.

     Future  minimum  rental  payments for  operating  leases  having  remaining
noncancelable  lease  terms in excess of one year at  September  30, 2002 are as
follows (in thousands):

         2003       . . . . . . . . . . . . . . . $    166
         2004       . . . . . . . . . . . . . . .      161
         2005       . . . . . . . . . . . . . . .      151
         2006       . . . . . . . . . . . . . . .       71
         2007       . . . . . . . . . . . . . . .       20
         Thereafter . . . . . . . . . . . . . . .      252
                                                  --------
                                                  $    821
                                                  ========
(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) 1.0% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each  year,  or (ii)  1/20 of its  advances  (borrowings)  from  the  FHLB of
Atlanta.  The Bank is in compliance with this  requirement with an investment in
FHLB stock of $10.6  million at September  30, 2002.  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.

24

<PAGE>



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

<TABLE>
<CAPTION>

(8) DEPOSITS
    Deposits at September 30 consisted of the following:
                                                                       2001                     2002
                                                               ---------------------   -----------------------
                                                                          Weighted                   Weighted
                                                                 Amount     Rate         Amount        Rate
                                                                 ------     ----         ------        ----
                                                                           (Dollars in thousands)
<S>                                                           <C>              <C>         <C>           <C>
Transaction accounts:
   Noninterest bearing . . . . . . . . . . . . . . . . . . .     $  49,098       --%        63,003         --%
   NOW . . . . . . . . . . . . . . . . . . . . . . . . . . .        55,926     0.44         67,381       0.38
   Money market checking . . . . . . . . . . . . . . . . . .       193,631     2.90        212,924       2.16
                                                                 ---------     ----        -------       ----
     Total transaction accounts . . . . . . . . . . . . . .        298,655     1.96        343,308       1.41
                                                                 ---------     ----        -------       ----

Passbook accounts:
   Regular passbooks . . . . . . . . . . . . . . . . . . . .        32,268     1.69         37,905       1.09
   Money market . . . . . . . . . . . . . . . . . . . . . . .        1,049     1.94          1,187       1.95
                                                                 ---------     ----        -------       ----
     Total passbook accounts . . . . . . . . . . . . . .            33,317     1.70         39,092       1.12
                                                                 ---------     ----        -------       ----
Certificate accounts:
   0.00 -5.99% . . . . . . . . . . . . . . . . . . . . . . .       164,306                 238,439
   6.00 -8.00% . . . . . . . . . . . . . . . . . . . . . . .        33,648                  15,758
   8.00 -10.00% . . . . . . . . . . . . . . . . . . . . . . .          438                     484
                                                                 ---------     ----        -------       ----
     Total certificate accounts . . . . . . . . . . . . . .        198,392     4.82        254,681       3.46
                                                                 ---------     ----        -------       ----
                                                                 $ 530,364     3.01%       637,081       2.21%
                                                                 =========     ====        =======       ====
</TABLE>



     The aggregate amount of all deposit accounts with a minimum denomination of
$100,000 or more was $201.2 million and $245.4 million at September 30, 2001 and
2002,  respectively.  Included  in  certificate  accounts  were $2.4  million at
September 30, 2001 and 2002, respectively, originated by brokers for a fee.


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


                                                    2001         2002
                                                    ----         ----
                                                      (In thousands)

       Within 1 year . . . . . . . . . . . .. .  $ 162,305      201,370
       After 1 but within 2 years . . . . .  . .    26,251       27,484
       After 2 but within 3 years. . . . . .. . .    4,067       20,358
       Thereafter......... . . . . . . . . . .. .    5,769        5,469
                                                 ---------      -------
                                                 $ 198,392      254,681
                                                 =========      =======

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


                                             2000        2001          2002
                                          --------     ------        ------
                                                    (In thousands)

Transaction accounts. . . . . . . . .     $  6,283      7,404         4,524
Passbook accounts.. . . . . . . . . .          909        741           459
Certificate accounts. . . . . . . . .        8,577     11,235         8,767
                                          --------     ------        ------
                                          $ 15,769     19,380        13,750
                                          ========     ======        ======

     The fair value of transaction  and passbook  accounts is $332.0 million and
$382.4 million which was the amount currently  payable at September 30, 2001 and
2002,  respectively.  The fair value of certificate  accounts was $199.9 million
and $258.5 million compared to a book value of $198.4 million and $254.7 million
at September 30, 2001 and 2002,  respectively,  and was estimated by discounting
the amounts payable at the certificate  rates currently  offered for deposits of
similar remaining maturities. The fair value estimates above did not include the
substantial  benefit  that  results  from the low cost  funding  provided by the
deposit liabilities compared to the cost of borrowing funds in the market.



                                                                              25
<PAGE>

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

(9) ADVANCES FROM FHLB

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

<TABLE>
<CAPTION>
                                                               2001                      2002
                                                     ------------------------  --------------------------
                                                                    Weighted                  Weighted
                                                       Amount         Rate        Amount        Rate
                                                       ------         ----        ------        ----
<C>                                                   <C>            <C>        <C>              <C>
Fiscal Year Maturity                                               (Dollars in thousands)
2002 ............................................     $  1,400       4.15%      $     --           --%
2003 ............................................       23,231       4.30         32,350         2.14
2004 ............................................        2,220       5.21         11,235         2.34
2005 ............................................          400       5.24         25,500         6.24
2006 ............................................        4,220       5.06          3,270         4.98
2007 ............................................           --         --          6,223         3.39
2008 or greater .................................      108,565       5.75        111,091         5.23
----                                                  --------       ----       --------         ----
                                                      $140,036       5.46%      $189,669         4.61%
                                                      ========       ====       ========         ====
</TABLE>

     Stock  in the  FHLB of  Atlanta  and  specific  first  mortgage  loans  and
mortgage-backed securities of approximately $204.0 million and $219.8 million at
September 30, 2001 and 2002,  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, 2002,  the excess first mortgage
loan  collateral  pledged  to the FHLB will  support  additional  borrowings  of
approximately  $37.8 million. At September 30, 2002, included in the three, four
and five  years or  greater  maturities  were  $109.0  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. Prepayment
penalties are included in general and  administrative  expenses in the statement
of operations. Also see note 1 (t).

     The  estimated  fair value of the FHLB  advances at September  30, 2001 and
2002 is $137.2 million and $197.9 million. This estimate is based on discounting
amounts  payable at  contractual  rates using current  market rates for advances
with similar maturities.

(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,
                                                                                                2000        2001      2002
                                                                                                ----        ----      ----
                                                                                                  (Dollars in thousands)
                 <S>                                                                            <C>        <C>       <C>
                 Outstanding balance:
                   Securities sold under agreements to repurchase:
                          Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,825    $ 3,703   $ 4,070
                          Broker . . . .  . . . . . . . . . . . . . . . .  . . . . . . . . . . $72,033     15,000    30,000

                 Weighted average rate (at month end) paid on:
                   Securities sold under agreements to repurchase:
                          Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    5.75%      3.36%     1.37%
                          Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      6.59       2.97      1.84

                 Maximum amount of borrowings outstanding at any month end:
                   Securities sold under agreements to repurchase:
                          Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,196    $ 3,726   $ 5,625
                          Broker. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  122,700     67,099    30,000

                 Approximate average outstanding with respect to:
                   Securities sold under agreements to repurchase:
                          Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$  2,826    $ 2,361   $ 3,600
                          Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,737     45,461    15,007

                 Weighted average rate (year to date) paid on: Securities sold under
                 agreements to repurchase:
                          Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    4.10%      3.73%     1.58%
                          Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    6.38       5.65      2.39
</TABLE>

 26

<PAGE>


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

(10)  REPURCHASE AGREEMENTS - CONTINUED

     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 collaterize securities
sold  under  agreements  to  repurchase  had a fair  value of $36.1  million  at
September 30, 2002 and are included in mortgage-backed  securities available for
sale in the consolidated balance sheet.

(11)      INCOME TAXES

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


                                              Current      Deferred      Total
                                              -------      --------      -----
                                                       (In thousands)
          2000:
          Federal. . . . . . . . . . . . . . $   4,484       (116)       4,368
          State   . . . . . . . . . . . . .        325          5          330
                                             ---------    -------     --------
                                             $   4,809       (111)       4,698
                                             =========    =======     ========
          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
                                             =========    =======     ========

     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, 2001 and 2002
relate to the following:

<TABLE>
<CAPTION>
                                                                                         2001         2002
                                                                                         ----         ----
                                                                                           (In thousands)
<S>                                                                                    <C>           <C>
Deferred tax assets:
    Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $   2,644     2,900
    Accrued medical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        95        94
    Other real estate reserves and deferred gains on other real estate . . . .                69       101
    Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . .       135        21
    Other  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       135       276
                                                                                       ---------    ------
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .          3,078     3,392
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          (135)      (21)
                                                                                       ---------    ------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          2,943     3,371
                                                                                       ---------    ------

Deferred tax liabilities:
    Tax bad debt reserve in excess of base year amount . . . . . . . . . . . . .             290       193
    Property and equipment principally due to differences in depreciation . .                356       310
    FHLB stock, due to stock dividends not recognized for tax purposes . . .                 227       207
    Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       466       565
    Book over tax basis in investment in unconsolidated subsidiary . . . . . .             2,823     2,953
    Unrealized gain on securities available for sale . . . . . . . . . . . . . . . . .     2,128     3,500
    Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . .        496       833
    Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        224       236
                                                                                       ---------    ------
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .         7,010     8,797
                                                                                       ---------    ------
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $  (4,067)   (5,426)
                                                                                       =========    ======
</TABLE>


                                                                              27
<PAGE>

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

(11)  INCOME TAXES - CONTINUED

     The  valuation  allowance  for deferred tax assets as of September 30, 2001
and 2002 was  $135,000 and  $21,000,  respectively.  The net change in the total
valuation  allowance  for the  years  ended  September  30,  2001 and 2002 was a
decrease of zero and $114,000,  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, 2002. 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 expense of $1.4  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 benefit of $13,000. 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:

                                                   2000       2001       2002
                                                   ----       ----       ----
                                                         (In thousands)

Computed federal income taxes................     $4,473      4,960      5,476
State tax, net of federal benefit ...........        218        197        335
Other, net ..................................          7        130         90
                                                  ------      -----      -----
Total income tax expense  . . . . . . . . .       $4,698      5,287      5,901
                                                  ======      =====      =====

     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, 2002 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.

(12)  Benefit Plans

     The Company  participates  in a  multiple-employer  defined benefit pension
plan covering  substantially all Associates.  Separate actuarial  valuations are
not available for each participating  employer,  nor are plan assets segregated.
Pension  expense  for the years  ended  September  30,  2000,  2001 and 2002 was
immaterial.  Plan assets exceeded the present value of accumulated plan benefits
at June 30, 2002, the latest actuarial valuation date.

     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 $250,000, $245,000 and $384,000 for fiscal years 2000,
2001 and 2002, respectively.

28

<PAGE>


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

(13)  REGULATORY MATTERS

     At  September  30,  2002,  the  Bank's  loans-to-one   borrower  limit  was
approximately  $10.3  million.  At September 30, 2002, 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, 2002, 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, 2002,  there have been no events or
conditions  that  management  believes have changed the Bank's  categories.  (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, 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 Total Assets)
   Tangible Capital: . . . . . . . . . . . .   $62,028     6.57%     $14,170    1.50%     N/A        N/A
   (To Total Assets)

As of September 30, 2001:
   Total Capital: . . . . . . . . . . . . . .  $60,711     13.30%    $36,511    8.00%     $45,639    10.00%
    (To Risk Weighted Assets)
   Tier 1 Capital: . . . . . . . . . . . . .   $55,252     12.11%    N/A        N/A       $27,383    6.00%
    (To Risk Weighted Assets)
   Tier 1 Capital: . . . . . . . . . . . . .   $55,252     7.28%     $30,515    4.00%     $38,144    5.00%
    (To Total Assets)
   Tangible Capital: . . . . . . . . . . . .   $55,252     7.28%     $11,443    1.50%     N/A        N/A
    (To Total Assets)

</TABLE>

(14)  LIQUIDATION ACCOUNT

     In conjunction with the Bank's conversion to stock form on October 6, 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.


                                                                              29
<PAGE>

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

     (14) 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 preceeding two years.


     (15) 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, 2002.

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

<TABLE>
<CAPTION>
                                                    2000                       2001                       2002
                                          ------------------------    -----------------------   ------------------------
                                             Basic       Diluted         Basic      Diluted       Basic        Diluted
                                          ----------    ----------    ----------   ----------   ----------    ----------
<S>                                       <C>           <C>           <C>          <C>          <C>           <C>
Weighted average shares outstanding       11,078,000    11,078,000    10,848,000   10,848,000   10,615,000    10,615,000
                                          ----------    ----------    ----------   ----------   ----------    ----------
Effective of dilutive securities:
Stock options                                     --       138,000            --      147,000           --       325,000
                                          ----------    ----------    ----------   ----------   ----------    ----------
Average shares outstanding                11,078,000    11,216,000    10,848,000   10,995,000   10,615,000    10,940,000
                                          ==========    ==========    ==========   ==========   ==========    ==========
</TABLE>

(16)  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 are vested 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, 2002 amounted to approximately  455,000 shares. All
outstanding  options have been retroactively  restated to reflect the effects of
the common  stock  dividends.  The stock  option plan is  administered  by three
non-management  directors of the Company. At September 30, 2002, the Company had
the following options outstanding:

<TABLE>
<CAPTION>

                                                    Weighted
                                                    Average        Weighted
                                      Number        Remaining      Average     Number        Average
Fiscal                                Options       Contractual    Exercise    Options       Exercise
Year      Range of exercise prices:   Outstanding   Life             Price     Exercisable   Price
------    -------------------------   -----------   -----------    --------    -----------  ---------
<C>                                    <C>            <C>          <C>          <C>          <C>
1995      $3.57 - $3.96   . . . . .     106,511       2.8 Years    $  3.79      106,511      $  3.79
1996      $4.21 . . . . . . . . . .      11,557       3.1 Years    $  4.21       11,557      $  4.21
1997      $6.42 - $6.66   . . . . .     126,238       4.2 Years    $  6.53      126,238      $  6.53
1998      $9.37 - $14.29  . . . . .     250,200       5.2 Years    $ 10.55      200,160      $ 10.55
1999      $9.49 - $11.25  . . . . .     186,775       6.1 Years    $ 10.51      112,065      $ 10.51
2000      $6.33 - $7.57   . . . . .     177,994       7.2 Years    $  7.50       71,197      $  7.50
2001      $6.08 - $9.50   . . . . .     193,956       8.1 Years    $  6.23       38,791      $  6.23
2002      $9.10 - $14.95  . . . . .     180,976       9.1 Years    $  9.25           --          N/A
                                      ---------       ---------    -------      -------      -------
          $3.57 - $14.95  . . . . .   1,234,207       6.3 Years    $  8.18      666,519      $  8.01
                                      =========       =========    =======      =======      =======

</TABLE>


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

(16)  STOCK OPTION PLAN - CONTINUED

     The  following  is a summary of the  activity of the stock option plans for
the years 2000, 2001, and 2002.

<TABLE>
<CAPTION>
                                                     2000                2001                   2002
                                             -------------------  --------------------  ---------------------
                                                       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 ......   1,004,173    $  9.43   1,055,860   $  9.45   1,214,504     $7.83
          Granted .....................     232,370       7.44     213,347      6.27     183,276      9.25
          Cancelled ...................    (108,645)      8.57     (23,855)     7.92     (10,868)     8.54
          Exercised ...................     (72,038)      4.12     (30,848)     4.68    (152,705)     6.62
                                          ---------    -------   ----------  -------   ---------     -----
          Outstanding, September 30 ...   1,055,860    $  9.45   1,214,504   $  7.83   1,234,207     $8.18
                                          =========    =======   =========   =======   =========     =====

</TABLE>

30

<PAGE>

     The Company  applies APB  Opinion  No. 25 and  related  interpretations  in
accounting for its plan.  Accordingly,  no compensation cost has been recognized
for its fixed  stock  option  plans.  Had  compensation  cost for the  Company's
stock-based  compensation  plans been determined  consistent with SFAS Statement
No. 123, 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):

<TABLE>
<CAPTION>
                                                            2000         2001          2002
                                                            ----         ----          ----
         <S>                              <C>             <C>         <C>          <C>
         Net income                       As reported     $   8,457   $    9,300   $  10,206
                                          Proforma            7,879        8,805       9,728
         Diluted earnings per share       As reported     $   0.75    $    0.85    $   0.93
                                          Proforma            0.70         0.80        0.89
</TABLE>


     The weighted  average fair value per share of options granted in 2000, 2001
and 2002  amounted to $3.05,  $2.98 and $4.61,  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 2000,  2001 and 2002,  respectively:  dividend yield of  approximately
3.35%, 2.03% and 1.62%,  expected  volatility of approximately 33%, 42% and 51%,
risk-free interest rate of 6.06%,  5.60% and 4.60%,  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.


     (17) COMMON STOCK DIVIDENDS

     On November 10, 1999, the Company declared a 5% stock dividend  aggregating
approximately  321,000  shares.  On March 14, 2000,  the Company  declared a 10%
stock dividend aggregating  approximately  671,000 shares. 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.  All share and per share data has
been retroactively restated to give effect to the common stock dividends.


     (18) CASH DIVIDENDS

     On each of December 16, 1998,  March 24, 1999,  June 30, 1999 and September
22, 1999, the Company  declared  quarterly cash dividends of $.04 per share.  On
December 23, 1999 the Company  declared a quarterly  cash  dividend of $.042 per
share.  On each of March 31, 2000, June 23, 2000,  September 29, 2000,  December
29, 2000 and March 21, 2001 the Company  declared  quarterly  cash  dividends of
$.043 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 $.05 per
share.  On each of June 19, 2002 and  September 18, 2002,  the Company  declared
quarterly cash dividends of $0.055 per share.


     (19) 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.

31

<PAGE>

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

(20) 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>
2001:
  Total interest income . . . . . . . . . . . . . . . . .$    15,655        15,409         15,003          14,188
  Total interest expense . . . . . . . . . . . . . . . .       9,445         9,046          7,912           6,920
                                                          ----------   -----------    -----------     -----------
  Net interest income . . . . . . . . . . . . . . . . . .      6,210         6,363          7,091           7,268
  Provision for loan losses . . . . . . . . . . . . . . .        270           225            235             225
                                                          ----------   -----------    -----------     -----------
  Net interest income after provision for
  loan losses . . . . . . . . . . . . . . . . . . . . . .      5,940         6,138          6,856           7,043
  Other income . . . . . . . . . . . . . . . . . . . . .       1,638         2,247          2,080           1,937
  General and administrative expenses . . . . . . . .          4,100         4,948          5,122           5,122
                                                          ----------   -----------    -----------     -----------

  Earnings before income taxes . . . . . . . . . . . . .       3,478         3,437          3,814           3,858
  Income taxes . . . . . . . . . . . . . . . . . . . . .       1,261         1,207          1,419           1,400
                                                          ----------   -----------     ----------      ----------
  Net income . . . . . . . . . . . . . . . . . . . . . . $     2,217         2,230          2,395           2,458
                                                          ==========    ==========     ==========      ==========
  Earnings per common share - diluted . . . . . . . .    $       .20           .21            .22             .22
                                                          ==========    ==========     ==========      ==========
  Weighted average shares outstanding-diluted . . .       10,997,000    10,964,000     10,958,000      10,985,000
                                                          ==========    ==========     ==========      ==========

<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
                                                          ----------    ----------     ----------      ----------
  Earnings 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
                                                          ==========    ==========     ==========      ==========
  Earnings per common share - diluted . . . . . .        $       .23           .23            .24             .24
                                                          ==========    ==========     ==========      ==========
  Weighted average shares outstanding-diluted .           10,927,000    10,826,000     10,859,000      11,104,000
                                                          ==========    ==========     ==========      ==========

</TABLE>


32

<PAGE>

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

(21) 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):


<TABLE>
<CAPTION>

Coastal Financial Corporation
Condensed Balance Sheets
September 30, 2001 and 2002
                                                                                     2001        2002
                                                                                     ----        ----
<S>                                                                               <C>              <C>
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $     141        738
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . .     58,961     67,946
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        125        326
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        820         71
                                                                                  ---------     ------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $  60,047     69,081
                                                                                  =========     ======

Liabilities and Stockholders' Equity
Accounts payable (principally dividends) . . . . . . . . . . . . . . . . . . . .        730        626
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      2,069      2,069
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . .     57,248     66,386
                                                                                  ---------     ------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . .      $  60,047     69,081
                                                                                  =========     ======
</TABLE>

<TABLE>
<CAPTION>


Coastal Financial Corporation
Condensed Statements of Operations
Years ended September 30, 2000, 2001 and 2002

                                                                         2000         2001        2002
                                                                       --------     -------      -------
<S>                                                                    <C>                <C>          <C>
Income:
  Interest income . . . . . . . . . . . . . . . . . . . . . . . . . .  $      5           3            1
  Management fees . . . . . . . . . . . . . . . . . . . . . . . . . .       304         300          300
  Dividends from subsidiary . . . . . . . . . . . . . . . . . . . . .     3,090       4,600        3,470
  Equity in undistributed earnings of subsidiaries . . . . . . . . . .    5,423       4,732        6,751
                                                                       --------     -------      -------
       Total income . . . . . . . . . . . . . . . . . . . . . . . .  .    8,822       9,635       10,522
                                                                       --------     -------      -------

Expenses:
  Professional fees . . . . . . . . . . . . . . . . . . . . . . . . .        71          80           79
  Supplies and printing . . . . . . . . . . . . . . . . . . . . . . .        62          39           58
  Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . .      162         152           84
  Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .       90          91           96
  Income tax benefit (credit) . . . . . . . . . . . . . . . . . . . .       (20)        (27)          (1)
                                                                       --------     -------      -------
       Total expenses . . . . . . . . . . . . . . . . . . . . .. . . .      365         335          316
                                                                       --------     -------      -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $  8,457       9,300       10,206
                                                                       ========     =======      =======
</TABLE>


                                                                              33
<PAGE>

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

(21) COASTAL FINANCIAL  CORPORATION  FINANCIAL STATEMENTS (PARENT COMPANY ONLY),
     CONTINUED

<TABLE>
<CAPTION>

                          Coastal Financial Corporation
                        Condensed Statement of Cash Flows
                  Years ended September 30, 2000, 2001 and 2002

                                                                                  2000         2001         2002
                                                                                  ----         ----         ----
        <S>                                                                     <C>            <C>         <C>
        Operating activities:
          Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $  8,457       9,300       10,206
          Adjustments to reconcile net income to net cash provided by:
           Equity in undistributed net income of subsidiary . . . . . . . .       (5,423)     (4,732)      (6,751)
           (Increase) decrease in other assets . . . . . . . . . . . . . . .          (6)       (747)         548
           Increase (decrease) in other liabilities . . . . . . . . . . . . .        151        (108)        (104)
                                                                                --------    --------     --------
           Total cash provided by operating activities . . . . . . . . .           3,179       3,713        3,899
                                                                                --------    --------     --------

        Financing activities: . . . . . . . . . . . . . . . . . . . . . . . .
           Cash dividends to shareholders . . . . . . . . . . . . . . . . . .     (1,912)     (2,015)      (2,222)
           Treasury stock repurchases . . . . . . . . . . . . . . . . . . . .     (1,964)     (2,134)      (2,286)
           Proceeds from stock options . . . . . . . . . . . . . . . . . . .         570         106        1,203
           Proceeds from line of credit . . . . . . . . . . . . . . . . . . .        500          --           --
           Other financing activities, net . . . . . . . . . . . . . . . . .           1          (1)           3
                                                                                --------    --------     --------
           Total cash used by financing activities . . . . . . . . . . .          (2,805)     (4,044)      (3,302)
                                                                                --------    --------     --------

           Net increase (decrease) in cash and cash equivalents . . . . . .          374        (331)         597
           Cash and cash equivalents at beginning of the year . . . . . . .           98         472          141
                                                                                --------    --------     --------
           Cash and cash equivalents at end of the years . . . . . . . . . . .  $    472         141          738
                                                                                ========    ========     ========
</TABLE>


(22) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

     The  carrying  amounts  and  fair  value  of  financial  instruments  as of
     September 30, 2001 and 2002 are summarized below:

<TABLE>
<CAPTION>
                                                                  2001                     2002
                                                        -----------------------   ------------------------
                                                        Carrying     Estimated    Carrying     Estimated
                                                         Amount      Fair Value    Amount      Fair Value
                                                         ------      ----------    ------      ----------
                                                                            (In thousands)
Financial Assets
   <S>                                                     <C>            <C>         <C>          <C>
   Cash and cash equivalents . . . . . . . . . . . . .     $ 34,320       34,320       25,802       25,802
   Investment securities        . . . . . . . . . . . . .     2,000        2,000        2,014        2,014
   Mortgage-backed securities . . . . . . . . . . . . . . . 190,553      190,553      331,808      331,808
   Loans receivable held for sale . . . . . . . . . . . . .  16,274       16,274       18,694       18,694
   Loans receivable, net . . . . . . . . . . . . . . . . .  488,754      508,802      536,851      541,697
   FHLB stock . . . . . . . . . . . . . . . . . . . . . .     7,624        7,624       10,559       10,559


Financial Liabilities
  Deposits:
   Demand accounts . . . . . . . . . . . . . . . . . . . .  331,972      331,972      382,400      382,400
   Certificate accounts         . . . . . . . . . . . . .   198,392      199,908      254,681      258,509
   Advances from Federal Home Loan Bank . . . . . .         140,036      137,166      189,669      197,918
   Securities sold under agreements to repurchase .          18,703       18,703       36,884       36,884
   Other borrowings . . . . . . . . . . . . . . . . . . .     2,069        2,069        2,069        2,069

</TABLE>

     Management  has made  estimates of fair value  discount rates and estimated
prepayment  rates that it believes to be  reasonable  based upon present  market
conditions. Changes in market interest and prepayment rates since September 30,


34

<PAGE>

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

(22) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

2001 and 2002,  could have a significant  impact on the fair value presented and
should be considered when analyzing this financial data.

     The Company had $82.6 million of off-balance sheet financial commitments as
of September 30, 2002, 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 $20.1 million at September,  30 2002. The fair value of
these  commitments was a gain of  approximately  $188,000 at September 30, 2002.
The forward sales  commitments  totaled $18.0 million at September 30, 2002. The
fair  value  of  these  commitments  was a loss  of  approximately  $134,000  at
September  30,  2002.  In  addition,  the Company  had sold  options to purchase
mortgage-backed  securities of $8.0 million. The fair value of these options was
a loss of approximately $57,000.

     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.


(23) SALE OF FLORENCE OFFICE

     In the second fiscal quarter of 2000, the Company sold its Florence,  South
Carolina  office  to  First  Federal  Savings   Association  of  Cheraw  ("First
Federal").  The office had  deposits of $24.9  million.  The Company  received a
deposit premium from First Federal and recorded a gain, net of selling expenses,
of $1.7 million. The Company funded the sale of the deposits through the sale of
loans,  associated  with this office of $10.9 million and increased  borrowings,
primarily  through  brokered  deposits.  The Company  recorded a gain on sale of
loans of  $60,000  related  to this sale.  In  conjunction  with the sale of the
Florence  office,  the Company has agreed not to compete in the Florence  market
for a period of four years.


(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,  2002,  the
outstanding balance was approximately $2.1 million.



                                                                              35
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
Management's 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 One of
the consolidated financial statements.  Of these policies, the Company considers
its  policy  regarding  the  allowance  for  loan  losses  to be one of its most
critical  accounting  policies,  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  $10.2  million  in net  income  for the year  ended
September  30, 2002,  compared to $9.3 million for the year ended  September 30,
2001.  Net  interest  income  increased  $5.1  million as a result of  decreased
interest  income of $6.4  million  and a decrease  of $11.5  million in interest
expense.  Provision for loan losses  increased  from $955,000 for the year ended
September 30, 2001, to $1.2 million for the year ended September 30, 2002. Other
income  increased  from $7.9  million in fiscal  2001,  to $8.1 million in 2002.
General and administrative  expenses increased $3.5 million or 18.3%, for fiscal
2002, as compared to fiscal 2001.

     Total assets  increased from $763.2 million at September 30, 2001 to $950.8
million at September  30, 2002,  or 24.6%.  Liquid  assets,  consisting of cash,
interest-bearing  deposits,  and  securities,  increased  from $226.9 million at
September 30, 2001, to $359.6  million at September 30, 2002.  Loans  receivable
increased  9.8% from $488.8  million at September 30, 2001, to $536.9 million at
September 30, 2002. Total loan  originations for fiscal 2002 were $418.2 million
as compared to $296.1 million for fiscal 2001.

     The  growth in liquid  assets was funded by  increased  deposits  of $106.7
million,  increased advances from the Federal Home Loan Bank ("FHLB") of Atlanta
of $49.6  million and  securities  sold under  agreements to repurchase of $18.2
million. As a result of increased Sales Centers and a strong emphasis on growing
local deposits during fiscal 2002,  deposits increased 20.1% from $530.4 million
at September 30, 2001, to $637.1 million at September 30, 2002. During this same
period,  transaction  deposits (defined as noninterest bearing checking accounts
and NOW  accounts)  increased  $25.4  million,  money market  checking  accounts
increased $19.3 million and certificate accounts increased $56.3 million.

     As a result of $10.2 million in net earnings,  less the cash dividends paid
to shareholders of  approximately  $2.2 million,  treasury stock  repurchases of
approximately  $2.3  million,  and the net change in  unrealized  gain (loss) on
securities available for sale, net of income tax of $2.2 million,  stockholders'
equity  increased  from $57.2  million at September 30, 2001 to $66.4 million at
September 30, 2002.


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, 2002.

36

<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. . . . . . . . . . . . . .  $  254,681   $  201,370   $   47,842   $   5,450    $       19
Short-term borrowings. . . . . . . . . .      69,234       69,234           --          --            --
Long-term debt . . . . . . . . . . . . .     159,388           --       36,735       9,493        113,160
Operating leases   . . . . . . . . . . .         821          166          312          91            252
                                          ----------   ----------   ----------   ---------    ----------
Total contractual cash obligations . . .  $  484,124   $  270,770   $   84,889   $  15,034    $   113,431
                                          ==========   ==========   ==========   =========    ===========
</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 $247.2 million, $296.1 million and $418.2
million for the years ended September 30, 2000, 2001 and 2002,  respectively.  A
large portion of these loan  originations  were financed  through loan principal
repayments  which amounted to $139.9 million,  $233.7 million and $268.1 million
for the  years  ended  September  30,  2000,  2001 and  2002,  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, 2000, 2001 and 2002, the
Company sold loans amounting to $33.7 million,  $28.5 million and $13.9 million,
respectively.

     During fiscal 2002, the Company securitized $84.0 million of mortgage loans
and reclassed them to securities available for sale. In accordance with SFAS No.
140,  no  gain  was  recognized  related  to the  securitization,  and  mortgage
servicing  rights of  approximately  $1.4  million  were  recorded.  The Company
subsequently sold $81.2 million of these  mortgage-backed  securities to outside
third  parties  and  recognized  a gain on sale of  $1.1  million.  The  gain is
included  in gains on sales of loans  held for sale in the  consolidated  income
statement.  The  proceeds  from sale are  included  in  proceeds  from  sales of
mortgage-backed  securities  in the  consolidated  statement of cash flows.  The
Company has no retained interest in the securities that were sold.

     During 2002, the Company used deposit  growth to  restructure  its debt. In
fiscal 2002  deposits  increased  from $530.4  million at September 30, 2001, to
$637.1 million at September 30, 2002.  During fiscal 2002,  the Company  prepaid
approximately  $59.3 million of advances from FHLB and incurred gross  penalties
of approximately  $1.1 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 4.61% at September  30,  2002,  compared to 5.46% at September  30,
2001.

     At  September  30, 2002,  the Company had  commitments  to originate  $28.8
million in loans and $53.8 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, 2002,  the Company had $201.4 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, 2002, the Company had excess collateral pledged
to the FHLB which would  support  additional  FHLB advance  borrowings  of $37.8
million.  Additionally,  at  September  30,  2002,  the Company  had  repurchase
agreement  lines of credit and  available  collateral  consisting  of investment
securities and  mortgage-backed  securities of $200.4 million as well as federal
funds lines available of $10.0 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 $62.0 million at September 30, 2002,  exceeding the Bank's tangible
and core  requirements  by $47.9  million and $24.2  million,  respectively.  At
September 30, 2002, the Bank's capital exceeded its current  risk-based  minimum
capital  requirement by $25.5 million.  The risk-based  capital  requirement may
increase in the future. Also see Note 13 of the Notes to Consolidated  Financial
Statements.

                                                                              37
<PAGE>

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

 Results of Operations
 Comparison of the Years Ended September 30, 2001 and 2002

 General

     Net  earnings  were $10.2  million  ($0.93 per diluted  share) for the year
ended  September 30, 2002,  an increase of 9.7% compared to $9.3 million  ($0.85
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 9.4%. 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.

 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."

38

<PAGE>


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

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.

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.


Results of Operations

     Comparison of the Years Ended September 30, 2000 and 2001

General

     Net earnings were $9.3 million ($0.85 per diluted share) for the year ended
September  30, 2001,  an increase of 10.0%  compared to $8.5 million  ($0.75 per
diluted  share)  for the year ended  September  30,  2000.  As a result of share
repurchases  and the  increase  in net  earnings,  diluted  earnings  per  share
increased  13.3%.  Net interest  income  increased  $2.5 million  primarily as a
result of an increase in interest  income of $2.2 million which was  accompanied
by a decrease in interest expense of $313,000.

Interest Income

     Interest  income for the year ended  September 30, 2001,  increased 3.7% to
$60.3  million as compared to $58.1  million  for the year ended  September  30,
2000. The yield on interest-earning assets for the year ended September 30, 2000
was 8.34%  compared to 8.26% for the year ended  September 30, 2001. The average
yield on loans  receivable  for fiscal year 2001 was 8.80%  compared to 8.74% in
2000.  The yield on  investments  which  includes  Investments,  Mortgage-Backed
Securities, Overnight Funds and Federal Funds, decreased to 7.00% for the fiscal
year 2001 from 7.33% for fiscal  year 2000.  Total  interest-earning  assets for
fiscal year 2001 averaged $738.5 million compared to $705.0 million for the year
ended  September 30, 2000.  The increase in average  interest-earning  assets is
primarily due to an increase in average loans receivable of approximately  $18.3
million and  mortgage-backed  and investment  securities of approximately  $12.6
million.

Interest Expense

     Interest expense on interest-bearing  liabilities was $33.3 million for the
year ended  September 30, 2001, as compared to $33.6 million in fiscal 2000. The
cost of interest-bearing  liabilities was 4.64% for the year ended September 30,
2001,  compared to 4.84% in fiscal year 2000.  The average  cost of deposits for
the year ended  September  30,  2001,  was 4.03%  compared to 3.88% for the year
ended  September  30, 2000.  The cost of FHLB  advances  and reverse  repurchase
agreements for fiscal 2001 was 5.90% and 5.99%, respectively,  compared to 6.12%
and  6.38%,  respectively,  for  fiscal  2000.  Total  average  interest-bearing
liabilities  increased 3.4% from $694.5 million at September 30, 2000, to $717.9
million  at  September  30,  2001.  The  increase  in  average  interest-bearing
liabilities  is due to an increase in average  deposits of  approximately  $75.3
million  and in average  FHLB  advances of $10.8  million.  This was offset by a
decrease in average reverse repurchase agreements of $62.3 million.

                                                                              39
<PAGE>

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

Net Interest Income

     Net  interest  income was $26.9  million for the year ended  September  30,
2001, an increase of $2.5 million,  compared to $24.4 million for the year ended
September 30, 2000. The net interest  margin  increased to 3.62% for fiscal 2001
compared to 3.50% for fiscal 2000.  Average  interest-earning  assets  increased
$33.5  million  while  average  interest-bearing   liabilities  increased  $23.4
million.  During fiscal 2001,  interest rates have decreased  significantly.  At
September 30, 2000 and September 30, 2001,  the prime rate of interest was 9.50%
and 6.0%, respectively. With the reduction in interest rates, resulting from the
Federal Reserve  Board's  decision to reduce the prime rate by 350 basis points,
it is expected that the Company's  yield on interest  earning assets and cost of
deposits and borrowing will decline in fiscal 2002. 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

     The Company's  provision for loan losses decreased from $978,000 for fiscal
2000 to $955,000 for fiscal 2001.  The allowance for loan losses as a percentage
of loans was 1.42% at  September  30, 2001  compared to 1.35% at  September  30,
2000. Loans delinquent 90 days or more were .64% of total loans at September 30,
2001,  compared to .92% at September 30, 2000. The allowance for loan losses was
220% of loans  delinquent  more than 90 days at September 30, 2001,  compared to
148% at September  30, 2000.  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  from $5.9 million for the
period ended  September 30, 2000, to $7.9 million for the period ended September
30,  2001.  Fees and  service  charges on loans and  deposit  accounts  was $2.6
million for fiscal  2001,  compared to $2.1  million for fiscal  2000.  Due to a
decreasing  long-term  interest rate environment which has resulted in increased
fixed-rate mortgage originations, gain on sale of loans was $1.3 million for the
year ended September 30, 2001, compared to $631,000 for the year ended September
30,  2000.  Gain on sale of  mortgage-backed  securities,  net was  $727,000 for
fiscal  2001,  compared to losses of $1.6  million for fiscal  2000.  This was a
result of the  restructuring  of a portion of the available for sale  investment
portfolio.  The losses were offset by a gain on the sale of the Florence  office
deposits  of $1.7  million in fiscal  2000.  Other  income  increased  from $1.5
million for the year ended  September  30,  2000,  to $1.7  million for the year
ended September 30, 2001.

Other Expense

     General and  administrative  expenses were $19.3 million for fiscal 2001 as
compared to $16.2  million  for fiscal  2000.  Salaries  and  employee  benefits
increased  to $10.5  million for fiscal  2001 as  compared  to $9.1  million for
fiscal  2000,  or  15.3%,  primarily  due to normal  increases  and the costs of
staffing  for four new offices.  Also as a result of the four office  additions,
net  occupancy,  furniture and fixtures and data  processing  expense  increased
$83,000 for fiscal 2001, as compared to fiscal 2000.  Other  expenses  increased
from $3.0 million in fiscal 2000 to $3.5 million in fiscal 2001. The increase is
due to increased expenses related to the servicing of deposit accounts. Included
in general and administrative expenses are penalties from the early repayment of
FHLB advances of $37.7 million during fiscal 2001.

Income Taxes

     Income taxes  increased from $4.7 million in fiscal 2000 to $5.3 million in
fiscal 2001 as a result of increased earnings before income taxes.

Non-performing Assets

     Non-performing  assets were $4.6 million at September  30, 2002 compared to
$5.6 million at September  30,  2001.  Loans past due 90 days or more  increased
from $3.3 million at September  30, 2001, to $3.5 million at September 30, 2002.
Real  estate  acquired  through  foreclosure  decreased  from  $2.4  million  at
September 30, 2001, to $1.0 million at September 30, 2002.

     At September 30, 2001, impaired loans totaled $3.4 million. There were $3.2
million in impaired  loans at September 30, 2002.  Included in the allowance for
loan  losses at  September  30,  2001 was  $281,000  related to  impaired  loans
compared to $194,000 at September 30, 2002. The average  recorded  investment in
impaired loans for the year ended September 30, 2001 was $3.6 million compared

40

<PAGE>

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

to $3.1  million  for  the  year  ended  September  30,  2002.  Interest  income
recognized  on  impaired  loans in fiscal  2001 was  $120,000.  Interest  income
recognized on impaired loans in fiscal 2002 was $36,000.

     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. To allow for
modeling  error,  a range of  probable  loss  ratios  is then  derived  for each
segment. The resulting percentages are then applied to the dollar amounts of the
loans in each segment to arrive at each segment's range of probable loss levels.

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

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

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

     Assessing  the  adequacy  of  the  allowance  is a  process  that  requires
considerable judgment.  Management's  methodology and judgments are based on the
information  currently available and includes numerous assumptions about current
events,  which 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 us to adjust our allowance based on information  available to them
at the time of their examination.

     The  Company  established  provisions  for loan  losses for the years ended
September  30,  2000,  2001 and 2002,  of $978,000,  $955,000 and $1.2  million,
respectively. For the years ended September 30, 2000, 2001 and 2002, the Company
had net  charge-offs  of $319,000,  $860,000  and  $511,000,  respectively.  Net
charge-offs as a percentage of average  outstanding  loans were .06%,  .17%, and
..10% for fiscal  years ended 2000,  2001 and 2002.  At September  30, 2002,  the
Company had an allowance for loan losses of $7.9 million, which was 1.42% of net
loans.


                                                                              41
<PAGE>

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

        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, 2001
and 2002,  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 $28.8 million.
For retail Customers,  loan commitments are generally lines of credit secured by
residential  property.  At September  30, 2002 retail loan  commitments  totaled
$37.2  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  $4.0 million at  September  30,  2002.  Commercial
lines of credit and unused  business  and  personal  credit  card  lines,  which
totaled  $12.7  million at September  30, 2002,  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.

     At September 30, 2002, the fair value of derivative  assets and liabilities
totaled $188,000 and $191,000 respectively.  The related notional amounts, which
are not recorded on the consolidated  balance sheet, totaled $20 million for the
derivative assets and $26 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, 2002.

42

<PAGE>

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

<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         9/30/02            9/30/02          Ratio
<S>                              <C>            <C>              <C>                 <C>                <C>
300 basis point rise             5.00%          400 BPS          $   953,898         $  82,297          8.63%
200 basis point rise             6.00%          300 BPS          $   972,427         $  94,417          9.71%
100 basis point rise             6.00%          250 BPS          $   987,717         $ 101,322         10.26%
No Change                        6.00%                           $   996,837         $ 102,380         10.27%
100 basis point decline          6.00%          250 BPS          $ 1,000,615         $  97,457          9.74%
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, 2002, 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,  2002,  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 Pronouncement

     In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets.  Statement 141 requires
that the purchase  method of  accounting  be used for all business  combinations
initiated  after  June  30,  2001  as  well  as  all  purchase  method  business
combinations  completed  after  June 30,  2001.  Statement  141  also  specifies
criteria  intangible  assets acquired in a purchase method business  combination
must meet to be  recognized  and reported  apart from  goodwill.  Statement  142
requires that goodwill and  intangible  assets with  indefinite  useful lives no
longer be amortized,  but instead  tested for  impairment  at least  annually in
accordance  with the  provisions of Statement  142.  Statement 142 also requires
that  intangible  assets with  estimable  useful lives be  amortized  over their
respective  estimated  useful  lives to their  estimated  residual  values,  and
reviewed  for  impairment  in  accordance  with  SFAS No.  144,  Accounting  for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
Company adopted  statement 141 in July 2001 and adopted statement 142 on October
1, 2001.  The  Company  does not have any  intangible  assets  affected by these
standards.

     In August 2001, the Financial  Accounting  Standards Board issued SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived  Assets which  addresses
the  financial  accounting  and  reporting  for the  impairment  or  disposal of
long-lived  assets.  While  SFAS 144  supercedes  SFAS 121,  Accounting  for the
Impairment of Long-Lived  Assets and for Long-Lived Assets to Be Disposed Of, it
retains many of the fundamental provisions of that Statement.  The provisions of
SFAS  144 are  effective  for  financial  statements  issued  for  fiscal  years
beginning  after  December 15,  2001,  and interim  periods  within those fiscal
years.  The  Company  adopted  SFAS 144 on October 1, 2002 with no impact to its
financial statements.

     In April 2002, The FASB issued SFAS No. 145, "Rescission of FASB Statements
No.  4,  44,  and  64,  Amendment  of  FASB  Statement  No.  13,  and  Technical
Corrections"  ("SFAS 145").  SFAS 145 rescinds SFAS No. 4, "Reporting  Gains and
Losses from  Extinguishments  of Debt"  ("SFAS 4"),  and an amendment of SFAS 4,
SFAS  No.   64,   "Extinguishments   of  Debt  Made  to   Satisfy   Sinking-Fund
Requirements."  SFAS 145 requires that gains and losses from  extinguishment  of
debt  should  be  classified  as an  extraordinary  item  only if they  meet the
criteria of FASB Opinion No. 30, "Reporting the Results of  Operations-Reporting
the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and

                                                                              43
<PAGE>

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


Infrequently  Occurring Events and Transactions"  ("FASB Opinion 30").  Applying
the provisions of FASB Opinion 30 will distinguish transactions that are part of
an entity's  recurring  operations  from those that are unusual or infrequent or
that  meet  the  criteria  for  classification  as an  extraordinary  item.  The
provisions of SFAS 145 are effective for financial  statements issued for fiscal
years  beginning  after May 15, 2002 and interim  periods  within  those  fiscal
years.  The Company  adopted SFAS 145 on July 1, 2002.  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.  Prepayment  penalties were included in
general and administrative expenses in the statement of operations.

     In  September  2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs
Associated  with Exit or Disposal  Activities"  ("SFAS  146"),  which  addresses
financial  accounting and reporting for costs  associated  with exit or disposal
activities and nullifies  Emerging Issues Task Force Issue No. 94-3,  "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity  (including  Certain  Costs  Incurred  in a  Restructuring)."  SFAS 146
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  SFAS  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 SFAS 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 in accordance with FASB Concepts Statements No.
6,  "Elements of Financial  Statements."  The  provisions of this  Statement are
effective for exit or disposal  activities that are initiated after December 31,
2002, with early application  encouraged.  The impact of adoption on the Company
is not known at this time.

     In October  2002,  the FASB issued SFAS No. 147,  "Acquisitions  of Certain
Financial  Institutions  an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation  No. 9" ("SFAS 147"). SFAS 147 removes  acquisitions of financial
institutions  from the scope of both FASB Statements No. 72 ("SFAS 72") and FASB
Interpretation  No. 9 and requires that those  transactions  be accounted for in
accordance with FASB Statements No. 141,  "Business  Combinations," and No. 142,
"Goodwill and Other Intangible  Assets," except for transactions  between two or
more mutual  enterprises.  Thus,  the  requirement  in SFAS 72 to recognize (and
subsequently  amortize) any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable assets acquired as an unidentifiable
intangible asset no longer applies to acquisitions  within the scope of SFAS 72.
In  addition,  SFAS 147 amends  FASB  Statement  No.  144,  "Accounting  for the
Impairment or Disposal of  Long-Lived  Assets"  ("SFAS 144"),  to include in its
scope   long-term   customer-relationship   intangible   assets   of   financial
institutions such as depositor-and  borrower-relationship  intangible assets and
credit cardholder intangible assets.  Consequently,  those intangible assets are
subject to the same  undiscounted cash flow  recoverability  test and impairment
loss  recognition  and  measurement  provisions that SFAS 144 requires for other
long-lived  assets  that are  held  and  used.

     The provisions of SFAS 147 are effective for financial statements issued on
or after October 1, 2002 and early  adoption is permitted.  The Company  adopted
this statement on October 1, 2002 with no impact.


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.


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 13 of the
Notes to the Consolidated Financial Statements.

44

<PAGE>


<TABLE>
<CAPTION>

Board of Directors

Coastal Financial Corporation              Coastal Federal Bank                     Coastal Investor Services, Inc.
<S>                                        <C>                                      <C>

James C. Benton                            James C. Benton                          G. David Bishop
President                                  President                                President
C.L. Benton & Sons, Inc.                   C.L. Benton & Sons, Inc.                 Waccamaw Community Foundation

G. David Bishop                            G. David Bishop                          James P. Creel
President,                                 President                                President
Waccamaw Community Foundation              Waccamaw Community Foundation            Creel Corporation

James T. Clemmons                          James T. Clemmons                        James H. Dusenbury
Chairman                                   Chairman                                 Retired - Attorney
Coastal Financial Corporation              Coastal Federal Bank                     Dusenbury and Clarkson Law Firm

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

James H. Dusenbury                         James H. Dusenbury                       E. Haden Hamilton, Jr.
Retired - Attorney                         Retired - Attorney                       President and Chief Executive Officer
Dusenbury and Clarkson Law Firm            Dusenbury and Clarkson Law Firm          Coastal Investor Services, Inc.

Michael C. Gerald                          Michael C. Gerald                        Jerry L. Rexroad,
President and Chief Executive Officer      President and Chief Executive Officer    CPA Chief Financial Officer
Coastal Financial Corporation              Coastal Federal Bank                     Coastal Investor Services, Inc.

Frank A. Thompson, II                      Frank A. Thompson, II                    Phillip G. Stalvey
President                                  President                                Executive Vice President Coastal
Peoples Underwriters, Inc.                 Peoples Underwriters, Inc.               Financial Corporation

                                                                                    Frank A. Thompson, II
                                                                                    President
                                                                                    Peoples Underwriters, Inc.

</TABLE>

45

<PAGE>

<TABLE>
<CAPTION>

COASTAL FEDERAL BANK
Leadership Group

<S>                                   <C>                             <C>                             <C>
Sherri J. Adams                       S. Lynn Dyson                   Ruth S. Kearns                  Jerry L. Rexroad, CPA
Personal Banking Leader               Personal Banking Leader         Senior Vice President           Executive Vice President
N. Myrtle Beach Banking Center        Waccamaw Banking Center         Customer Recognition Officer    Chief Financial Officer

Ginger Allen                          Barbara R. Faber,               L. Eric Keys                    Stacy M. Sansbury
Assistant Vice President              CPA Assistant Vice President    Vice President                  Personal Banking Leader Conway
Senior Underwriter                    Banking Administration          Community Banking Leader        Banking Center
                                       Group Leader                   South Horry County Community
Donna P. Bailey                                                                                       Eulette W. Sauls
Assistant Vice President              Rita E. Fecteau                 Debra M. Lambe                  Customer Account Relationship
Associate Dean of Career Development  Vice President                  Facilities/Maintenance Leader   Group Leader
                                      Accounting
James R. Baker, MCSE                  Group Leader                    Scott W. Lander                 Sherry G. Schoolfield, CRCM
Assistant Vice President                                              Senior Vice President           Assistant Vice President
Systems Engineer                      J. Daniel Fogle                 Area Banking Leader             Compliance Officer
                                       Vice President                 North Carolina Area
Harry Bates IV                        Residential Banking Leader                                      Douglas E. Shaffer
Personal Banking Leader               Carolina Forest/Waccamaw/       Justin Lee                      Senior Vice President
Oak Street Banking Center             Conway Banking Centers          Personal Banking Leader         Area Banking Leader
                                                                      Socastee Banking Center/        North and West Horry
Jeffrey A. Benjamin                   Joel P. Foster                  Socastee BI-LO Convenience      County Areas
Senior Vice President                 Vice President                  Center
Credit Administration Group Leader    Community Banking Leader                                        Steven J. Sherry
                                      Myrtle Beach Community          Edward L. Loehr                 Executive Vice President
Lynn Bernstein                                                        Vice President                  Marketing Group Leader
Item Processing Leader                Andrew D. Gable                 Budgeting and Treasury
                                      Assistant Vice President                                        Liz C. Short
Amanda Brown                          Closing and Construction        Kathleen M. Lutes               Personal Banking Leader
Personal Banking Leader               Group Leader                    Assistant Vice President        Murrells Inlet Banking Center
Southport Banking Center                                              Senior Underwriter
                                      William Gehman, CPA                                             Joe Shumbo
Cynthia Lee  Buffington               Senior Vice President           Richard Marsh                   Vice President
Assistant  Vice President             Corporate Controller            Personal Banking Leader         Residential Banking Leader
Item Processing Group Leader                                          Loris Banking Center            Sunset Beach/Southport
                                      Mary L. Geist                                                   Banking Centers
Ronnie Burbank                        Vice President                  Michael C. Mauney
Vice President                        Data Services                   Assistant Vice President        J. Marcus Smith, Jr.
Senior Banking Leader                 Group Leader                    Collections Group Leader        Senior Vice President
Wilmington Downtown Banking Center                                                                    Internal Auditor
                                      Michael C. Gerald               Amy E. McLaurin
Glenn T. Butler, MCSE, CCNA           President and Chief Executive   Personal Banking Leader         Carolyn Specht
Vice President Network                Officer                         Sunset Beach Banking Center     Purchasing Services Leader
Services Group Leader
                                      Kenan D. Godwin                 Janice B. Metz                  Phillip G. Stalvey
Anne R. Caldwell                      Banking Center Leader           Marketing Programs Coordinator  Executive Vice President
Assistant Vice President              Oak Street Banking Center                                       Banking Group Leader
Deposit Servicing Leader                                              Lauren Elaine  Miller
                                      Amy M. Gore                     Vice President                  Delan Stevens
Shonda C. Chestnut                    Personal Banking Leader         Dean of Coastal Federal         Vice President
Assistant Vice President              Wilmington Oleander Banking     University                      Community Banking Leader
Personal Banking Leader               Center                                                          West Horry County Community
Surfside Beach Banking Center                                         Deborah J. Myers
                                      Jimmy R. Graham                 Electronic Banking              Sandra J. Szarek
Susan J. Cooke                        Executive Vice President        Group Leader                    Loan Servicing Group Leader
Senior Vice President                 Chief Information Officer
Administrative Services                                               Ronald A. Nolan                 Regina C. Taylor
Group Leader                          Don C. Hamilton                 Assistant Vice President        Sales Resource Leader
                                      Vice Pesident                   Security Officer
Joe Cox                               Residential Brokerage                                           Matthew J. Towns
Vice President                        Group Leader                    Deborah Ann Orobello            Vice President
Community Banking Leader              Banking Center Resource Group   Personal Banking Leader         Credit Administration
Loris Community                                                       Little River Banking Center
                                      Lisa Moore Harris                                               Douglas W. Walters
Robert D. Douglas                     Vice President                  Charles Page                    Vice President
Executive Vice President              Community Banking Leader        Vice President                  Residential Banking Leader
Human Resources                       Wilmington Community            Senior Banking Leader           N. Myrtle Beach/Myrtle
                                                                      Carolina Forest/Waccamaw        Beach/Surfside Beach/Murrells
Trina Dusenbury                       Glenn D. Humbert                Banking Centers                 Inlet/Socastee Banking Centers
Vice President                        Vice President
Residential Loan Administrator        Community Banking Leader        Orit Perez                      Sandra R. Zanfini
Group Leader                          Brunswick County Community      Personal Banking Leader         Corporate Support
                                                                      BI-LO 38th Convenience Center   Group Leader/
                                      Lisa B. James                                                   Assistant Corporate Secretary
                                      Vice President                  Patricia Price
                                      Account Servicing Group Leader  Personal Banking Leader
                                                                      Pawleys Island Banking Center

</TABLE>

46

<PAGE>

<TABLE>
<CAPTION>

Locations

Coastal Federal Bank                                                Coastal Investor Services, Inc.
<S>                             <C>                                 <C>
Oak Street Office               Socastee Office (BI-LO)             Steven Brockmann
2619 Oak Street                 5020 Dick Pond Road                 Financial Advisor
Myrtle Beach, SC 29577-3129     Myrtle Beach, SC  29588             843.918.7600
843.205.2000                    843.205.2042
                                                                    Cynthia M. Clark
Carolina Forest Office          Southport Office                    Financial Advisor
3894 Renee Drive Myrtle         4956-1 Long Beach Road SE           843.918.7600
Beach, SC 29579                 Southport, NC  28461
843.205.2016                    843.205.2032 910.454.4173           Susan J. Cooke
                                                                    Corporate Secretary
Conway Office                   Sunset Beach Office                 843.205.2000
310 Wright Boulevard            1625 Seaside Road S.W.
Conway, SC 29526                Sunset Beach, NC  28468             John L. Creamer
843.205.2005                    843.205.2012 910.579.8160           Vice President and Financial Advisor
                                                                    843.918.7600
Dunes Office                    Surfside Office
7500 North Kings Highway        112 Highway 17                      Linda Doane
Myrtle Beach, SC 29572          South & Glenns Bay Road             Sales Assistant
843.205.2001                    Surfside Beach, SC  29575           843.916.7600
                                843.205.2003
Little River Office                                                 E. Haden Hamilton, Jr.
1602 Highway 17                 Waccamaw Medical Park Office        President, Chief Executive Officer
Little River, SC 29566          112 Waccamaw Medical Park           and Financial Advisor
843.205.2014                    Drive Conway, SC  29526             843.918.7600
                                843.205.2009
Loris Office                                                        John Michael Hill
4262 Main Street                38th Avenue Office (BI-LO)          Vice President and Financial Advisor
Loris, SC 29569                 1245 38th Avenue North              843.918.7600
843.756.4455                    Myrtle Beach, SC  29577
                                843.205.2041                        Debra Hinson Operations Leader/
Murrells Inlet Office                                               Registered Sales Assistant
3348 Highway 17                 Wilmington Office                   843.918.7600
South & Inlet Crossing          5710 Oleander Drive, Suite 209
Murrells Inlet, SC 29576        Wilmington, NC 28403                Larry Hyams
843.205.2008                    843.205.2031 910.313.1161           Financial Advisor
                                                                    843.918.7600
North Myrtle Beach Office       Wilmington Downtown Office
521 Main Street                 109 Market Street                   Jennifer H. Ivey
North Myrtle Beach, SC 29582    Wilmington, NC 28401                Registered Sales Assistant
843.205.2002                    843.205.2033                         843.918.7600
                                910.763.2372
Pawleys Island Office                                               Sandra Peterman
Coastal Federal Town Center                                         Sales Assistant
11403 Ocean Highway                                                 843.918.7600
Pawleys Island, SC 29585
843.205.2020                                                        Jerry L. Rexroad, CPA
                                                                    Chief Financial Officer
Socastee Office                                                     843.205.2000
4801 Socastee Boulevard
Myrtle Beach, SC 29575
843.205.2007

</TABLE>


                                                                              47

<PAGE>

Corporate Information

     Common Stock and Dividend Information

The common stock of Coastal  Financial  Corporation  is quoted through the Nasdq
Stock Market under the symbol CFCP. For information contact:

          Herzog,  Heine, Geduld, Inc. at 1.800.523.4936

          Hofer & Arnett, Inc. at 1.800.774.8723

          Raymond James Financial Services at 1.843.918.7600

          Monroe Securities, Inc. at 1.800.766.5560

          Knights Securities at 212.336.8690

          Spear, Leeds & Kellogg at 1.800.526.3160

          Trident Securities at 1.800.222.2618

     As of  November  29,  2002,  the  Corporation  had 1,026  shareholders  and
10,606,948 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 13 and 14 of
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
to reflect stock dividends.

                         HIGH          LOW         CASH
                         BID           BID         DIVIDEND
                         ---           ---         --------

Fiscal Year 2002:
First Quarter           $ 9.90      $  8.90         $0.050
Second Quarter            9.61         9.26          0.050
Third Quarter            15.04         9.14          0.055
Fourth Quarter           15.45        13.00          0.055

Fiscal Year 2001:
First Quarter           $ 7.33      $  5.25         $0.043
Second Quarter           10.50         6.17          0.043
Third Quarter             9.33         7.11          0.050
Fourth Quarter           10.25         8.00          0.050


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, 2002,
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 28, 2003 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.

[GRAPHIC - COASTAL FEDERAL BANK]  [GRAPHIC - COASTAL INVESTOR SERVICES]

[GRAPHIC - RAYMOND JAMES FINANCIAL SERVICES]

Securities are offered  exclusively  through Raymond James * Financial 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.


48