SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                            -------------------------
                                    FORM 10-K


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

         For the Fiscal Year Ended September 30, 2000

                                       OR


         |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934

                         Commission File Number: 0-19684

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


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


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


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

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

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

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

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

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

         As of December 15, 2000,  there were issued and  outstanding  7,263,918
shares of the registrant's Common Stock.

                  The  aggregate  market  value  of the  voting  stock  held  by
         nonaffiliates  of the  registrant,  based on the closing sales price of
         the registrant's  common stock as quoted on the NASDAQ System under the
         symbol "CFCP" on December 15, 2000, was  $73,583,489(7,263,918)  shares
         at $10.13  per  share,  which is the  average  of the  closing  ask and
         closing bid price on December 15,  2000.  It is assumed for purposes of
         this calculation that none of the registrant's officers,  directors and
         5% stockholders are affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE

         1.   Portions of the Annual Report to Stockholders for the Fiscal Year
              Ended September 30, 2000. (Parts I and II)

         2.   Portions of the Proxy Statement for the 2001 Annual Meeting of
              Stockholders. (Part III)


<PAGE>



                                     PART I

Item 1.  Business

General

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

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

         Coastal  Federal  conducts its business  from its main office in Myrtle
Beach, South Carolina,  ten branch offices located in South Carolina, one branch
office located in Sunset Beach, North Carolina, and one branch office located in
Wilmington,  North  Carolina.  The Bank expects to open an additional  office in
Brunswick County and Horry County in its second fiscal quarter. At September 30,
2000,  Coastal  Financial had total assets of $768.8 million,  total deposits of
$406.2 million and  stockholders'  equity of $46.9 million.  The deposits of the
Bank are insured by the Federal Deposit Insurance Corporation ("FDIC") under the
Savings Association  Insurance Fund ("SAIF").  The corporate offices of the Bank

                                       2
<PAGE>

are located at 2619 Oak Street,  Myrtle Beach,  South Carolina and the telephone
number is (843) 205-2000.

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

         Coastal Federal's  principal  business currently consists of attracting
deposits from the general public and using these funds to originate conventional
one-to-four family first mortgage loans, consumer, commercial business loans and
commercial  real estate loans.  Commercial real estate loans were 24.7% of total
loans at September 30, 2000.

         As  part  of  its  lending  strategy,  subject  to  market  conditions,
management  intends to continue  emphasizing  the  origination  of consumer  and
commercial  business loans in addition to first mortgage loans. At September 30,
2000, 4.3% and 8.5%, respectively,  of the Bank's total loan portfolio consisted
of commercial business and consumer loans.


                                       3
<PAGE>





Rate/Volume Analysis

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

<TABLE>
<CAPTION>
                                                                      Year Ended September 30,
                                 ---------------------------------------------------------------------------------------------------
                                            1998 Compared to 1997                            1999 Compared to 1998
                                             Increase (Decrease)                              Increase (Decrease)
                                         ____________Due to__________                     ____________Due to__________
                                                     ------                                           ------
                                   Rate        Volume       Rate/         Net        Rate          Volume        Rate/        Net
                                   ----        ------       -----         ---        ----          ------        -----        ---
                                                           Volume                                         Volume
                                  ----------------------------------------------    ------------------------------------------------
                                                                                               (Dollars in thousands)
<S>                             <C>           <C>          <C>           <C>         <C>           <C>         <C>          <C>
Interest-Earning Assets:
 Loans ....................     $   195       $ 2,240      $    13       $ 2,448     $  (830)      $ 3,150     $   (93)     $ 2,227
 Mortgage-backed
 Securities/Investments ...        (436)        4,711         (992)        3,283         201         3,156          81        3,438
                                --------      -------      --------      -------     -------       -------     -------      -------

Total net change in
 income on interest-
 earning assets ...........        (241)        6,951         (979)        5,731        (629)        6,306         (12)       5,665
                                --------     --------      --------      -------     -------       -------     -------      -------

Interest-Bearing
 Liabilities:

 Deposits .................        (165)        1,089          (13)          911      (1,188)        1,148         108           68
 FHLB advances ............        (298)        1,501          (83)        1,120        (392)        2,564        (165)       2,007
 Repurchase
   Agreements .............         (47)        2,422         (100)        2,275         (49)          519          (5)         465
                               ---------      -------      --------      -------     -------       -------     -------      -------

Total net change in
 expense on interest-
 bearing liabilities ......        (510)        5,012         (196)        4,306      (1,629)        4,231         (62)       2,540
                               ---------      -------      --------      -------     -------       -------     -------      -------

Net change in net
 Interest income ..........    $    269       $ 1,939      $  (783)      $ 1,425     $ 1,000       $ 2,075     $    50      $ 3,125
                               ========       =======      ========      =======     =======       =======     =======      =======
</TABLE>


<TABLE>
<CAPTION>

                                   --------------------------------------------------
                                               2000 Compared to 1999
                                                Increase (Decrease)
                                            __________Due to__________
                                                      ------
                                       Rate        Volume       Rate/        Net
                                       ----        ------       -----        ---
                                                                Volume
                                    -------------------------------------------------

<S>                                  <C>          <C>          <C>           <C>
Interest-Earning Assets:
 Loans ....................          $   857      $ 4,477      $   130       $ 5,464
 Mortgage-backed
 Securities/Investments ...            1,991          906          159         3,056
                                     -------      -------      -------       -------

Total net change in
 income on interest-
 earning assets ...........            2,848        5,383          289         8,520
                                     -------      -------      -------       -------

Interest-Bearing
 Liabilities:

 Deposits .................              427          680           35         1,142
 FHLB advances ............            1,336          889          154         2,379
 Repurchase
   Agreements .............              576        2,215          333         3,124
                                     -------      -------      -------       -------

Total net change in
 expense on interest-
 bearing liabilities ......            2,339        3,784          522         6,645
                                     -------      -------      -------       -------

Net change in net
 Interest income ..........          $   509      $ 1,599      $  (233)      $ 1,875
                                     =======      =======      =======       =======
</TABLE>




                                       4
<PAGE>



Average Balance Sheet

         The  following  table sets forth  certain  information  relating to the
Corporation's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived  by  dividing  income or  expense  by the  average  balance of assets or
liabilities,  respectively,  for the periods  presented.  Average  balances  are
derived from  month-end  balances.  Management  does not believe that the use of
month-end  balances  instead of daily  average  balances has caused any material
difference  in the  information  presented.  Non-accrual  loans are  included in
average balance calculations.

<TABLE>
<CAPTION>
                                                                 Year Ended September 30,
                                      ---------------------------------------------------------------------------
                                                        1998                                    1999
                                      -----------------------------------     -----------------------------------
                                         Average                   Yield/      Average                    Yield/
                                         Balance     Interest      Rate        Balance      Interest       Rate
                                         -------     --------      ----        -------      --------      -------
                                                                                (Dollars in thousands)
<S>                                      <C>          <C>          <C>       <C>            <C>            <C>
ASSETS

 Loans ................................  $414,938     $ 36,314     8.75%     $450,940       $ 38,541       8.55%
 Mortgage-backed
  Securities/Investments(1) ...........   125,509        7,580     6.04       177,758         11,018       6.20
Total interest-earning                   --------     --------     ----      --------       --------       ----
 assets ...............................  $540,447     $ 43,894     8.11%     $628,698       $ 49,559       7.88%
                                         ========     ========     ====      ========       ========       =====
LIABILITIES

 Transaction accounts .................   179,398        5,756     3.21       210,072          6,368       3.03
 Passbook accounts ....................    36,102          924     2.56        33,310            962       2.89
 Certificate accounts .................   144,569        7,879     5.45       144,698          7,297       5.04
 FHLB advances ........................   115,389        6,488     5.62       161,005          8,495       5.28
 Securities sold under
   repurchase agreements ..............    60,998        3,404     5.58        70,299          3,869       5.50
  Total interest-bearing                 --------      -------     ----      --------       --------      -----
   liabilities.........................  $536,456     $ 24,451     4.60%     $619,384       $ 26,991       4.33%
                                         ========     ========     ====      ========       ========       ====


Net interest income/
 interest rate spread .................               $ 19,443     3.51%                    $ 22,568       3.55%
Net yield on interest earning
 assets ...............................                            3.64%                                   3.67%

Ratio of interest earning assets
 to interest-bearing
 liabilities ..........................                            1.03x                                  1.03x
</TABLE>


<TABLE>
<CAPTION>
                                              Year Ended September 30,
                                      ------------------------------------
                                                      2000
                                       -----------------------------------
                                       Average                    Yield/
                                       Balance       Interest      Rate
                                       --------     ---------      ----

<S>                                    <C>           <C>           <C>
ASSETS

 Loans ............................... $503,306      $ 44,005      8.74%
 Mortgage-backed .....................  192,375        14,074      7.32
                                       --------      --------      -----
  Securities/Investments(1)
Total interest-earning

 assets .............................. $695,681      $ 58,079      8.34%
                                       ========      ========     =====
LIABILITIES

 Transaction accounts ................  215,255         6,283      2.92
 Passbook accounts ...................   40,891           909      2.22
 Certificate accounts ................  149,982         8,577      5.72
 FHLB advances .......................  177,834        10,874      6.11
 Securities sold under
   repurchase agreements .............  110,563         6,993      6.32
  Total interest-bearing               --------      --------     -----
   liabilities........................ $694,525      $ 33,636      4.84%
                                       ========      ========     =====


Net interest income/
 interest rate spread ................               $ 24,443      3.50%
Net yield on interest earning
 assets ..............................                             3.57%

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


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


<

                                       5
<PAGE>





Lending Activities

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

         The Bank's  loan  portfolio  totaled  approximately  $521.9  million at
September 30, 2000,  representing  approximately  67.9% of its total assets.  On
that date,  approximately  56.1% of Coastal  Federal's  total loan portfolio was
secured by mortgages on one-to-four family residential properties.

         In an effort  to  ensure  that the  yields  on its loan  portfolio  and
investments are  interest-rate  sensitive,  the Bank has implemented a number of
measures, including: (i) emphasis on origination of adjustable rate mortgages on
residential and commercial  properties;  (ii) origination of construction  loans
secured by residential  properties,  generally with terms for a one-year period;
and (iii)  origination of commercial and consumer loans having either adjustable
rates or relatively  short  maturities.  At September 30, 2000,  adjustable rate
loans  constituted  approximately  $384.4 million (or 73.7%) of the Bank's total
loan portfolio.  Therefore,  at such date, fixed rate loans comprised only 26.3%
of the total loan portfolio. These lending practices were adopted to shorten the
term of the  Bank's  assets  and make  the loan  portfolio  more  responsive  to
interest rate volatility.




                                       6
<PAGE>





Loan Portfolio Analysis

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

<TABLE>
<CAPTION>
                                                                                           At September 30,
                                       ---------------------------------------------------------------------------------------------
                                              1996                     1997                    1998                        1999
                                       -------------------       ----------------      ----------------------   --------------------
                                       Amount      Percent       Amount   Percent      Amount      Percent       Amount    Percent
                                       ------      -------       ------   -------      ------      -------       ------    -------
                                                           (Dollars in thousands)
<S>                                  <C>             <C>      <C>           <C>      <C>            <C>      <C>             <C>
Mortgage loans:
 Construction .....................  $  34,566       8.65%    $  34,216     7.93%    $  31,261      7.09%   $   46,766       9.48%
 On existing property ..............   231,373      57.89       240,268    55.69       254,161     57.63       265,069      53.73
 Income property (Commercial) ......    73,295      18.34        97,680    22.64        95,420     21.63       114,931      23.29
Commercial business loans ..........    14,831       3.71        10,939     2.54        14,848      3.37        22,818       4.62
Consumer loans:
 Mobile home .......................     1,103       0.28         1,291     0.30           990      0.22         1,166       0.24
 Automobiles .......................     7,261       1.82         6,055     1.40         5,106      1.16         6,809       1.38
 Equity lines of credit ............    12,441       3.11        15,294     3.54        18,655      4.23        21,081       4.27
 Other .............................    24,776       6.20        25,714     5.96        20,567      4.67        14,738       2.99
                                     ---------     ------       -------  -------     ---------      ----      --------       ----

Total loans and loans
    held for sale .................. $ 399,646     100.00%     $431,457   100.00%     $441,008    100.00%   $  493,378     100.00%
                                                   =======               =======                  ======                   ======

Less:
 Loans in process ..................   (18,589)                 (15,084)               (11,292)               (15,315)
 Deferred loan (fees) costs ........       286                      458                    702                    354
 Allowance for loan losses .........    (4,172)                  (4,902)                (5,668)                (6,430)
                                      --------                ---------                -------                 -------

Total loans and loans held
       for sale, net ............... $ 377,171                $ 411,929              $ 424,750              $ 471,987
                                     =========                =========              =========              =========
</TABLE>

<TABLE>
<CAPTION>

                                      -----------------------
                                              2000
                                      -----------------------
                                        Amount      Percent
                                        ------      -------

<S>                                   <C>             <C>
Mortgage loans:
 Construction .....................   $  54,905       10.13%
 On existing property ..............    283,851       52.39
 Income property (Commercial) ......    133,569       24.65
Commercial business loans ..........     23,357        4.31
Consumer loans:
 Mobile home .......................      1,374        0.25
 Automobiles .......................      7,789        1.44
 Equity lines of credit ............     23,009        4.25
 Other .............................     13,915        2.58
                                     ----------      ------

Total loans and loans
    held for sale ..................    $541,769     100.00%
                                                    ========

Less:
 Loans in process ..................    (13,329)
 Deferred loan (fees) costs ........        519
 Allowance for loan losses .........     (7,064)
                                     ----------

Total loans and loans held
       for sale, net ............... $  521,895
                                     ==========
</TABLE>

                                       7
<PAGE>


         Single  Family   Residential   Loans.  The  Bank  actively   originates
conventional loans to enable borrowers to purchase existing homes or residential
lots,  refinance existing mortgage loans or construct new homes.  Mortgage loans
originated by the Bank are  generally  long-term  loans,  amortized on a monthly
basis,  with principal and interest due each month. The contractual loan payment
period for single family  residential loans typically range from 15 to 30 years.
The Bank's  experience  indicates that real estate loans remain  outstanding for
significantly  shorter  periods  than their  contractual  terms.  Borrowers  may
refinance or prepay loans at their  option,  subject to any  prepayment  penalty
provisions  included in the note.  The Bank  generally  requires  mortgage title
insurance on all single family residential mortgage loans.

         The Bank offers  adjustable rate mortgage loans ("ARMs"),  the interest
rates of which  generally  adjust  based upon  either the prime rate or treasury
securities  indices.  The interest  rates on ARMs  generally may not adjust more
than 2% per year and 6% over the life of the loan. Based upon market conditions,
the Bank may  originate  ARMs at below the  fully  phased-in  interest  rate but
generally  qualifies  borrowers for one-year and three-year ARMS at 2% above the
initial rate when the loan to value ratio exceeds 70%.  Monthly  payments  could
increase significantly at the first repricing period. Although Coastal Federal's
ARMs are  beneficial  in helping  Coastal  Federal  improve  the  interest  rate
sensitivity  of its assets,  such loans may pose potential  additional  risks to
Coastal  Federal.  Should  interest rates  continue to increase,  certain of the
Bank's  adjustable rate loans may reach their lifetime interest rate change cap.
At September  30, 2000,  $3.8 million of the Bank's  adjustable  rate loans were
within 200 basis points of their cap. A precipitous  increase in interest  rates
could be expected to result in an increase in  delinquencies or defaults on such
loans.  Whereas a  significant  decrease  in rates  could  cause  repayments  to
increase significantly.

         Coastal Federal also offers  one-to-four  family residential loans with
fixed rates of  interest.  These loans  generally  can be sold in the  secondary
market  or are  portfolio  loans  where  the  Bank  offers  such  loans at rates
approximately  1% above  conforming  loan  rates.  Loans sold to  correspondents
amounted to $24.8 million and $13.4  million,  respectively,  in fiscal 1999 and
2000.  Coastal  Federal  sold  approximately  $36.0  million and $20.3  million,
respectively,  of  mortgages  in 1999 and 2000 to FHLMC.  In  addition,  Coastal
Federal  securitized  and sold  mortgages  to FHLMC of $27.7  million  and $14.9
million in 1999 and 2000, respectively.

                                       8
<PAGE>


         At September  30, 2000,  approximately  $292.7  million or 56.1% of the
Bank's loan portfolio consisted of one-to-four family residential loans.

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

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

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

                                       9
<PAGE>


         At September  30,  2000,  approximately  $54.9  million or 10.5% of the
Bank's gross loan portfolio  consisted of construction loans on both residential
($18.0 million) and commercial properties ($36.9 million).  Undisbursed proceeds
on these loans amounted to $13.3 million at September 30, 2000.

         Commercial Real Estate Loans.  The Bank may invest,  by OTS regulation,
in non-residential real estate loans up to 400% of its capital as computed under
GAAP plus  general loan loss  reserves.  At  September  30,  2000,  this limited
Coastal Federal's aggregate  non-residential  real estate loans to approximately
$223.5  million.  At such date, the Bank had  non-residential  real estate loans
outstanding  of $133.6  million.  The Bank will  maintain  a level of these loan
types  within the  guidelines  set  forth.  The  commercial  real  estate  loans
originated  by the  Bank are  primarily  secured  by  shopping  centers,  office
buildings, warehouse facilities, retail outlets, hotels, motels and multi-family
apartment  buildings.  The  interest  rate of the  commercial  real estate loans
presently  offered by the Bank generally  adjusts every one, three or five years
and is indexed to U.S. Treasury securities.  Such loans generally have a fifteen
to twenty  year  term,  with the  payments  based up to a  similar  amortization
schedule.  The Bank may  require the loan to include a call option at the Bank's
option in five to ten years. The Bank generally  requires that such loans have a
minimum debt service coverage of 120% of projected net operating income together
with other generally accepted underwriting criteria.

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

         Consumer  Loans.  The Bank is permitted by OTS regulations to invest up
to 35% of its assets in consumer loans. The Bank currently offers a wide variety
of consumer loans on a secured and unsecured  basis  including home  improvement

                                       10
<PAGE>

loans,  loans secured by savings accounts and automobile,  truck and boat loans.
The Bank also offers a revolving line of credit secured by  owner-occupied  real
estate. Total consumer loans, including equity lines of credit generally secured
by one-to-four  family  residences,  amounted to $46.1  million,  or 8.5% of the
total loan portfolio, at September 30, 2000.

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

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

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

         Coastal Federal has been making commercial business loans since 1983 on
both a secured and unsecured  basis with terms which generally do not exceed one
year.  The majority of these loans have interest rates which adjust with changes
in the prime rate as published in The Wall Street  Journal.  The Bank's non-real
estate  commercial  loans  primarily  consist of  short-term  loans for  working
capital  purposes,  seasonal  loans and lines of  credit.  The Bank  customarily
requires a personal  guaranty  of payment  by the  principals  of any  borrowing

                                       11
<PAGE>

entity and  reviews  the  financial  statements  and  income tax  returns of the
guarantors.  At September 30, 2000,  the Bank had $23.4 million  outstanding  in
commercial  business loans,  which  represented  approximately  4.3% of its loan
portfolio.

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

                                       12
<PAGE>




Loan Maturity

         The  following  table sets forth certain  information  at September 30,
2000  regarding  the  dollar  amount of loans  maturing  in the  Company's  loan
portfolio  based on their  contractual  terms to  maturity  but does not include
scheduled  payments or potential  prepayments.  Demand  loans  (without a stated
maturity),  loans having no stated schedule of repayments and no stated maturity
and overdrafts are reported as due in one year or less.

<TABLE>
<CAPTION>
                                        More than      More than     More than     More than
                                        One Year      Three Years   Five Years    Ten Years
                            One Year    Through        Through       Through       Through         Over
                            or Less    Three Years    Five Years    Ten Years     Twenty Years    Twenty Years       Totals
                            --------   -----------    ----------    ---------     ------------    ------------       ------
                                                        (In thousands)
<S>                        <C>         <C>          <C>           <C>           <C>                <C>             <C>
First mortgage loans . .   $ 37,508    $   2,058    $   1,894     $  18,161     $  67,992          $  196,614      $  324,227
Other residential and
   non-residential . . .     46,293       20,752        5,213        10,114        47,785               3,412         133,569
Equity lines of credit .     23,009           --                         --            --                  --          23,009
Consumer loans . . . . .      5,800        3,921        5,195           606         1,985                 226          17,733
Commercial loans . . . .     17,129        1,813        2,841           255         1,229                  90          23,357
                           ---------     --------     --------      --------      --------             ------     -----------
       Total loans . . .  $ 129,739    $  28,544    $  15,143     $  29,136    $  118,991          $  200,342      $  521,895
                          ==========   ==========   ==========    ==========   ===========        ===========     ===========
</TABLE>



         The following table sets forth the dollar amount of all loans due after
one year at September 30, 2000 which have fixed  interest  rates and those which
have floating or adjustable interest rates.

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

First mortgage loans ......      $ 57,153      $229,566      $286,719
Other residential and
    Non-residential .......        18,862        68,414        87,276
Consumer loans ............        10,647         1,286        11,933
Commercial loans ..........         3,889         2,339         6,228
                                 --------      --------      --------
       Total loans ........      $ 90,551      $301,605      $392,156
                                 ========      ========      ========

                                       13
<PAGE>




         Loan  Solicitation and Processing.  The Bank actively solicits mortgage
loan applications  from existing  customers,  walk-ins,  referrals and from real
estate brokers.  Commercial real estate loan  applications  also are obtained by
direct solicitation by loan officers.

         Detailed loan  applications  are obtained to determine  the  borrower's
ability  to repay,  and the more  significant  items on these  applications  are
verified   through  the  use  of  credit  reports,   financial   statements  and
confirmations through verification forms. After analysis of the loan application
and property or collateral  involved,  including an appraisal of the property by
independent appraisers approved by the Bank's Board of Directors and reviewed by
the Bank's underwriter,  a lending decision is made by the Bank. With respect to
commercial  loans,  the Bank also reviews the capital  adequacy of the business,
the ability of the  borrower  to repay the loan and honor its other  obligations
and  general  economic  and  industry  conditions.  All loan  applications  over
$500,000 require the approval by a member or members, depending on loan size, of
the  Bank's  Internal  Loan  Committee,   Director  Gerald  and  Executive  Vice
Presidents  Rexroad and Stalvey.  All loan applications  greater than $2,000,000
require the approval of the Bank's Loan  Committee  which  consists of Directors
Clemmons,  Gerald,  Thompson and Executive Vice Presidents  Rexroad and Stalvey.
All first mortgage loan applications in excess of 80% of the lesser of appraised
value or purchase  price of the  property,  unless the  borrowers  have  private
mortgage insurance, must be approved by a member of the Bank's Loan Committee.

         Loan applicants are promptly  notified of the decision of the Bank by a
letter setting forth the terms and conditions of the decision. If approved, such
terms and conditions include the amount of the loan, interest rate, amortization
term, a brief  description of real estate to be mortgaged to the Bank and notice
of requirement of insurance coverage necessary to protect the Bank's interest in
the collateral.

         The  Bank's  general  policy  is to  obtain  a title  insurance  policy
insuring  that the Bank has a valid lien on the  mortgaged  real estate and that
the  property is free of  encumbrances.  Borrowers  must also obtain paid hazard
insurance  policies  prior to closing and, when the property is in a flood plain
as  designated by the Federal  Emergency  Management  Agency,  obtain paid flood
insurance  policies.  It is the  policy of  Coastal  Federal  to  require  flood
insurance for the full  insurable  value of the  improvements  for any such loan
located in a designated  flood hazard area.  Borrowers on loans which exceed 80%
of the value of the security  property are also  required to advance  funds on a
monthly basis, with each payment of principal and interest, to a mortgage escrow

                                       14
<PAGE>

account  from which the Bank makes  disbursements  for items such as real estate
taxes,  hazard insurance  premiums and private mortgage insurance  premiums.  In
cases of flood  insurance,  it is the Bank's  policy to require  escrow on these
premiums regardless of the loan-to-value ratio.

         Loan  Originations,  Purchases  and  Sales.  The Bank is  qualified  to
service loans for FHLMC and FNMA.  Depending  upon  interest  rates and economic
conditions,  the Bank has sold  loans in order to provide  additional  funds for
lending,  to generate  servicing  fee income,  and to decrease the amount of its
long-term,  fixed rate loans in order to minimize the gap between the maturities
of its  interest-earning  assets  and  interest-bearing  liabilities.  The  Bank
generally  continues to collect payments on the loans, to supervise  foreclosure
proceedings,  if necessary, and to otherwise service the loans. The Bank retains
a portion of the interest paid by the borrower on the loans as consideration for
its servicing  activities.  At September 30, 2000, the Bank was servicing  loans
sold to others with a principal balance of approximately  $106.1 million.  Sales
of whole loans and participation interests by the Bank are made without right of
recourse  to the Bank by the buyer of the loans in the event of  default  by the
borrower. At September 30, 2000, the Bank's consolidated loan portfolio included
purchased  loans of  approximately  $23.3  million,  which  have been  primarily
secured by single  family  residences  and which have been written as adjustable
rate mortgage loan instruments.  These loans are generally secured by properties
located  in  the   Southeast  and  were   purchased   according  to  the  Bank's
non-conforming mortgage loan underwriting standards.



                                       15
<PAGE>




Loans Originated, Purchased and Sold

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

<TABLE>
<CAPTION>
                                                       Year Ended September 30,
                                              -------------------------------------------
                                                  1998           1999             2000
                                              ------------    ----------        ---------
                                                           (In thousands)
<S>                                            <C>             <C>             <C>
Loans receivable, net, at the beginning
    of the period .......................      $ 411,929       $ 424,750       $ 471,987
                                               ---------       ---------       ---------

Loans originated:
  Construction ..........................         62,805          72,456          68,799
  Residential ...........................         70,588          96,510         120,961
  Nonresidential ........................         23,622          22,233          10,480
  Land ..................................         20,025          19,060           6,103
  Commercial business ...................         16,076          29,232          29,419
  Consumer ..............................         12,136          16,866          11,434
                                               ---------       ---------       ---------
    Total loans originated ..............        205,252         256,357         247,196
                                               ---------       ---------       ---------

Loans purchased, primarily single
family residential mortgages ............         10,442           9,078           4,027
                                               ---------       ---------       ---------

Loans sold ..............................        (71,674)        (60,781)        (33,695)
                                               ---------       ---------       ---------

Loan principal repayment and other ......       (125,289)       (128,805)       (139,900)
                                               ---------       ---------       ---------

Sale of loans, related to the sale of the
Florence office .........................           --              --           (10,897)

Securitization of mortgage loans ........         (4,997)        (27,713)        (14,894)

Other ...................................           (913)           (899)         (1,929)
                                               ---------       ---------       ---------

Loans receivable, net, at end of period .      $ 424,750       $ 471,987       $ 521,895
                                               =========       =========       =========
</TABLE>

                                       16

<PAGE>



         Loan Commitments.  The Bank, upon the submission of a loan application,
generally  provides  a  45-day  written  commitment  as  to  the  interest  rate
applicable  to such loan.  If the loan has not been closed  within 45 days,  the
rate may be adjusted to reflect current market  conditions at the Bank's option.
Loans  which  require  closing  time in  excess  of 45  days  from  the  date of
application are issued a written  commitment,  with a term ranging from three to
six months. For fixed rate loans, the Bank either charges a higher interest rate
on the loan or may  charge up to one point to lock in the rate for 180 days.  At
September 30, 2000, the Company had residential loan origination  commitments of
approximately $4.3 million.

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

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

         Problem  Assets  and  Asset  Classification.  Loans are  reviewed  on a
regular basis and a reserve for  uncollectible  interest is established on loans
where collection of interest is  questionable,  generally when such loans become
90 days  delinquent.  Loan balances that relate to interest amounts reserved are
considered  to be on a  nonaccrual  basis.  Typically,  payments  received  on a
nonaccrual  loan are  applied  to the  outstanding  principal  and  interest  as
determined at the time of collection of the loan.



                                       17
<PAGE>



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

<TABLE>
<CAPTION>
                                                            At September 30,
                                 -----------------------------------------------------------------
                                   1996          1997           1998         1999          2000
                                   ----          ----           ----         ----          ----
                                                      (Dollars in thousands)
<S>                              <C>           <C>           <C>           <C>           <C>
Loans accounted for on a
nonaccrual basis:

Real estate -
   Residential ...........       $  307        $   71        $  222        $1,097        $2,080
   Commercial ............           --            --            --           267         2,478
   Commercial business ...           60            99         1,962            --            --
   Consumer ..............           78            87            73            67           224
                                 ------        ------        ------        ------        ------
     Total ...............          445           257         2,257         1,431         4,782
                                 ------        ------        ------        ------        ------

Accruing loans which are
contractually past due
90 days or more:

   Real estate -
     Residential .........           --            --            --            --            --
     Commercial ..........           --            --            --            --            --
   Commercial business ...           --            --            --            --            --
   Consumer ..............           --            --            --            --            --
                                 ------        ------        ------        ------        ------
      Total ..............           --            --            --            --            --
                                 ------        ------        ------        ------        ------

Restructured loans .......           --            --            --           418           419
Real estate owned ........          323           250            35            96           867
Other nonperforming assets           --            --            --            --            --
                                 ------        ------        ------        ------        ------
Total nonperforming assets       $  768        $  507        $2,292        $1,945        $6,068
                                 ======        ======        ======        ======        ======
Total nonaccrual loans to
  net loans ..............         0.12%         0.06%         0.54%         0.30%         0.92%
Total nonaccrual loans to
  total assets ...........         0.10%         0.05%         0.35%         0.20%         0.62%
Total nonperforming assets
  to total assets ........         0.17%         0.10%         0.36%         0.27%         0.79%
</TABLE>



         In fiscal years 1998,  1999 and 2000,  interest income which would have
been recorded was approximately  $181,000,  $46,000 and $220,000,  respectively,
had  nonaccruing  loans been current in accordance with their original terms. At
September 30, 2000,  impaired loans totaled $1.4 million and consisted primarily
of two  commercial  loans.  There were no impaired  loans at September 30, 1999.
Included in the  allowance  for loan losses at  September  30, 2000 was $345,000
related to impaired loans. The average recorded investment in impaired loans for
the year ended  September  30, 2000 was $1.5  million.  No  interest  income was
recognized on impaired loans in fiscal 2000.



                                       18
<PAGE>




         The  allowance  for  uncollectible  interest  which is  netted  against
accrued interest  receivable  totaled $70,000 and $242,000 at September 30, 1999
and 2000, respectively.

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

         Coastal  Federal had seven  individual  classified  assets in excess of
$750,000 as of September 30, 2000. At that date,  classified  assets amounted to
$18.5 million ($7.7 million  substandard;  $278,000 doubtful;  and $10.6 million
special  mention).  Substandard  assets consist primarily of ten commercial real
estate loans with aggregate  balances of approximately $5.5 million at September
30, 2000.  Special  mention assets consist  primarily of eight  commercial  real
estate loans with aggregate  balances of approximately $9.9 million at September
30, 2000.

         Allowance for Loan Losses.  In making loans,  the Bank  recognizes  the
fact that credit losses will be experienced  and that the risk of loss will vary

                                       19
<PAGE>

with, among other things, the type of loan being made, the  creditworthiness  of
the borrower over the term of the loan and, in the case of a secured  loan,  the
quality of the security for the loan.

         The Bank's  management  evaluates the need to establish  allowances for
losses on loans and other assets each year based on estimated losses on specific
loans and on any real estate held for sale or investment  when a finding is made
that a significant  decline in value has occurred.  Such  evaluation  includes a
review of all loans for which full  collectibility may not be reasonably assured
and considers, among other matters, the estimated market value of the underlying
collateral of problem  loans,  prior loss  experience,  economic  conditions and
overall  portfolio  quality.  Additions to the  allowance for losses are charged
against  earnings  in the  year  they  are  established.  The  Bank  established
provisions for losses on loans for the years ended  September 30, 1998, 1999 and
2000 of $865,000, $750,000 and $978,000, respectively. As a result, the Bank has
a $7.1 million allowance for loan losses as of September 30, 2000. The allowance
as a percentage of loans  receivable was 1.35% at September 30, 2000 compared to
1.36% at  September  30,  1999.  See  "Management's  Discussion  and  Analysis -
Non-Performing Assets and - Allowance for Loan Losses" in the 2000 Annual Report
to Stockholders attached hereto and incorporated by reference.

         While the Bank believes it has established  its existing  allowance for
loan losses in  accordance  with GAAP at  September  30,  2000,  there can be no
assurance  that  regulators,  when  reviewing  the Bank's loan  portfolio in the
future,  will not request the Bank to  significantly  increase its allowance for
loan losses,  thereby  adversely  affecting the Bank's  financial  condition and
earnings.



                                       20
<PAGE>






Loan Loss Allowance Analysis

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

<TABLE>
<CAPTION>
                                                                Year Ended September 30,
                                           ---------------------------------------------------------------
                                             1996           1997          1998          1999         2000
                                             ----           ----          ----          ----        -----
                                                                     (Dollars in thousands)
<S>                                        <C>           <C>           <C>           <C>           <C>
Allowance at beginning of
  period ............................      $ 3,578       $ 4,172       $ 4,902       $ 5,668       $ 6,430
Allowance recorded on
  acquired loans ....................           --           110           109           112            50
Sale of Florence office loans .......           --            --            --            --           (75)
Provision for loan losses ...........          790           760           865           750           978
                                           -------       -------       -------       -------       -------
Recoveries:
  Residential real estate ...........           --            20             7           184            12
  Commercial real estate ............           75            14             1            13            --
  Real estate construction ..........           --            --            --            --            --
  Consumer ..........................            7            38            56            55            65
                                           -------       -------       -------       -------       -------
   Total recoveries .................           82            72            64           252            77
                                           -------       -------       -------       -------       -------

Charge-offs:
  Residential real estate ...........           24            46            28            15            28
  Commercial real estate ............          216            --            17             8            --
  Real estate construction ..........           --            --            --            --            --
  Consumer ..........................           38           166           227           329           368
                                           -------       -------       -------       -------       -------
   Total charge-offs ................          278           212           272           352           396
                                           -------       -------       -------       -------       -------
   Net charge-offs (recoveries) .....          196           140           208           100           319
                                           -------       -------       -------       -------       -------
Allowance at end of period ..........      $ 4,172       $ 4,902       $ 5,668       $ 6,430       $ 7,064
                                           =======       =======       =======       =======       =======

Ratio of allowance to net
  loans outstanding at the
  end of the period .................         1.11%         1.19%         1.33%         1.36%         1.35%

Ratio of net charge-offs (recoveries)
  to average loans outstanding
  during the period .................         0.05%         0.04%         0.05%         0.02%         0.06%

</TABLE>


                                       21
<PAGE>



Loan Loss Allowance by Category

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

<TABLE>
<CAPTION>
                                                                          September 30,
                          ---------------------------------------------------------------------------------------------------------
                                          1996                                1997                                 1998
                          ---------------------------------  -----------------------------------  ---------------------------------

                                      As a %     Loan Type                As a %      Loan Type              As a %       Loan Type
                                     of out-     As a %                  of out-      As a %                 of out-      As a %
                                     standing    of out-                 standing     of out-                standing     of out-
                                     loans in    standing                loans in     standing               loans in     standing
                          Amount     category    loans       Amount      category     loans       Amount     category     loans
                          ------     --------    -----       ------      --------     -----       ------     --------     -----
                                                                    (Dollars in thousands)
<S>                        <C>         <C>         <C>         <C>        <C>         <C>          <C>        <C>         <C>
Real Estate - mortgage

 Residential               $  837      0.37%       65.35%      $1,064     0.41%       63.56%       $1,375     0.47%       67.60%
 Commercial                 2,875      3.80        22.34        3,261     2.78        28.52%        3,685     3.30        26.32
 Consumer                     460      1.01        12.31          577     1.77         7.92           608     2.82         6.08
                          -------                --------    --------              --------      --------               -------
 Total Allowance for        $4,172     1.11%      100.00%     $4,902      1.19%      100.00%       $5,668     1.33%      100.00%
                            ======                =======     =======               =======      ========               =======
  loan losses

</TABLE>

<TABLE>
<CAPTION>
                                                       September 30,
                          ------------------------------------------------------------------------
                                          1999                               2000
                          ---------------------------------  -----------------------------------

                                      As a %     Loan Type                As a %      Loan Type
                                     of out-     As a %                  of out-      As a %
                                     standing    of out-                 standing     of out-
                                     loans in    standing                loans in     standing
                          Amount     category    loans       Amount      category     loans
                          ------     --------    -----       ------      --------     -----
                                                   (Dollars in thousands)
<S>                        <C>         <C>         <C>         <C>        <C>         <C>

Real Estate - mortgage

Residential              $1,747         0.56%       66.01%   $2,081         0.60%       66.53%
Commercial                4,191         3.04        29.18     4,719         3.01        30.07
Consumer                    492         2.17         4.81       264         1.49         3.40
                         ------                    ------    ------                    ------
Total Allowance for      $6,430         1.36%      100.00%   $7,064         1.35%      100.00%
                         ======                    ======    ======                    ======
  loan losses

</TABLE>

                                       22
<PAGE>



 Investment Activities

         Under OTS  regulations,  the Bank has  authority  to invest in  various
types of liquid  assets,  including  U.S.  Treasury  obligations,  securities of
various federal agencies and of state and municipal governments, deposits at the
FHLB of Atlanta,  certificates  of deposit of  federally  insured  institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
such  savings  institutions  may  also  invest a  portion  of  their  assets  in
commercial  paper,  corporate debt  securities  and mutual funds,  the assets of
which conform to the investments that federally  chartered savings  institutions
are otherwise authorized to make directly.  These institutions are also required
to maintain  minimum  levels of liquid assets which vary from time to time.  See
"Regulation  of Coastal  Federal - Federal Home Loan Bank  System." The Bank may
decide to increase its liquidity  above the required  levels  depending upon the
availability  of funds and  comparative  yields on  investments  in  relation to
return on loans.

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

         Investment  decisions  are made by the  Investment  Officer who reports
quarterly  to  the  Asset/Liability  Committee  ("ALCO  committee").   The  ALCO
Committee meets  quarterly and consists of Directors  Creel,  Bishop,  Thompson,
Clemmons and Gerald, and Executive Vice Presidents Graham,  Rexroad,  Sherry and
Stalvey and Vice  President  Loehr.  The ALCO  Committee  acts  within  policies
established  by the Board of  Directors.  At  September  30,  2000,  the  Bank's
investment  portfolio had a market value of  approximately  $197.8 million.  The
investment  securities  portfolio  consisted primarily of U.S. Government agency
securities and mortgage-backed  securities.  For further information  concerning
the Bank's securities portfolio,  see Notes 2 and 3 of the Notes to Consolidated
Financial Statements attached hereto and incorporated by reference.



                                       23
<PAGE>


Securities Analysis

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

<TABLE>
<CAPTION>
                                                                September 30,
                              ----------------------------------------------------------------------------------
                                       1998                        1999                           2000
                              ----------------------      ------------------------    --------------------------
                              Amortized   Percent of       Amortized   Percent of      Amortized    Percent of
                              Cost(1)     Portfolio        Cost(1)     Portfolio       Cost(1)      Portfolio
                              -------     ---------        -------     ---------       -------      ----------
                                                           (Dollars in thousands)

<S>                          <C>         <C>             <C>           <C>             <C>           <C>
U.S. Government agency
Securities:
FHLMC .............          $   --          --%         $   --           --           $2,858        32.99%
FHLB ..............           8,840       90.64%          4,723        75.99%           3,077        35.52%
FNMA ..............              --           --             --           --            1,235        14.26%
Federal Farm Credit
Bond ..............             912         9.36%            --           --               --            --
Federal Agric Mtg
Association .......              --          --           1,492        24.01%           1,499         17.23%
                             ------       ------         ------       ------           ------        ------

  Total ...........          $9,752       100.00%        $6,215       100.00%          $8,669        100.00%
                             ======       ======         ======       ======           ======        ======
</TABLE>


(1)  The market value of the Bank's investment securities portfolio amounted to
     $9.8 million, $6.1 million and $8.5 million at September 30, 1998, 1999 and
     2000, respectively.


The following table sets forth the final maturities and weighted average yields
of the securities at amortized cost at September 30, 2000.

<TABLE>
<CAPTION>
                                                      Less Than                   One to                        Five to
                                                      One Year                  Five Years                    Ten Years
                                            -------------------------      -----------------------     ----------------------
                                                Amount        Yield          Amount       Yield         Amount         Yield
                                                ------        -----          ------       -----         ------         -----
                                                                            (Dollars in thousands)
U.S. Government agency
securities:
<S>                                            <C>             <C>         <C>           <C>            <C>            <C>
FHLMC ....................................          --           --        $  988         7.02%         $1,870         5.75%
FHLB .....................................          --           --           322         6.48%          2,755         6.14%
FNMA .....................................          --           --            --           --%          1,235         6.44%
Federal Farm
Credit Bond ..............................          --           --            --           --%             --           --%
Federal Agric Mtg
Association ..............................          --           --            --           --           1,499         5.93%
                                               -------         ----        ------         ----          ------         ----

  Total ..................................     $    --          --%        $1,310        6.89%          $7,359         6.05%
                                               =======         ====        ======        ====           ======         ====
</TABLE>


                                       24
<PAGE>

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

<TABLE>
<CAPTION>
                                                                              September 30,
                                ----------------------------------------------------------------------------------------------------
                                              1998                                1999                                 2000
                                -----------------------------   ----------------------------------   -------------------------------
                                Amortized        Percent of         Amortized         Percent of        Amortized         Percent of
                                Cost(1)          Portfolio          Cost(1)           Portfolio          Cost(1)           Portfolio
                                ----------   ----------------   ---------------   ----------------   ---------------   -------------
                                                                       (Dollars in thousands)
<S>                             <C>               <C>            <C>                   <C>              <C>                 <C>
Mortgage-backed Securities:
   FHLMC ..................     $ 24,901          14.69%         $ 35,175              18.98%           $ 19,191            10.02%
   FNMA ...................       95,024          56.05%          103,117              55.64%            122,665            64.03%
   GNMA ...................       49,586          29.26%           23,349              12.60%             18,698             9.76%
   CMO ....................           --             --            23,680              12.78%             31,023            16.19%
                                --------         ------          --------             ------            --------           ------

     Total ................     $169,511         100.00%         $185,321             100.00%           $191,577           100.00%
                                ========         ======          ========             ======            ========           ======
</TABLE>



(1)  The market value of the Bank's mortgage-backed securities portfolio
     amounted to $170.2 million, $182.1 million and $189.2 million at September
     30, 1998, 1999 and 2000, respectively.


         The  following  table sets forth the  maturities  and weighted  average
yields of the securities, at amortized cost, at September 30, 2000.

<TABLE>
<CAPTION>
                                   Less Than                     One to                   Five to                Ten Years
                                   One Year                    Five Years                Ten Years             and Thereafter
                             ----------------------     -----------------------   ---------------------   ---------------------
                              Amount        Yield        Amount        Yield      Amount        Yield       Amount       Yield
                              ------        -----        ------        -----      ------        -----       ------       -----
                                                                     (Dollars in thousands)

U.S. Government and agency
Securities

<S>                            <C>           <C>          <C>           <C>     <C>               <C>      <C>           <C>
   FHLMC .................     $ --          --%          $ --          --%     $     --          --%      $ 19,191      6.49%
   FNMA ..................       --          --%            --          --%           --          --%       122,665      7.34%
   GNMA ..................       --          --%            --          --%           --          --%        18,698      7.75%
   CMO ...................       --          --%            --          --%        1,629          6.50%      29,394      6.69%
                               ----          ---          ----          ---     --------          ----     --------       ----

     Total ...............       --          --%            --          --%     $  1,629          6.50%    $189,948      7.19%
                               ====          ===          ====          ===     ========          ====     ========       ====
</TABLE>



                                       25
<PAGE>


Service Corporation Activities

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



                                -----------------
                                 COASTAL FEDERAL
                                -----------------


                                                         ---------------------
                                                           COASTAL FEDERAL(1)
                                                                 HOLDING
                                                               CORPORATION
                                                         ---------------------


                                                         ---------------------
                                                              COASTAL REAL
                                                            ESTATE INVESTMENT
                                                               CORPORATION
                                                         ---------------------
                                ------------------
                                 COASTAL MORTGAGE
                                     BANKERS*
                                ------------------

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

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


*    Inactive

(1) First tier operating subsidiary of Coastal Federal Savings Bank consolidated
with Coastal Federal Savings Bank for regulatory reporting. On December 10, 1998
Coastal  Federal   exchanged  its  stock  of  Coastal  Real  Estate   Investment
Corporation  for  100% of the  outstanding  stock  of  Coastal  Federal  Holding
Corporation.


                                       26
<PAGE>


         On  November  2,  1995,  Coastal  Financial  purchased  Granger-O'Harra
Mortgage,  Inc.  ("Granger-O'Harra")  and  merged  Granger-O'Harra  into  a  new
subsidiary,  Coastal  Federal  Mortgage,  Inc.  Coastal Federal  Mortgage,  Inc.
engaged in the  origination  of conforming  mortgage loans which are sold in the
secondary market,  generally on a servicing released basis.  During fiscal 1999,
Coastal Federal  Mortgage's  operations  were  discontinued.  Consequently,  the
Bank's mortgage banking function was expanded.

         On May 7, 1996, the  Corporation  formed Coastal  Technology  Services,
Inc.  ("CTS").   CTS's  activities  for  fiscal  2000  were  immaterial  to  the
consolidated financial condition and results of operations of Coastal Financial.

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

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

Deposit Activities and Other Sources of Funds

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

         Deposit Accounts.  Deposits are attracted from within Coastal Federal's
primary  market  area  through  the  offering  of a broad  selection  of deposit
instruments,  including NOW checking  accounts,  money market accounts,  regular
statement savings and passbook accounts,  certificates of deposit and retirement
savings plans.  In addition,  Coastal Federal also issues  certificate  accounts
originated  by brokers for a fee.  Included in  certificate  accounts were $31.8


                                       27
<PAGE>

million of brokered deposits at September 30, 2000.  Deposit account terms vary,
according  to the  minimum  balance  required,  the time  periods the funds must
remain on deposit and the interest rate, among other factors. In determining the
terms of its deposit  accounts,  Coastal Federal  considers the rates offered by
its competition,  profitability  to Coastal  Federal,  matching deposit and loan
products and its customer  preferences and concerns.  Coastal Federal  generally
reviews its deposit mix and pricing at least monthly.



                                       28
<PAGE>




Deposit Flow

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

<TABLE>
<CAPTION>
                                                                   At September 30,
                                 ----------------------------------------   ----------------------------------------
                                                  1998                                        1999
                                 ----------------------------------------   ----------------------------------------
                                                 Percent      Increase                      Percent       Increase
                                      Amount    of Total     (Decrease)        Amount      of Total      (Decrease)
                                      ------    --------     ----------        ------      --------      ----------
                                                               (Dollars in thousands)
<S>                               <C>              <C>      <C>             <C>                <C>       <C>
Transaction accounts:
  NOW checking .............      $  42,434        10.99%   $   3,661       $  50,774          12.70%    $   8,340
  Commercial checking ......         27,285         7.06        3,520          37,256           9.32         9,971
                                  ---------       ------    ---------       ---------         ------     ---------

Total transaction accounts .         69,719        18.05        7,181          88,030          22.03        18,311
                                  ---------       ------    ---------       ---------         ------     ---------

Money market demand accounts        124,207        32.15       19,731         138,188          34.58        13,981
Savings accounts ...........         37,242         9.64       (2,203)         39,212           9.81         1,970

Fixed-rate certificates
(original maturity):

  3 months .................          2,045         0.53          219           4,440           1.11         2,395
  6 months .................         25,563         6.62        3,378          23,367           5.85        (2,196)
  9 months .................          5,396         1.40       (1,946)          5,220           1.31          (176)
  12 months ................         46,121        11.94        2,220          37,953           9.50        (8,166)
  18 months ................         35,140         9.10        2,890          16,016           4.01       (19,124)
  24 months ................         17,348         4.49        9,958          19,104           4.78         1,756
  30 months ................          6,558         1.70        1,749          13,677           3.42         7,119
  36 months ................          4,740         1.23       (4,475)          4,622           1.16          (118)
  48 months ................          6,852         1.77        1,188           4,870           1.22        (1,982)
  96 months ................             29         0.01            2              31           0.01             2
                                  ---------       ------    ---------       ---------         ------     ---------
                                    149,792        38.77       15,183         129,300          32.35       (20,490)
                                  ---------       ------    ---------       ---------         ------     ---------
Variable rate certificates:
 (original maturity)
  18 months ................          3,137         0.81         (541)          2,716           0.68          (421)
  30 months ................          2,224         0.58         (146)          2,227           0.56             3
                                  ---------       ------    ---------       ---------         ------     ---------
Total variable .............          5,361         1.39         (687)          4,943           1.24          (418)
                                  ---------       ------    ---------       ---------         ------     ---------

Total certificates .........        155,153        40.16       14,496         134,243          33.59       (20,910)
                                  ---------       ------    ---------       ---------         ------     ---------

Total deposits .............      $ 386,321       100.00%   $  39,205       $ 399,673         100.00%    $  13,352
                                  =========       ======    =========       =========         =======    =========
</TABLE>



<TABLE>
<CAPTION>

                                    --------------------------------------
                                                   2000
                                    --------------------------------------
                                                 Percent       Increase
                                       Amount    of Total      (Decrease)
                                       ------    --------      ----------

<S>                                  <C>            <C>        <C>
Transaction accounts:
  NOW checking .............         $  48,945      12.05%     $  (1,829)
  Commercial checking ......            35,214       8.67         (2,042)
                                     ---------     ------      ---------

Total transaction accounts .            84,159      20.72         (3,871)
                                     ---------     ------      ---------

Money market demand accounts           120,133      29.57        (18,055)
Savings accounts ...........            36,205       8.91         (3,007)

Fixed-rate certificates
(original maturity):

  3 months .................             3,695       0.91           (745)
  6 months .................            62,377      15.36         39,010
  9 months .................             3,211       0.79         (2,009)
  12 months ................            32,650       8.04         (5,303)
  18 months ................            24,520       6.04          8,504
  24 months ................            18,073       4.45         (1,031)
  30 months ................             8,620       2.12         (5,057)
  36 months ................             3,275       0.81         (1,347)
  48 months ................             4,821       1.19            (49)
  96 months ................                33       0.01              2
                                     ---------     ------      ---------
                                       161,275      39.70         31,975
                                     ---------     ------      ---------
Variable rate certificates:
 (original maturity)
  18 months ................             2,287       0.56           (429)
  30 months ................             2,158       0.53            (69)
                                     ---------     ------       --------
Total variable .............             4,445       1.09           (498)
                                     ---------     ------      ---------

Total certificates .........           165,720      40.80         31,477
                                     ---------     ------       --------

Total deposits .............         $ 406,217     100.00%     $   6,544
                                     =========     =======     =========
</TABLE>



                                       29
<PAGE>



Time Deposits by Maturity and Rate

         The  following  table  sets forth the  amount  and  maturities  of time
deposits at September 30, 2000.

<TABLE>
<CAPTION>
                                                 Amount Due
                     Less Than      1-2         2-3           3-4           After
Rate                 One Year       Years       Years         Years         4 Years        Total
----                 --------       -----       -----         -----         -------        -----
                                             (In thousands)
<S>                  <C>           <C>         <C>           <C>           <C>           <C>
0.00 - 5.99%         $ 62,407      $ 11,163    $  1,840      $    404      $     69      $ 75,883
6.00 - 8.00%           73,628        11,596       2,094         1,027         1,098        89,443
8.01 - 10.00%              --           394          --            --            --           394
                     --------      --------    --------      --------      --------      --------

   Total......       $136,035      $ 23,153    $  3,934      $  1,431      $  1,167      $165,720
                     ========      ========    ========      ========      ========      ========
</TABLE>


         The  following  table  sets forth the  amount  and  maturities  of time
deposits with  balances of $100,000 or more at September  30, 2000.  Included in
certificate  accounts were $31.8  million at September  30, 2000,  originated by
brokers for a fee.

                                   Amount Due
--------------------------------------------------------------------------------
  Within       Over 3               Over 6                  Over 12     Total
  3 Months     through 6 months     through 12 months       Months
--------------------------------------------------------------------------------
                                  (In thousands)
  $12,208      $ 17,850              $31,410                $ 7,316     $ 68,784
  ========     =========             ========               ========    ========


         In the unlikely event Coastal Federal is liquidated, depositors will be
entitled to full payment of their  deposit  accounts  prior to any payment being
made to the Corporation as the sole stockholder of Coastal Federal.

         Borrowings.  Demand and time  deposits are the primary  source of funds
for Coastal  Federal's  lending and  investment  activities  and for its general
business purposes. The Bank has in the past, however,  relied upon advances from
the FHLB of  Atlanta to  supplement  its  supply of  lendable  funds and to meet
deposit  withdrawal  requirements.  The FHLB of Atlanta has served as one of the
Bank's  primary  borrowing  sources.  Advances  from  the  FHLB of  Atlanta  are
typically  secured by the Bank's first  mortgage  loans.  At September 30, 2000,
Coastal  Federal had advances  totaling  $225.2 million from the FHLB of Atlanta
due on various  dates  through  2008 with a weighted  average  interest  rate of
6.44%.



                                       30
<PAGE>




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

         In addition to the borrowing  described  above,  the Bank, from time to
time, has borrowed funds under reverse repurchase  agreements  pursuant to which
it  sells   securities   (generally   secured  by  government   securities   and
mortgage-backed  securities)  under an agreement to buy them back at a specified
price  at a  later  date.  These  agreements  to  repurchase  are  deemed  to be
borrowings  collateralized  by the  securities  sold. At September 30, 2000, the
Bank had  $72.0  million  in  broker  repurchase  agreements.  The Bank has also
offered  repurchase  agreements to its customers  which are borrowings  that are
collateralized by underlying government  securities.  At September 30, 2000, the
Bank had $3.8 million outstanding in customer repurchase agreements.

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

<TABLE>
<CAPTION>
                                                             At September 30,
                                           -------------------------------------------------------
                                               1998               1999                 2000
                                           -------------------------------------------------------
                                                             (Dollars in thousands)
<S>                                        <C>                  <C>                  <C>
Outstanding balance:
  Securities sold under agreements
   to repurchase:
   Customer ......................         $     4,214          $     4,848          $     3,825
   Broker ........................              55,000               92,100               72,033
  Short-term FHLB advances (1) ...             120,235              118,000              116,476

Weighted average rate paid on:
  Securities sold under agreements
   to repurchase:
   Customer ......................                3.43%                3.37%                5.75%
   Broker ........................                5.69                 5.53                 6.59
  Short-term FHLB advances (1) ...                5.10                 5.14                 6.68
</TABLE>


                                       31

<PAGE>

<TABLE>
<CAPTION>

<S>                                               <C>               <C>               <C>
Maximum amount of borrowings outstanding
  At any month end:
  Securities sold under agreements
   To repurchase:
   Customer                                       $  4,214          $  4,848          $  4,196
   Broker                                           86,250            92,100           122,700
  Short-term FHLB advances (1)                     120,235           147,135           154,546

Approximate average short-term borrowings
  outstanding with respect to:
  Securities sold under agreements
   To repurchase:
   Customer                                       $  2,989          $  3,199          $  2,826
   Broker                                           56,262            67,100           107,737
  Short-term FHLB advances (1)                      92,369           118,276           127,458

Weighted average rate paid on:
  Securities sold under agreements
   To repurchase:
   Customer                                           3.61%             3.09%             4.10%
   Broker                                             5.58              5.30              6.38
  Short-term FHLB advances (1)                        5.10              5.14              6.68
</TABLE>


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

Competition

         The Bank faces strong  competition  in the  attraction of deposits (its
primary  source of lendable  funds) and in the  origination  of loans.  Its most
direct  competition  for  deposits  and loans has  historically  come from other
financial  institutions  located in its primary  market area. The Bank estimates
that there are over 70 offices of other  financial  institutions  in its primary
market area.  Particularly in times of high interest  rates,  the Bank has faced
additional  significant  competition for investors'  funds from short-term money
market  securities  and other  corporate and government  securities.  The Bank's
competition  for loans  comes  principally  from other  financial  institutions,
mortgage banking companies and mortgage brokers.

Personnel

         As of September 30, 2000, the Company had 214 full-time  Associates and
21 part-time  Associates.  The  Associates  are not  represented by a collective
bargaining  unit.  The Bank  believes its  relationship  with its  Associates is
excellent.


                                       32
<PAGE>


                           REGULATION AND SUPERVISION

General

         As a savings and loan holding  company,  the Corporation is required by
federal law to file reports  with,  and  otherwise  comply  with,  the rules and
regulations  of  the  OTS.  The  Bank  is  regulated,  examined  and  supervised
extensively by the OTS, as its primary federal  regulator,  and the FDIC, as the
deposit  insurer.  The Bank is a member of the Federal Home Loan Bank System and
its  deposit  accounts  are  insured  up to  applicable  limits  by the  Savings
Association  Insurance Fund managed by the FDIC. The Bank must file reports with
the OTS and the FDIC  concerning  its  activities  and  financial  condition  in
addition  to  obtaining   certain   approvals   before   entering  into  certain
transactions   such  as  mergers  with,  or   acquisitions   of,  other  savings
institutions.  The OTS and the FDIC  examine the Bank  periodically  to test the
Bank's safety and soundness and compliance with various regulatory requirements.
This  regulation and supervision  establishes a comprehensive  framework for the
Bank's  activities  and is intended  primarily to protect the insurance fund and
the Bank's depositors.

         The regulatory  structure also gives regulatory  authorities  extensive
discretion in their  supervisory  and  enforcement  activities  and  examination
policies,   including   policies   regarding   asset   classification   and  the
establishment of adequate loan loss reserves for regulatory purposes. Any change
in regulatory  requirements  and  policies,  whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Corporation,  the Bank and
their operations.  The description of statutory  provisions and regulations that
apply to the  Corporation  and the Bank  discussed  below and  elsewhere in this
prospectus is not a complete  description  of them and their effects on the Bank
and the Corporation.

Holding Company Regulation

         The  Corporation is a  nondiversified  unitary savings and loan holding
company under federal law. Formerly,  a unitary savings and loan holding company
was not  restricted  as to the types of  business  activities  in which it could
engage,  provided  that its  subsidiary  savings  association  continued to be a
qualified  thrift  lender.  See  "-Federal  Savings  Institution   Regulation  -
Qualified Thrift Lender Test." Recent  legislation,  however,  restricts unitary
savings and loan  holding  companies  not  existing or applied for before May 4,


                                       33
<PAGE>

1999 to activities  permissible for a financial holding company as defined under
the  legislation,  including  insurance  and  securities  activities,  and those
permitted for a multiple savings and loan holding  company,  as described below.
The Corporation qualifies for the grandfather.

         A savings and loan  holding  company is  prohibited  from,  directly or
indirectly,  acquiring  more  than 5% of the  voting  stock of  another  savings
institution or savings and loan holding  company and from acquiring or retaining
control of a depository  institution that is not insured by the FDIC,  unless it
first  receives the approval of the OTS. In evaluating  applications  by holding
companies to acquire savings  institutions,  the OTS considers the financial and
managerial  resources  and  future  prospects  of the  holding  company  and the
institution  involved,  the effect of the acquisition on the risk to the deposit
insurance  funds,  the  convenience  and needs of the community and  competitive
factors.

         The OTS may not  approve  any  acquisition  that  results in a multiple
savings and loan holding company controlling  savings  institutions in more than
one state.  However,  there are two exceptions to this general rule.  First, the
approval of  interstate  supervisory  acquisitions  by savings and loan  holding
companies.  Second, the acquisition of a savings institution in another state if
the laws of the state of the target savings institution  specifically permit the
acquisition.  The  states  vary in the extent to which  they  permit  interstate
savings and loan holding company acquisitions.

         Although  savings  and loan  holding  companies  do not  have  specific
capital  requirements  or specific  restrictions  on the payment of dividends or
other capital  distributions,  federal  regulations place these  restrictions on
subsidiary savings institutions as described below. The Bank must notify the OTS
30 days before  declaring  any dividend to the  Corporation.  In  addition,  the
financial impact of a holding company on its subsidiary  institution is a matter
that is  evaluated  by the OTS,  which has  authority  to order the  stoppage of
activities or divestiture of subsidiaries  deemed to pose a threat to the safety
and soundness of the institution.

Federal Savings Institution Regulation

         Business Activities. The activities of federal savings institutions are
governed by federal law and  regulations.  These laws and regulations  delineate
the  nature and  extent of the  activities  in which  federal  associations  may

                                       34
<PAGE>

engage. In particular,  many types of lending authority for federal  association
are limited to a specified percentage of the institution's capital or assets.

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

         The  risk-based  capital  standard  requires an institution to maintain
Tier 1 or core capital to risk-weighted  assets of at least 4% and total capital
to risk-weighted assets of at least 8%. Total capital is defined as core capital
and supplementary  capital.  In determining the amount of risk-weighted  assets,
all assets,  including  certain  off-balance  sheet assets,  are multiplied by a
risk-weight  factor of 0% to 100%,  assigned by the OTS capital regulation based
on the risks believed  inherent in the type of asset.  Core or Tier 1 capital is
defined  as  common   stockholders'   equity  and  retained  earnings,   certain
noncumulative  perpetual  preferred  stock and  related  surplus,  and  minority
interests in equity  accounts of  consolidated  subsidiaries,  less  intangibles
other than certain mortgage servicing rights and credit card relationships.  The
components  of  supplementary   capital  include  cumulative   preferred  stock,
long-term  perpetual   preferred  stock,   mandatory   convertible   securities,
subordinated  debt and intermediate  preferred stock, and the allowance for loan
and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall,
the amount of  supplementary  capital  included as part of total capital  cannot
exceed 100% of core capital.

         The  capital   regulations  also  incorporate  an  interest  rate  risk
component.  Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating  their
risk-based capital requirements.  Presently, the OTS has deferred implementation

                                       35
<PAGE>

of the interest rate risk component. At September 30, 2000, the Bank met each of
its  capital  requirements.  See  Note 12 to  Notes  to  Consolidated  Financial
Statements for further information.

         Prompt  Corrective  Regulatory  Action.  The  OTS is  required  to take
certain supervisory actions against undercapitalized  institutions, the severity
of  which  depends  upon  the  institution's   degree  of   undercapitalization.
Generally,  a  savings  institution  that has a ratio of total  capital  to risk
weighted  assets  of less  than  8%,  a  ratio  of  Tier 1 or  core  capital  to
risk-weighted assets of less than 4%, or a ratio of core capital to total assets
of less than 4%, or 3% or less for  institutions  with the  highest  examination
rating, is considered to be "undercapitalized." A savings institution that has a
total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than
3% or a leverage  ratio that is less than 3% is considered to be  "significantly
undercapitalized"  and a savings  institution  that has a  tangible  capital  to
assets   ratio   equal  to  or  less  than  2%  is  deemed  to  be   "critically
undercapitalized."  Although there is a narrow exception, the OTS is required to
appoint  a  receiver  or  conservator  for an  institution  that is  "critically
undercapitalized"  if the institution is critically  undercapitalized on average
during the calendar quarter 270 days after becoming critically undercapitalized.
The regulation also provides that an institution must file a capital restoration
plan with the OTS within 45 days of the date that the OTS notifies it that it is
"undercapitalized,"     "significantly    undercapitalized"    or    "critically
undercapitalized."  Compliance  with the plan must be  guaranteed  by any parent
holding company. In addition, numerous mandatory supervisory actions immediately
apply  to an  undercapitalized  institution,  including,  but  not  limited  to,
increased   monitoring  by  regulators  and  restrictions  on  growth,   capital
distributions  and  expansion.  The OTS  could  also take any one of a number of
discretionary  supervisory  actions,  including  issuing a capital directive and
replacing senior executive officers and directors.

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

                                       36
<PAGE>


         The FDIC may terminate an institution's  deposit  insurance if it finds
that the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue  operations or has violated any applicable law,
regulation,  rule,  order or  condition  imposed  by the  FDIC or the  OTS.  The
management  of the Bank does not know of any  practice,  condition  or violation
that might lead to termination of its deposit insurance.

         Financial  Institution  Modernization  Legislation.   Recently  enacted
federal   legislation   (Gramm-Leach  Bliley  Act)  designed  to  modernize  the
regulation  of the  financial  services  industry  expands  the  ability of bank
holding companies to affiliate with other types of financial  services companies
such as insurance  companies and  investment  banking  companies.  However,  the
legislation  provides that  companies  that acquire  control of a single savings
association  after May 4, 1999 (or that filed an  application  for that  purpose
after  that  date) are not  entitled  to the  unrestricted  activities  formerly
allowed for a unitary savings and loan holding company.  Rather, these companies
will have authority to engage in the activities  permitted "a financial  holding
company" under the new legislation,  including insurance and  securities-related
activities, and the activities currently permitted for multiple savings and loan
holding companies, but generally not in commercial activities. The authority for
unrestricted  activities is  grandfathered  for unitary savings and loan holding
companies,  such as the Corporation,  that existed before May 4, 1999.  However,
the authority for  unrestricted  activities  would not apply to any company that
acquired the Corporation.

         Loans to One Borrower.  Federal law provides that savings  institutions
must generally follow the limits on loans to one borrower applicable to national
banks. A savings  institution  may not make a loan or extend credit to single or
related  group of  borrowers  in excess  of 15% of its  unimpaired  capital  and
surplus.  An additional  amount may be lent, equal to 10% of unimpaired  capital
and surplus, if secured by specified readily-marketable collateral. At September
30,  2000,  the Bank's limit on loans to one  borrower  was  approximately  $8.4
million.  The Bank may apply to have this amount  increased to $16.8 million for
borrowers who have loans  secured by  residential  collateral.  At September 30,
2000,  the Bank had applied for this limit  increase for three  borrowers with a
maximum approved aggregate exposure to the three borrowers of $27.9 million with
aggregate  outstanding and committed exposure of $19.9 million. At September 30,
2000,  the Bank's  largest  aggregate  amount of loans to one borrower was $12.3

                                       37
<PAGE>

million,  all of which was  performing  according to their  terms.  The Bank had
received permission to increase the loan to one borrower limit on this borrower.

         Qualified Thrift Lender Test. Federal law requires savings institutions
to meet a qualified thrift lender test. Under the test, a savings association is
required to either qualify as a "domestic  building and loan association"  under
the Internal Revenue Code or maintain at least 65% of its "portfolio  assets" in
certain "qualified thrift investments" in at least 9 months out of each 12-month
period.  "Portfolio  Assets" equals total assets less specified liquid assets up
to 20% of  total  assets,  intangibles,  including  goodwill,  and the  value of
property used to conduct business.  "Qualified thrift investments" are primarily
residential mortgages and related investments, including certain mortgage-backed
securities.

         A savings institution that fails the qualified thrift lender test faces
certain  operating  restrictions  and may be required to convert to a commercial
bank  charter.  As of September  30, 2000,  the Bank complied with the qualified
thrift  lender  test.  Recent  legislation  has  expanded  the  extent  to which
education  loans,  credit card loans and small  business loans may be considered
"qualified thrift investments."

         Limitation on Capital Distributions. OTS regulations impose limitations
upon  all  capital  distributions  by  a  savings  institution,  including  cash
dividends,  payments to repurchase  its shares and payments to  stockholders  of
another  institution in a cash-out merger.  The rule effective through the first
quarter of 1999  established  three tiers of institutions  based primarily on an
institution's   capital  level.  A  Tier  I  institution  exceeded  all  capital
requirements  before and after a proposed capital  distribution and has not been
advised  by the  OTS  that it  needs  more  than  normal  supervision.  A Tier I
institution  could,  after first giving notice to but without obtaining approval
of the OTS,  make capital  distributions  during the calendar  year equal to the
greater of 100% of its net  earnings to date during the  calendar  year plus the
amount that would have reduced by one-half  the excess  capital over its capital
requirements at the beginning of the calendar year, or 75% of its net income for
the previous four quarters.  Any additional capital distributions required prior
regulatory approval.

         Effective  April 1, 1999,  the OTS's  capital  distribution  regulation
changed.  Under the new regulation,  an application to and the prior approval of
the OTS is required before any capital  distribution if the institution does not
meet  the  criteria  for  "expedited   treatment"  of  applications   under  OTS
regulations (generally, compliance with all capital requirements and examination

                                       38
<PAGE>

ratings in one of two top categories),  the total capital  distributions for the
calendar  year exceed net income for that year plus the amount of  retained  net
income for the preceding two years,  the institution  would be  undercapitalized
following the distribution or the distribution  would otherwise be contrary to a
statute,  regulation or agreement  with OTS. If an  application is not required,
the  institution   must  still  give  advance  notice  to  OTS  of  the  capital
distribution. If the Bank's capital fell below its regulatory requirements or if
the OTS  notified  it that it was in need of more than normal  supervision,  the
Bank's ability to make capital  distributions could be restricted.  In addition,
the OTS could prohibit a proposed capital distribution, which would otherwise be
permitted by the regulation if the OTS determines that the distribution would be
an unsafe or unsound practice.

         Liquidity. The Bank is required to maintain an average daily balance of
specified  liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term  borrowings.
This liquidity requirement is currently 4%, but may be changed from time to time
by the OTS to any amount within the range of 4% to 10%.  Monetary  penalties may
be imposed for failure to meet these liquidity requirements.  The Bank met these
requirements at September 30, 2000.

         Assessments.  Savings  institutions  are required to pay assessments to
the OTS to fund the  agency's  operations.  The general  assessments,  paid on a
semi-annual  basis,  are computed upon the savings  institution's  total assets,
including consolidated subsidiaries,  as reported in the Bank's latest quarterly
thrift  financial  report.  The Bank's  assessments  for the  fiscal  year ended
September 30, 2000 totaled $135,000.

         Branching.   OTS  regulations   permit  federally   chartered   savings
associations to branch nationwide under certain conditions.  Generally,  federal
savings  associations  may  establish  interstate  networks  and  geographically
diversify  their  loan  portfolios  and  lines of  business.  The OTS  authority
preempts  any state law  purporting  to regulate  branching  by federal  savings
associations.

         Transactions  with Related  Parties.  The Bank's authority to engage in
transactions  with  "affiliates"  is  limited  by  federal  law.  Generally,  an
affiliate  is any company  that  controls  or is under  common  control  with an
institution,   including  the  Corporation.  The  aggregate  amount  of  covered
transactions with any individual  affiliate is limited to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions

                                       39
<PAGE>

with all affiliates is limited to 20% of the savings  institution's  capital and
surplus.  Certain  transactions  with  affiliates  are required to be secured by
collateral in an amount and of a type  described in federal law. The purchase of
low quality assets from  affiliates is generally  prohibited.  The  transactions
with affiliates must be on terms and under  circumstances,  that are at least as
favorable to the  institution  as those  prevailing  at the time for  comparable
transactions with non-affiliated  companies.  In addition,  savings institutions
are prohibited  from lending to any affiliate that is engaged in activities that
are not  permissible for bank holding  companies and no savings  institution may
purchase the securities of any affiliate other than a subsidiary.

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

         Enforcement.  The  OTS  has  primary  enforcement  responsibility  over
savings  institutions  and  has the  authority  to  bring  actions  against  the
institution and all institution-affiliated  parties, including stockholders, and
any  attorneys,   appraisers  and   accountants   who  knowingly  or  recklessly
participate  in wrongful  action likely to have an adverse  effect on an insured
institution.  Formal enforcement action may range from the issuance of a capital
directive or cease and desist order, to removal of officers and/or directors, to
institution of a receivership or  conservatorship,  or to termination of deposit
insurance.  Civil  penalties  cover a wide range of violations and can amount to
$27,500 per day, or even $1.2 million per day in especially  serious cases.  The
FDIC has the authority to recommend to the Director of the OTS that  enforcement
action to be taken with respect to a particular savings  institution.  If action

                                       40
<PAGE>

is not  taken by the  Director,  the FDIC has  authority  to take  action  under
certain  circumstances.  Federal law also  established  criminal  penalties  for
certain violations.

         Standards for Safety and Soundness.  The federal banking  agencies have
adopted Interagency  Guidelines  prescribing Standards for Safety and Soundness.
The  guidelines  set forth the safety and soundness  standards  that the federal
banking  agencies  use to identify  and address  problems at insured  depository
institutions  before capital  becomes  impaired.  If the OTS  determines  that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may  require  the  institution  to  submit  an  acceptable  plan to  achieve
compliance with the standard.

Federal Home Loan Bank System

         The Bank is a member  of the  Federal  Home  Loan  Bank  System,  which
consists of 12 regional  Federal Home Loan Banks.  The Federal Home Loan Bank of
Atlanta  provides a central credit facility  primarily for member  institutions.
The Bank,  as a member of the Federal Home Loan Bank of Atlanta,  is required to
acquire  and hold  shares of  capital  stock in that  Federal  Home Loan Bank of
Atlanta in an amount at least equal to 1.0% of the aggregate principal amount of
its unpaid residential  mortgage loans and similar  obligations at the beginning
of each year,  or 1/20 of its advances  (borrowings)  from the Federal Home Loan
Bank of Atlanta,  whichever is greater.  The Bank complied with this requirement
with an  investment  in Federal Home Loan Bank of Atlanta stock at September 30,
2000,  of $11.9  million.  Federal  Home Loan Bank of Atlanta  advances  must be
secured by specified types of collateral.

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

                                       41
<PAGE>


Federal Reserve System

         The Federal Reserve Board regulations  require savings  institutions to
maintain  non-interest  earning  reserves  against their  transaction  accounts,
primarily NOW and regular checking accounts.  The regulations  generally require
that reserves be maintained against aggregate  transaction  accounts as follows:
for accounts  aggregating  $42.8  million or less,  subject to adjustment by the
Federal  Reserve  Board,  the  reserve  requirement  is  3%;  and  for  accounts
aggregating  greater  than $42.8  million,  the  reserve  requirement  is $1.284
million plus 10%,  subject to adjustment by the Federal Reserve Board between 8%
and 14%, against that portion of total  transaction  accounts in excess of $42.8
million. The first $5.5 million of otherwise reservable balances, as adjusted by
the Federal Reserve Board, are exempted from the reserve requirements.  The Bank
complies with the foregoing requirements.

Community Reinvestment Act

         Under  the  Community   Reinvestment   Act,  as   implemented   by  OTS
regulations,  a savings association has a continuing and affirmative  obligation
consistent  with its safe and sound  operation  to help meet the credit needs of
its entire  community,  including  low and  moderate-income  neighborhoods.  The
Community  Reinvestment Act does not establish specific lending  requirements or
programs  for  financial   institutions  nor  does  it  limit  an  institution's
discretion  to develop the types of products and  services  that it believes are
best  suited  to  its  particular  community,   consistent  with  the  Community
Reinvestment Act. The Community Reinvestment Act requires the OTS, in connection
with its examination of an institution;  to assess the  institution's  record of
meeting the credit needs of its  community  and to take such record into account
in  its  evaluation  of   applications  by  such   institution.   The  Community
Reinvestment  Act  requires  public  disclosure  of an  institution's  Community
Reinvestment  Act rating.  The Bank's latest  Community  Reinvestment Act rating
received for the OTS was "satisfactory."

                                    TAXATION

Federal Taxation

         General.  The  Corporation  and the  Bank  report  their  income  via a
consolidated  return  on a  fiscal  year  basis  using  the  accrual  method  of
accounting  and are  subject to federal  income  taxation  in the same manner as
other  corporations  with some  exceptions,  including  particularly  the Bank's

                                       42
<PAGE>

reserve for bad debts discussed below.  The following  discussion of tax matters
is  intended  only as a  summary  and does  not  purport  to be a  comprehensive
description of the tax rules applicable to the Bank or the Corporation.

         Tax Bad Debt  Reserves.  For  discussion  related to the Bank's Tax Bad
Debt  Reserves,  please  refer  to Note 10 of the  Company's  Annual  Report  to
Stockholders for the fiscal year ended September 30, 2000.

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

         Corporate   Alternative   Minimum  Tax.  The  Code  imposes  a  tax  on
alternative  minimum  taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss  carryovers.  AMTI is increased by an amount
equal to 75% of the amount by which the Bank's adjusted current earnings exceeds
its AMTI (prior to reduction for net operating losses).

                                       43
<PAGE>


         Dividends-Received  Deduction and Other Matters.  The  Corporation  may
exclude from its income 100% of dividends  received from the Bank as a member of
the same  affiliated  group of  corporations.  The corporate  dividends-received
deduction is generally 70% in the case of dividends  received from  unaffiliated
corporations   with  which  the  Corporation  and  the  Bank  will  not  file  a
consolidated  tax return,  except that if the  Corporation or the Bank owns more
than 20% of the stock of a corporation  distributing a dividend, then 80% of any
dividends received may be deducted.

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

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

         For information  regarding income taxes payable by Coastal Federal, see
Note 10 of the Notes to Consolidated Financial Statements.



                                       44
<PAGE>



Item 2.  Properties

         The  following  table sets forth the location of the offices of Coastal
Financial's subsidiaries,  as well as certain additional information relating to
these offices, as of September 30, 2000.

<TABLE>
<CAPTION>
                                                      Total Investment
                                                      Including Land,       Net Book      Approximate
                                        Year          Building, Furni-      Value as      Square        Owned/
Location                                Opened        ture and Fixtures    Of 9/30/00     Footage       Leased
--------                                ------        -----------------    ----------     -------       ------
                                                             (Dollars in thousands)
<S>                                     <C>           <C>                   <C>             <C>           <C>
Main Office
2619 Oak St.
Myrtle Beach, SC (1)                     1980         $  9,924              $ 3,206         25,000        Owned

Dunes Office
7500 North Kings Hwy
Myrtle Beach, SC                         1971              696                  281          2,000        Owned

Ocean Drive Office
521 Main Street
North Myrtle Beach, SC                   1973              962                  481          4,100        Owned

Surfside Office
112 Highway 17 South
  & Glenns Bay Road
Surfside Beach, SC                       1975            1,502                  939          3,300        Owned

Conway Office
310 Highway 378
Conway, SC                               1976              849                  266          2,882        Owned

Socastee Office
1 Cimerron Drive                         1981              897                  323          2,275        Owned
Myrtle Beach, SC

Murrells Inlet Office
Highway 17 South
Murrells Inlet, SC                       1986              980                  566          3,450        Owned

Waccamaw Medical Pk Office
7000 Waccamaw Medical Pk Rd              1986              569                  264          1,450        Owned
Conway, SC

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

Coastal Investor Services, Inc.
2619 Oak Street
Myrtle Beach, SC                          1987              104                   16           N/A         N/A
</TABLE>


                                       45
<PAGE>

<TABLE>
<CAPTION>
                                                      Total Investment
                                                      Including Land,       Net Book      Approximate
                                        Year          Building, Furni-      Value as      Square        Owned/
Location                                Opened        ture and Fixtures    Of 9/30/00     Footage       Leased
--------                                ------        -----------------    ----------     -------       ------
                                                                     (Dollars in thousands)
<S>                                      <C>         <C>                      <C>            <C>
South Brunswick Office
1625 Seaside Road S.W.
Sunset Beach, NC                         1998        $ 1,012                  $ 883          3,000         Owned

Coastal Federal University Center
504 27th Avenue North
Myrtle Beach, SC                         1997          1,156                  1,071         17,500         Owned

Conway Annex Property
1515 4th Avenue
Conway, SC 29526                         1999            487                    482         10,000         Owned

Little River Office
1602 Highway 17
Little River, SC 29566                   1999          1,220                  1,174          2,300         Owned

Carolina Forest Office
3894 Renee Drive
Myrtle Beach, SC 29579                   2000          1,267                  1,229          3,500         Owned

Bi-Lo 38th Avenue
1245 38th Avenue North
Myrtle Beach, SC 29577                   2000            292                    284            600         Leased

Wilmington Office
5710 Oleander Drive, Suite 209
Wilmington, NC 28403                     1999             62                     53          1,400         Leased
</TABLE>

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

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

         The net book value of the Company's  investment  in office,  properties
and equipment  totaled $11.5 million at September 30, 2000.  See Note 5 of Notes
to the consolidated  Financial Statements.  Coastal Federal uses the services of
an independent data processing  service to process customer records and monetary
transactions,  post deposit and general  ledger  entries and record  activity in
installment lending, loan servicing and loan originations.


                                       46
<PAGE>



Item 3.  Legal Proceedings

         The Company is not a defendant in any lawsuits.  The  subsidiaries  are
defendants in lawsuits arising out of the normal course of business. The Company
believes that none of the lawsuits would have a material impact on the Company's
financial status.

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

         Not Applicable.

                                     PART II

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

         The information  contained under the section  captioned "Market for the
Corporation's Common Stock and Related Stockholder Matters" in the Corporation's
Annual  Report to  Stockholders  for the Fiscal  Year Ended  September  30, 2000
("Annual Report") is incorporated herein by reference.

Item 6.  Selected Financial Data

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

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

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

Item 7A.  Quantitative and Qualitative Disclosures about
                  Market Risk

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



                                       47
<PAGE>




Item 8.  Financial Statements and Supplementary Data

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

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

         The  registrant  has not,  within the 24 months  before the date of the
most recent financial statements,  changed its accountants,  nor have there been
any disagreements on accounting and financial disclosure.

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

         The information  contained under the section  captioned  "Proposal I --
Election of Directors" in the Bank's  definitive  proxy statement for the Bank's
2001 Annual Meeting of  Stockholders  (the "Proxy  Statement")  is  incorporated
herein by reference.

         Certain executive officers of the Bank also serve as executive officers
of the Corporation.  The day-to-day  management duties of the executive officers
of the Corporation and the Bank relate primarily to their duties as to the Bank.



                                       48
<PAGE>




Executive Officers of the Registrant

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


 Michael C. Gerald, 51                   Mr.  Gerald  has been  associated  with
 President, Chief Executive              Coastal  Federal  since 1974 and serves
 Officer and a Director                  as   Director,   President   and  Chief
                                         Executive  Officer  of the  Corporation
                                         and Bank.  Mr.  Gerald  also  serves as
                                         Director   and   President  of  Coastal
                                         Mortgage   Bankers  &  Realty  Company,
                                         Inc.,  and as Director and President of
                                         Coastal    Real    Estate    Investment
                                         Corporation. He currently serves on the
                                         Board of Visitors  of Coastal  Carolina
                                         University's  Wall School of  Business,
                                         the Board of  Directors of the Waccamaw
                                         Community  Foundation,   the  Board  of
                                         Directors  of  the  Coastal   Education
                                         Foundation,  the Board of  Directors of
                                         the North Carolina Bankers  Association
                                         and  the  Board  of  Directors  of  the
                                         Financial Institutions Retirement Fund.


Jimmy R. Graham, 52,                     Mr.  Graham  serves as  Executive  Vice
Executive Vice President and             President and Chief Information Officer
Information Systems Group                of Coastal  Federal.  Mr. Graham serves
Leader                                   as Executive  Vice President of Coastal
                                         Financial  Corporation.   He  has  been
                                         associated with the bank since 1977.



Jerry L. Rexroad, CPA, 40,              Mr.  Rexroad joined the Company in April
Executive Vice President and            1995 and is Executive Vice President and
Chief Financial Officer                 Chief   Financial   Officer  of  Coastal
                                        Federal    and     Coastal     Financial
                                        Corporation.  Mr. Rexroad also serves as
                                        the  Chief   Financial   Officer  and  a
                                        Director for Coastal  Mortgage Bankers &
                                        Realty    Company,     Inc.,     Coastal
                                        Investments  Corporation,   and  Coastal
                                        Federal  Mortgage,  Coastal  Real Estate
                                        Investment  Corporation and President of
                                        Coastal Federal Holdings Corporation. He
                                        currently    serves   on   the    Junior
                                        Achievement  Board of Directors of Horry
                                        County.  He is a  Past  Chairman  of the
                                        Board   of    Directors    for    Junior
                                        Achievement  of Horry  County as well as
                                        Past  Chairman of the Board of Directors
                                        for Junior  Achievement  of  Greenville.
                                        Mr.  Rexroad is a Director of PowerHouse
                                        Ministries,  Inc.  and  Chairman  of the
                                        Board of Deacons at Grand Strand Baptist
                                        Church.   He  is  a   certified   public
                                        accountant, and is a member of the AICPA
                                        and   SCACPA.   Prior  to  joining   the
                                        Company,  Mr. Rexroad was a partner with
                                        KPMG LLP where he was  partner in charge
                                        of the Financial  Institutions  practice
                                        in South Carolina.


                                       49
<PAGE>



 Phillip G. Stalvey, 44,                 Mr. Stalvey is Executive Vice President
 Executive Vice President                and Sales Group Leader for the Bank. He
 And Sales Group Leader.                 also  serves  as  an   Executive   Vice
                                         President of the  Corporation  and is a
                                         director  of Coastal  Federal  Mortgage
                                         and Coastal Investor Services,  Inc. He
                                         has  been   associated   with   Coastal
                                         Federal  for  the  part  18  years.  In
                                         addition,  Mr.  Stalvey  is a member of
                                         the Florence Stake  Presidency with his
                                         Church,  a committee  member of a local
                                         Scout  Troop  and a member of the Board
                                         of  Directors  for the Myrtle Beach Air
                                         Force Base Redevelopment Authority.



Steven J. Sherry, 49                     Mr. Sherry is Executive  Vice President
Executive Vice President and             and Director of Marketing for the Bank.
Director of Marketing.                   He  also  serves  as   Executive   Vice
                                         President/Chief  Marketing  Officer for
                                         Coastal Financial  Corporation.  He has
                                         been associated  with Coastal  Federal,
                                         in a consultative fashion for over five
                                         years,    and    formally    with   the
                                         organization   for  2  1/2  years.  Mr.
                                         Sherry   is  a   member   of  the  Bank
                                         Marketing   Association,    and   holds
                                         various    achievement    awards    for
                                         marketing and advertising.



Susan J. Cooke, 50                       Ms.   Cooke  is  Vice   President   and
Vice President and                       Corporate Secretary for Coastal Federal
Corporate Secretary                      and for Coastal Financial  Corporation,
                                         Corporate    Secretary    for   Coastal
                                         Mortgage   Bankers  &  Realty  Company,
                                         Inc.,  and Coastal  Investor  Services,
                                         Inc. Ms. Cooke has been  employed  with
                                         Coastal Federal for thirteen years. She
                                         is a member of the American  Society of
                                         Corporate  Secretaries,  Inc.  and  the
                                         National    Association    for   Female
                                         Executives.



Robert D. Douglas, 41                    Mr. Douglas  joined the  corporation in
Executive Vice President                 June 1994 and serves as Executive  Vice
Human Resources/Coastal                  President   of  the  Bank  and  Coastal
Federal University Group                 Financial  Corporation.   He  currently
                                         serves on the Myrtle Beach Area Chamber
                                         of   Commerce    Governmental   Affairs
                                         Committee.   He  previously  served  as
                                         Chairman   of   the   Human   Resources
                                         Committee, and as a member of the Young
                                         Management  Division  of the  Community
                                         Financial    Institutions    of   South
                                         Carolina Association.  He has served on
                                         various  advisory  committees  for  the
                                         Horry    County    Drug   and   Alcohol
                                         Commission,   and  the  South  Carolina
                                         Employment Security Commission.



                                       50
<PAGE>



                            Item 11.  Executive Compensation

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

Item 12.  Security Ownership of Certain Beneficial Owners and
                  Management

         (a)      Security Ownership of Certain Beneficial Owners

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

         (b)      Security Ownership of Management

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

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

Item 13.  Certain Relationships and Related Transactions

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



                                       51
<PAGE>


                                     PART IV

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

1.       Independent Auditors' Report(1)

         2.       All Financial Statements(1)

                  (a)      Consolidated Statements of Financial Condition as of
                           September 30, 1999 and 2000.

                  (b)      Consolidated  Statements of  Operations  for the
                           Years Ended  September 30, 1998,  1999, 2000.

                  (c)      Consolidated  Statements of Stockholders'  Equity and
                           Comprehensive  Income for the Years  Ended  September
                           30, 1998, 1999, 2000.

                  (d)      Consolidated  Statements  of Cash Flows for the Years
                           Ended  September  30, 1998,  1999, 2000.

                  (e)      Notes to Consolidated Financial Statements.

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

4.       Exhibits

 3       (a)    Certificate of Incorporation of Coastal Financial Corporation(2)

 3       (b)    Bylaws of Coastal Financial Corporation(2)

10       (a)    Employment Agreement with Michael C. Gerald(3)

         (b)    Employment Agreement with Jerry L. Rexroad(3)

         (c)    Employment Agreement with Phillip G. Stalvey(5)

         (d)    Employment Agreement with Allen W. Griffin(3)

         (e)    Employment Agreement with Jimmy R. Graham(3)

         (f)    Employment Agreement with Richard L. Granger(3)

         (g)    Employment Agreement with Robert S. O'Harra(3)

         (h)    Employment Agreement with Steven J. Sherry(6)


                                       52
<PAGE>


         (i)    1990 Stock Option Plan(3)

         (j)    Directors Performance Plan(4)

         (k)    2000 Stock Option Plan(7)

13              Annual Report to Stockholders for the Fiscal Year Ended
                September 30, 2000(1)

21              Subsidiaries of the Registrant

23              Consent of Independent Auditors

27              Financial Data Schedule


         5.     No reports on Form 8-K have been filed  during  the last
                quarter of the fiscal  year  covered by  this report.

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

(1)      Incorporated  by reference from the Annual report to  Stockholders  for
         the fiscal  year  ended  September  30,  2000,  attached  as an exhibit
         hereto.

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

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

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

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

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

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



                                       53
<PAGE>




                                   SIGNATURES



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


                                        COASTAL FINANCIAL CORPORATION

 Date:  December 22, 2000                By:  /s/ Michael C. Gerald
                                              --------------------
                                              Michael C. Gerald
                                              President/Chief Executive
                                              Officer
                                             (Duly Authorized Representative)


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


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

Date:  December 22, 2000                            December 22, 2000

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

Date:  December 22, 2000                   Date:   December 22, 2000

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

Date:  December 22, 2000                   Date:   December 22, 2000

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

Date:  December 22, 2000                   Date:   December 22, 2000




                                       54
<PAGE>







                                   EXHIBIT 13

                      ANNUAL REPORT TO STOCKHOLDERS FOR THE

                                       FISCAL YEAR ENDED SEPTEMBER 30, 2000



<PAGE>


<PAGE>