EXHIBIT 13

                      ANNUAL REPORT TO STOCKHOLDERS FOR THE

                      FISCAL YEAR ENDED SEPTEMBER 30, 1996

<PAGE>



















                         COASTAL FINANCIAL CORPORATION  














                        
                               1996 ANNUAL REPORT


<PAGE>
                                -- DEDICATION --

                          COASTAL FINANCIAL CORPORATION

                             A QUEST FOR EXCELLENCE

                                  GREAT PEOPLE

                                  GREAT MARKETS




                              [GRAPHIC-PHOTOGRAPH]



           The ultimate source of our success at Coastal Financial is,
         without question, our demonstrated ability to attract, develop
                 and retain the very best and brightest people.
             Their total commitment to Exceeding the Expectations of
              our Customers assures a continued focus on our Basic
               Corporate Objective of Maximizing The Value Of Our
               Shareholders' Investment and our Long-Term Goal Of
          Being The Best Financial Services Company In Our Marketplace.
            1996 was the best year in Coastal Financial's history and
                 continued to showcase our capacity for turning
                         potential into accomplishment.
          Our great people, great markets and overriding commitment to
        our QUEST FOR EXCELLENCE operating philosophy has again produced
      outstanding results for our Shareholders and will help to insure that
                         our best years are yet to come.

                                [GRAPHIC-CHART]

The  value  of one  share  of  Coastal  Financial  Corporation's  Capital  Stock
purchased  at $10.00 in the  initial  public  offering,  and  affected  by stock
dividends,  stock splits, and reinvested cash dividends,  was $134.94 based upon
NASDAQ  Quotations at September  30, 1996.  The  foregoing  reflects  historical
results and may not be indicative of future stock prices.
<PAGE> 
                              FINANCIAL HIGHLIGHTS

    The following table sets forth certain information  concerning the financial
position of the Company  (including data from operations of its subsidiaries) as
of and for the dates indicated.  The consolidated  data is derived in part from,
and should be read in conjunction with, the Consolidated Financial Statements of
the Company and its subsidiaries presented herein.
<TABLE>
<CAPTION>
                                                                                             At September 30,
                                                                               ---------------------------------------------
                                                                                 1992        1993        1994        1995
                                                                                 ----        ----        ----        ----
                                                                               (dollars in thousands, except per share data)
<S>                                                                            <C>         <C>         <C>         <C>       
FINANCIAL CONDITION DATA:
Total assets................................................................   $328,175    $335,284    $374,980    $401,201
Loans receivable, net.......................................................    266,722     280,425     331,175     356,819
Mortgage-backed securities..................................................     14,640       3,525         794      12,776
Cash, interest-bearing deposits and investment securities...................     28,345      27,580      29,316      13,530
Deposits....................................................................    255,720     266,855     247,385     273,099
Borrowings..................................................................     48,525      41,906      98,446      95,997
Stockholders' equity........................................................     18,452      21,829      23,104      24,820
OPERATING DATA:
Interest income.............................................................   $ 27,773    $ 25,967    $ 24,562    $ 30,328
Interest expense............................................................     16,572      12,876      11,548      17,272
                                                                               --------    --------    --------    --------
Net interest income.........................................................     11,201      13,091      13,014      13,056
Provision for loan losses...................................................        645       1,389         510         202
                                                                               --------    --------    --------    --------
Net interest income after provision for loan losses.........................     10,556      11,702      12,504      12,854
                                                                               --------    --------    --------    --------
Other income:
Fees and service charges on loans and deposit accounts......................        694         811       1,001       1,051
Gain on sales of loans receivable...........................................        284       1,125         411          39
Gain (loss) on sales of investment securities...............................          5         (29)         --          --
Gain on sales of mortgage-backed securities, net............................         --         238          54          --
Real estate operations......................................................       (482)       (176)        341         876
Other income................................................................      1,367       1,209       1,022       1,284
                                                                               --------    --------    --------    --------
Total other income..........................................................      1,868       3,178       2,829       3,250
Total general and administrative expense....................................      8,268       9,272      10,279      10,152
                                                                               --------    --------    --------    --------
Earnings before income taxes................................................      4,156       5,608       5,054       5,952
Income taxes................................................................      1,641       2,270       1,906       2,232
                                                                               --------    --------    --------    --------
Net earnings before cumulative effect of adopting FASB 109..................      2,515       3,338       3,148       3,720
                                                                               --------    --------    --------    --------
Cumulative effect of adopting FASB 109......................................         --          --         664          --
Net income..................................................................   $  2,515    $  3,338    $  3,812    $  3,720
                                                                               ========    ========    ========    ========
Net earnings per common share before cumulative effect of adopting FASB
  109.......................................................................   $    .71    $    .91    $    .86    $   1.05
Cumulative effect of adopting FASB 109......................................         --          --         .18          --
Net earnings per common share...............................................   $    .71    $    .91    $   1.04    $   1.05
                                                                               ========    ========    ========    ========
Cash dividends per common share.............................................         --          --    $    .19    $    .38
Weighted average shares outstanding.........................................      3,522       3,678       3,661       3,555
                                                                               ========    ========    ========    ========
<PAGE>
<CAPTION>
                                                                                1996
                                                                                ----
<S>                                                                           <C>
FINANCIAL CONDITION DATA:
Total assets................................................................  $459,712
Loans receivable, net.......................................................   370,368
Mortgage-backed securities..................................................    27,029
Cash, interest-bearing deposits and investment securities...................    38,332
Deposits....................................................................   313,430
Borrowings..................................................................   109,886
Stockholders' equity........................................................    27,681
OPERATING DATA:
Interest income.............................................................  $ 34,720
Interest expense............................................................    19,091
                                                                              --------
Net interest income.........................................................    15,629
Provision for loan losses...................................................       790
                                                                              --------
Net interest income after provision for loan losses.........................    14,839
                                                                              --------
Other income:
Fees and service charges on loans and deposit accounts......................     1,415
Gain on sales of loans receivable...........................................       990
Gain (loss) on sales of investment securities...............................        (6)
Gain on sales of mortgage-backed securities, net............................       189
Real estate operations......................................................       345
Other income................................................................     1,699
                                                                              --------
Total other income..........................................................     4,632
Total general and administrative expense....................................    13,586
                                                                              --------
Earnings before income taxes................................................     5,885
Income taxes................................................................     2,164
                                                                              --------
Net earnings before cumulative effect of adopting FASB 109..................     3,721
                                                                              --------
Cumulative effect of adopting FASB 109......................................        --
Net income..................................................................  $  3,721
                                                                              ========
Net earnings per common share before cumulative effect of adopting FASB
  109.......................................................................  $   1.04
Cumulative effect of adopting FASB 109......................................        --
Net earnings per common share...............................................  $   1.04
                                                                              ========
Cash dividends per common share.............................................  $    .44
                                                                              ========
Weighted average shares outstanding.........................................     3,595
                                                                              ========
</TABLE>
    Earnings  per  share  and  weighted  average  shares  outstanding  have been
restated to reflect 10%, 15% and 5% common stock dividends  declared on November
29, 1991, August 28, 1992 and May 30, 1995,  respectively,  three 3 for 2 common
stock  dividends  declared on January 27,  1993,  August 18, 1993 and January 7,
1994, respectively,  and two 5 for 4 stock dividends declared on January 9, 1996
and June 20, 1996. 
<PAGE>
KEY OPERATING RATIOS:
    The table below sets forth certain performance ratios of the Company for the
periods indicated.
<TABLE>
<CAPTION>


                                                                                     At or for Years Ended September 30,
                                                                               ---------------------------------------------
                                                                                 1992        1993        1994        1995
                                                                                 ----        ----        ----        ----
<S>                                                                            <C>         <C>         <C>         <C>
Other Data:
Return on assets (net income divided by average assets) before impact of
  adopting FASB 109.........................................................       0.78%       1.00%       0.92%       0.94%
Including effect of adopting FASB 109.......................................        N/A         N/A        1.12%        N/A
Return on average equity (net income divided by average equity) before
  impact of adopting FASB 109...............................................      14.71%      16.59%      13.88%      15.54%
Including effect of adopting FASB 109.......................................        N/A         N/A       16.80%        N/A
Average equity to average assets............................................       5.30%       6.08%       6.66%       6.08%
Tangible book value per share...............................................   $   5.34    $   6.27    $   6.82    $   7.40
Dividend payout ratio.......................................................        N/A         N/A       16.19%      34.46%
Interest rate spread (difference between average yield on interest-earning
  assets and average cost of interest-bearing liabilities)..................       3.73%       4.15%       4.09%       3.52%
Net interest margin (net interest income as a percentage of average
  interest-earning assets)..................................................       3.72%       4.20%       4.12%       3.62%
Allowance for loan losses to total loans at end of period...................       0.69%       0.98%       1.01%       1.00%
Ratio of non-performing assets to total assets (1)..........................       1.83%       0.75%       0.56%       0.53%
Tangible capital ratio......................................................       5.47%       6.27%       5.94%       6.13%
Core capital ratio..........................................................       5.47%       6.27%       5.94%       6.13%
Risk-based capital ratio....................................................       9.05%      10.57%      10.11%      10.45%
Number of:
  Real estate loans outstanding.............................................      5,460       5,647       6,614       6,688
  Deposit accounts..........................................................     33,274      32,960      33,618      39,881
  Number of full service offices............................................          8           8           8           8
<PAGE>
<CAPTION>
           

                                                                                1996
                                                                                ----
<S>                                                                           <C>
Other Data:
Return on assets (net income divided by average assets) before impact of 
  adopting FASB 109.........................................................      0.85%
Including effect of adopting FASB 109.......................................       N/A
Return on average equity (net income divided by average equity) before
  impact of adopting FASB 109...............................................     13.97%
Including effect of adopting FASB 109.......................................       N/A
Average equity to average assets............................................      6.10%
Tangible book value per share...............................................  $   8.04
Dividend payout ratio.......................................................     38.51%
Interest rate spread (difference between average yield on interest-earning
  assets and average cost of interest-bearing liabilities)..................      3.76%
Net interest margin (net interest income as a percentage of average
  interest-earning assets)..................................................      3.86%
Allowance for loan losses to total loans at end of period...................      1.11%
Ratio of non-performing assets to total assets (1)..........................      0.17%
Tangible capital ratio......................................................      5.93%
Core capital ratio..........................................................      5.93%
Risk-based capital ratio....................................................     10.41%
Number of:
  Real estate loans outstanding.............................................     5,741
  Deposit accounts..........................................................    41,755
  Number of full service offices............................................         9


(1) Nonperforming  assets  consist of nonaccrual  loans 90 days or more past due
    and real estate acquired through foreclosure.
</TABLE>
<PAGE>
                                  DEAR FRIENDS                                  

   This year's Annual Report focuses on our  exceptional  people and the dynamic
markets in which we do business.
 
   It was truly a great  year.  Our stock  price  increased  56%.  Our  business
flourished. And, most importantly, our people grew personally and professionally
by facing and conquering the significant challenges which were encountered.

   Since 1991,  our  operating  earnings                                        
have increased at an annualized  rate in 
excess of 17%. Even more exciting is the 
fact that,  during  that same  period of 
time,  the  value of  Coastal  Financial 
Corporation's   stock  has  grown  at  a 
compound   annual   rate  of  over  68%. 
                                                     [GRAPHIC-PHOTOGRAPH]       
   Another  noteworthy  measure  of  our 
success  is  evidenced  by the growth of 
our  market  capitalization,  which  has 
increased  from $4.6  million in October 
1990,  the  date of our  initial  public 
offering,  to $65.4 million at the close 
of this fiscal year. Simply stated . . . 
an  initial   investment  of  $1,000  in 
October 1990 would have grown to $13,494 
at September 30, 1996.                   

   Now that's what I call maximizing the value of Shareholders' Investment,  and
it is all due to our great people,  great markets and  overriding  commitment to
our QUEST FOR EXCELLENCE operating philosophy.

1996 . . . OUR BEST YEAR YET
                                   The  real  news  for  1996  was  the   strong
                                checking account and loan portfolio growth which
                                resulted primarily from the restructuring of our
                                operating environment to create a stronger focus
                                on  the  sales  and   marketing   of   financial
                                services.  The  result  was a year in  which  we
[GRAPHIC-PHOTOGRAPH]            achieved   dramatic   gains  in  both  operating
                                earnings and Shareholder value.

                                   Our financial  performance during fiscal 1996
                                again  met  our  high   expectations   and  well
                                positions  us  to  aggressively  address  future
                                opportunities.
<PAGE>
   Noteworthy Financial Results for Fiscal 1996:


   --  The   market   price  of  Coastal       [GRAPHIC-PERFORMANCE GRAPH]
Financial  Corporation's stock increased
56%.   This   compares   with  an  18.7%
increase  in the NASDAQ Bank Index and a
17.6%  increase in the NASDAQ  Composite
Index during the same period.                  
   -- The  value  of  Coastal  Financial
Corporation's  common stock has grown at
a  compound  annual  rate  of  over  68%
during the past five years.
   --  An  increase  of  10.1%  in  cash
dividends paid per common share.
   -- The  payment  of two 5 for 4 stock
splits   in  the   form  of  25%   stock
dividends.

   -- Net  earnings  of $3.7  million or       [GRAPHIC-CHART}
$1.04  per  share,  after  payment  of a
special,  one-time  FDIC  assessment  of
$1.0 million,  after tax. Excluding this
non-recurring  charge,  net earnings for
fiscal 1996 increased 27% over the prior
year.
   --   Shareholders'   equity  advanced
11.5% to $27.7 million.

   -- Book  value per share grew 8.7% to       [GRAPHIC-CHART}
$8.04

   -- A 14.6%  growth in total assets to       [GRAPHIC-CHART}
$459.7 million.
   -- Loans receivable increased 3.8% to
$370.4 million.  Additionally,  included
in  mortgage-backed  securities are $6.2
million of loans which were  securitized
in fiscal 1996.
   -- Deposits grew 14.8% to the highest
level in the Company's history.
   --  Transaction  deposits grew by 60%
in fiscal 1996.

   --  Non-performing  Assets  to  Total       [GRAPHIC-CHART}
Assets decreased to 0.17%.

   --  Allowance  for Loan Losses to Net       [GRAPHIC-CHART}
Loans increased to 1.11%.
   -- The  Company  had Loan Charge Offs
of .05% in 1996.
<PAGE>
    As good as these  results  are,  what  about  the  future?  We  believe  our
performance  during 1996 was a pretty good  indication of the good things yet to
come. But before we look forward,  let's review our business philosophy and look
back at this past year.

OUR GUIDING VISION

   Charles  Darwin once wrote "It is not     [GRAPHIC-PHOTOGRAPH]
the   strongest   of  the  species  that
survive,  nor the most intelligent,  but
the one most responsive to change."

   As a financial  services  leader,  we
are  constantly  focusing on current and
future needs and continually  developing
new ideas to keep our Customers happy.

   Our  QUEST FOR  EXCELLENCE  operating
philosophy  assures  that we view change
and constant improvement as essential to
the   achievement   of   our   long-term
objectives.   Despite  our  success,  we
continue   to  work  hard  to  keep  our
organization efficient,  assure that our
most experienced leaders remain close to
our   Customers  and  maintain  a  fresh
outlook and entrepreneurial spirit.

[GRAPHIC-PHOTOGRAPH]                       In our ongoing effort to improve upon
                                        our   performance,   Coastal   Financial
                                        Corporation  works  diligently to create
                                        an exciting and highly charged corporate
                                        atmosphere which is both challenging and
                                        rewarding.                              
                                                                               
                                           Our unique  approach to business  has
                                        enabled  us  to  develop   the  kind  of
                                        unencumbered,  flexible  operating style
                                        that  can  achieve   superior   results.
                                        Instead of layers of bureaucracy, we are
                                        substituting   significant   levels   of
                                        personal  responsibility  to everyone in
                                        the organization.  This environment will
                                        help  to  assure  that we  remain  fast,
                                        flexible and totally Customer focused.  
                                       
    We are absolutely  convinced that this approach will help to assure that our
best years are yet to come.

A LOOK AT 1996

    It  really  was a great  year for  Coastal  Financial,  especially  when you
consider some of the obstacles we overcame.
<PAGE>
   For starters, we continued to operate        [GRAPHIC-PHOTOGRAPH]
in  an  inequitable   environment  where
other  financial   services   companies,
whose  deposits were insured by the FDIC
under the Bank Insurance Fund (BIF) were
allowed  a   significant   advantage  in
premium  cost as compared to  companies,
such as Coastal Federal,  whose deposits
are   insured  by  the  FDIC  under  the
Savings   Association   Insurance   Fund
(SAIF).   During  fiscal  1996,  Coastal
Federal  paid  $622,000 for FDIC deposit
insurance    premiums,    while    other
financial services  companies,  with the
same  level  of   deposits,   but  whose
deposits  were  insured  under  the BIF,
would have paid practically  nothing for
the same deposit insurance coverage.

   This BIF/SAIF insurance premium disparity was significantly  reduced with the
passage of the Omnibus Appropriations Bill on September 30, 1996. As a result of
this  legislation,  Coastal  Financial  Corporation  recognized  a $1.0  million
non-recurring charge to after-tax earnings in the fourth quarter of fiscal 1996.

   Beginning  January 1, 1997, our premiums for deposit  insurance,  while still
not on parity with BIF insured financial services companies,  are expected to be
reduced from 23 cents per $100 in deposits to 6.4 cents per $100 in deposits.

[GRAPHIC-PHOTOGRAPH]                       We at Coastal  Financial  have worked
                                        very  hard   toward   the   passage   of
                                        legislation  addressing  this  disparate
                                        treatment of deposit insurance  premiums
                                        for the past two years and are extremely
                                        pleased  that  the   Administration  and
                                        Congress have addressed this significant
                                        issue in a responsible manner.          
                                                                                
                                           The 1996  financial  results are only
                                        partially  indicative of the real growth
                                        we experienced  this past year.  Some of
                                        the initiatives and  achievements  aimed
                                        at  increasing  the value of the Company
                                        and maximizing our ability to capitalize
                                        on  opportunities  in  the  years  ahead
                                        were:                                   
                                                                                
                                        

                                

   --  A  major  Corporate   reorganization  which  restructured  our  operating
environment  in order to create a stronger  focus on the sales and  marketing of
financial services.
<PAGE>
   -- The extremely  successful offering       [GRAPHIC-PHOTOGRAPH]
of our COASTAL BANKER  CHECKING  program
which was  developed  during fiscal 1995
and   introduced  at  the  beginning  of
fiscal 1996.  As of September  30, 1996,
over 10,000  members of the  communities
we serve have  switched  to this  unique
checking account program.

   -- The development and implementation
of  advanced  cash  and  asset/liability
management processes.  These initiatives
will   greatly   aid  us  in   achieving
profitable growth,  controlling  general
and administrative expenses and managing
the overall  sensitivity  of our balance
sheet to interest rate volatility.

   -- The  consolidation of Coastal Federal's  mortgage banking  operations into
Coastal  Federal  Mortgage,  formerly  Granger-O'Harra  Mortgage.  Through  this
initiative,  we have not only enhanced operational efficiency and profitability,
but have also entered a number of new and rapidly growing markets throughout the
state. In fact, in a typical month, over half of our mortgage banking volume now
comes from markets where we had no presence a year ago.

   -- The opening of a full service  banking  office in  Florence.  In just five
months, we have significantly  exceeded our fiscal 1996 business plan objectives
and are well  positioned to expand our banking  programs to the  individuals and
businesses of the growing and dynamic Pee Dee area communities.

   -- The continued  growth and development of Coastal  Investments  Corporation
and its talented  group of  securities  brokerage  sales  professionals.  During
fiscal 1996,  revenue from the sales of investment  products increased by almost
30%  over  the  prior  year.  We  are  now  poised  to  grow  that  organization
substantially  through  innovative  sales  and  marketing  initiatives. 

   -- The conversion of our Check Imaging  system from an outsource  environment
to an in-house process. Through this well planned and executed endeavor, we have
considerably  shortened the delivery cycle for checking account  statements and,
in addition, significantly reduced the costs related to this activity.
<PAGE>
   -- Our leadership  role in serving as        [GRAPHIC-PHOTOGRAPH]
the  Major  Corporate  Sponsor  for  the
Horry County March of Dimes  WalkAmerica
Campaign For Healthier  Babies continued
to   evidence   our   support   for  the
communities we serve.  The $65,000 which
was    raised   by   our    caring   and
civic-minded  Associates was recognized,
both statewide and  nationally,  for its
4th place finish among the top 100 South
Carolina  teams,   and  its  89th  place
finish among the 500  nationally  ranked
teams.

   -- The  overwhelming  response to our
SAVE  FOR   AMERICA   program  by  local
schools    recently    prompted    state
Treasurer   Richard   Eckstrom  to  hail
Coastal Federal as "a model bank for its
long-term     vision    and    community
commitment to encourage student saving."
Through the  combined  efforts of School
Administrators,           Parent-Teacher
Organization    volunteers    and    our
Associates,  this vehicle  allows school
children to  maintain a savings  account
through  in-school  direct  deposits and
encourages    them    to    learn    the
fundamentals  of banking,  goal  setting
and practical money management.

[GRAPHIC-PHOTOGRAPH]                       --  Each  year,   Coastal   Financial
                                        Corporation  and its great people,  give
                                        generously  of their  time,  talents and
                                        financial  resources  in support of over
                                        250   community    organizations   which
                                        contribute  significantly to the quality
                                        of  life,  health  and  welfare  of  our
                                        neighborhoods.                          
                                                                                
                                           Our  concept  of  viewing  change and
                                        constant improvement as essential to the
                                        achievement of our long-term  objectives
                                        is  well  reflected  by  these  results.
                                                                                
                                       
GREAT PEOPLE 

   Coastal  Financial's  success in meeting both marketplace and  organizational
challenges is due, in large measure,  to the fact that our Leadership  Group and
Associates are fully committed to our QUEST FOR EXCELLENCE  operating philosophy
in the conduct of their routine business activities.
<PAGE>
   During this past year,  several of our Leadership Group members  envisioned a
plan to reach out to the new residents of our communities who were interested in
learning  more about the banking  services  available  in our  marketplace.  The
program  which was  developed in response to this  challenge has given us a very
effective new delivery  channel to that segment of the market.  These Leadership
Group  members  could have just as easily  continued  to work in the ways of the
past, but chose instead to make a difference.

   All businesses  wish for this kind of    [GRAPHIC-PHOTOGRAPH]
initiative, but few ever get it. Part of
the reason is too much supervision,  too
many committees trying to make decisions
that   leaders   should  be  making  and
inadequate  product and Customer service
training.  As a result,  the  people who
must make  decisions  while dealing with
Customers    feel     constrained    and
intimidated.

   This is just one example of the great
things  we  see  daily  which  are  made
possible  by  our  great   people  being
totally   committed  to  our  QUEST  FOR
EXCELLENCE operating philosophy.

   This philosophy has two major focuses which guide our day-to-day  activities.
The first is a strong commitment to business  results,  and the second is a high
level of integrity.

[GRAPHIC-PHOTOGRAPH]                       Our  emphasis  on  results  is  quite
                                        obvious.  We could not have achieved the
                                        tremendous   accomplishments  of  recent
                                        years without the outstanding individual
                                        performance  of each  of our  Leadership
                                        Group members and  Associates.  However,
                                        it is our corporate  commitment to never
                                        compromising our integrity that provides
                                        the foundation for our future.          
                                                                                
                                           No  matter  how good  the  individual
                                        performances  of our great  people  are,
                                        they are only effective if  orchestrated
                                        into  something  of  real  value.   That
                                        requires  teamwork and  unselfish  ness,
                                        two   components   which  are  virtually
                                        unattainable  without  an  extraordinary
                                        degree of  integrity  and a  deep-seeded
                                        sense of confidence and unity of purpose
                                        throughout the organization.            
<PAGE>
GREAT MARKETS

   Horry  County,   the  second  fastest       [GRAPHIC-PHOTOGRAPH]
growing Metropolitan Statistical Area in
the nation,  and Florence County,  which
was   recently   cited   by   the   U.S.
Department  Of  Commerce  as the fastest
growing  metropolitan area in the United
States in terms of exports  from 1993 to
1995,  are  certainly  two very exciting
markets  in  which  to  be   building  a
financial services business.

   According to recent statistics, Horry
County,  which has  enjoyed  an  average
annual  growth rate of 4.4 percent  over
the past 60 years,  as  compared  to the
state   average  of  1.7   percent,   is
projected  to  achieve   average  annual
growth  of  5.3   percent   during   the
1990-2010  period.  Over  that same time
frame,  South  Carolina's  population is
projected  to  increase  by  an  average
annual rate of 1.4 percent.

   And, a rapidly  expanding  retail and
service-based   industry   has   brought
national attention to the Pee Dee Region
in  recent  editions  of  THE  NEW  YORK
TIMES,  THE WALL STREET  JOURNAL and THE
KIPLINGER LETTER.

   We are, indeed,  very fortunate to be
located in the heart of communities with
such exceptional momentum.

                                        COASTAL FINANCIAL'S FUTURE

[GRAPHIC-PHOTOGRAPH]                       A  word  about  the  future.  Coastal
                                        Financial  has  the  greatest  Board  Of
                                        Directors,    Leadership    Group    and
                                        Associates    imaginable.    They    are
                                        talented,    experienced   and   totally
                                        committed   to   our   Basic   Corporate
                                        Objective of Maximizing The Value Of Our
                                        Shareholders'    Investment    and   our
                                        Long-Term   Goal  of   Being   The  Best
                                        Financial   Services   Company   In  Our
                                        Marketplace.  Not  only do  they  have a
                                        powerful record of  accomplishment,  but
                                        more importantly, they are determined to
                                        see that our best years are yet to come.
                                                                                
   The one question we are most often asked is the same question we continually
ask ourselves: "Can we keep it up?"
<PAGE>
[GRAPHIC-PHOTOGRAPH]                       We believe the answer is a resounding
                                        "yes,"  as  long  as  we  maintain   our
                                        philosophy   of   viewing   change   and
                                        constant improvement as essential to the
                                        achievement of our long-term objectives.
                                        That's  what  really  sets us apart from
                                        the competition.                        
                                                                                
                                           Consumer tastes and interests  change
                                        at   such  a   rapid   pace   that   the
                                        marketplace and work environment seem to
                                        be in constant flux.  Sometimes  drastic
                                        change,  sometimes  subtle  change,  but
                                        always change.                          
                                                                                
   If we remain fast, flexible and focused,  change will never be a problem, but
rather, create unique opportunities.

   I just can't thank our great people  enough.  They do their very best to help
many tens of thousands of our Customers  every day and are totally  committed to
Exceeding their Expectations on every occasion.

   In the final analysis,  when you stop and think about it, a goal like that is
really  all we can ask for and all we  should  want,  because  it's the best way
possible to assure a great future.

   All of us at Coastal Financial Corporation  appreciate your continued loyalty
and  support  and are  looking  ahead to the future  with great  enthusiasm  and
excitement.

                                                        /s/Michael C. Gerald
                                                        --------------------
                                                           Michael C. Gerald
                                                           President
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

General

    Coastal Financial Corporation (the "Company"),  reported $3.7 million in net
income in fiscal 1996 and 1995.  Net earnings for the year ended  September  30,
1996 included a special assessment from the FDIC for the recapitalization of the
Savings  Association  Insurance  Fund  ("SAIF")  of  $1,620,000,  and a  related
reduction in income taxes of $615,000.  Excluding this special  assessment,  net
income  increased 27.0% in 1996. Net interest income increased $2.6 million as a
result of increased  interest  income of $4.4  million  offset by an increase of
$1.8  million in interest  expense.  Provision  for loan losses  increased  from
$202,000 for the year ended  September  30, 1995, to $790,000 for the year ended
September 30, 1996.  Other income increased from $3.3 million in fiscal 1995, to
$4.6 million in 1996. General and administrative expenses increased $3.4 million
for  fiscal  1996,  as  compared  to  fiscal  1995.   Included  in  general  and
administrative  expenses in fiscal 1996,  is a $1.6 million  special  assessment
from the FDIC for the recapitalization of the SAIF Insurance Fund.

    Total assets  increased  from $401.2 million at September 30, 1995 to $459.7
million  at   September   30,  1996.   Liquid   assets,   consisting   of  cash,
interest-bearing  deposits,  and  securities,  increased  from $26.3  million at
September  30, 1995 to $65.3  million at September  30, 1996.  Loans  receivable
increased  3.8% from $356.8  million at September 30, 1995, to $370.3 million at
September 30, 1996. Total loan  originations for fiscal 1996 were $160.3 million
as  compared  to $141.0  million  for fiscal  1995.  Mortgage-backed  securities
increased  from  $12.8  million  at  September  30,  1995,  to $27.0  million at
September 30, 1996.  Included in the ending  mortgage-backed  security portfolio
are $6.2  million of  mortgage-backed  securities  which were  created  from the
securitization of conforming loans during fiscal 1996.

    The growth in loans was funded by  increased  deposits of $40.3  million and
loan  repayments.  The  Company's  strategy is to increase  its reliance on core
deposits as opposed to its  traditional  reliance on certificates of deposit and
advances from the Federal Home Loan Bank ("FHLB").  During fiscal 1996, deposits
increased  from $273.1  million at  September  30,  1995,  to $313.4  million at
September  30, 1996.  During this same period,  transaction  deposits  increased
$52.7 million.

    As a result of $3.7  million in net  earnings,  the  acquisition  of Coastal
Federal Mortgage, Inc. for $376,000 (see discussion under "Liquidity and Capital
Resources"),  less the cash dividends paid to shareholders of approximately $1.5
million, stockholders' equity increased from $24.8 million at September 30, 1995
to $27.7 million at September 30, 1996. 

Liquidity and Capital Resources

    In  accordance  with OTS  regulations,  the  Company is required to maintain
specific  levels of cash and liquid  investments  in qualifying  types of United
States treasury and Federal agency  securities and other  investments  generally
having  maturities of five years or less. The required level of such investments
is calculated on a liquidity base,  consisting of net withdrawable  accounts and
short-term  borrowings,  and is equal to 5.0% of such  base  amount.  Short-term
liquid assets may not be less than 1.0% of the liquidity base.
<PAGE>
    Historically, the Company has maintained its liquidity at levels believed by
management to be adequate to meet requirements of normal  operations,  potential
deposit  outflows and strong loan demand and still allow for optimal  investment
of funds and return on assets. The liquidity ratio, as calculated for regulatory
purposes,  was 5.5%, 7.3%, and 8.0% for the years ended September 30, 1994, 1995
and 1996, respectively. The Company expects to continue to maintain liquidity at
approximately the same level as 1996.

    The  principal  sources  of  funds  for the  Company  are  cash  flows  from
operations,   consisting  mainly  of  mortgage,  consumer  and  commercial  loan
payments,  retail customer deposits and advances from the Federal Home Loan Bank
("FHLB") of Atlanta.

    The principal use of cash flows is the origination of loans receivable.  The
Company originated loans receivable of $174.8 million, $141.0 million and $160.4
million for the years ended September 30, 1994, 1995 and 1996,  respectively.  A
large portion of these loan  originations  were financed  through loan principal
repayments  which amounted to $104.6  million,  $104.2 million and $93.6 million
for the  years  ended  September  30,  1994,  1995 and  1996,  respectively.  In
addition,  the Company has sold certain loans in the secondary market to finance
future loan  originations.  The increase in  originations  and sales of mortgage
loans can be primarily  attributed to the purchase of Coastal Federal  Mortgage,
d/b/a Granger & O'Harra  Mortgage Inc. ("CFM") in November 1995. CFM specializes
in originating  conforming  mortgage loans which are then sold to  correspondent
financial  institutions.  For the year ended  September 30, 1996, CFM originated
$36.4  million of loans and sold $34.5  million  of loans.  For the years  ended
September  30, 1994,  1995 and 1996,  the Company sold loans  amounting to $29.3
million, $2.8 million and $40.7 million, respectively.

    During fiscal 1996,  deposits increased from $273.1 million at September 30,
1995, to $313.4  million at September 30, 1996.  The increase was  attributed to
transaction  accounts which  increased  approximately  $52.7  million.  This was
offset by a decrease  in  passbook  accounts  of $3.6  million  and  certificate
accounts of $8.8 million.

    At September 30, 1996, the Company had commitments to originate $9.0 million
in loans and $32.0 million in unused lines of credit,  which the Company expects
to fund from normal operations.

    At September  30, 1996,  the Company had $94.7  million of  certificates  of
deposit  which  were  due  to  mature  within  one  year.  Based  upon  previous
experience, the Company believes that a major portion of these certificates will
be  redeposited.  Additionally,  at September  30, 1996,  the Company had excess
collateral  pledged to the FHLB which  would  support  additional  FHLB  advance
borrowings of $63.0 million.

    As a condition of deposit insurance,  current FDIC regulations  require that
Coastal  Federal  Savings  Bank (the  "Bank")  calculate  and maintain a minimum
regulatory capital requirement on a quarterly basis and satisfy such requirement
at the calculation date and throughout the ensuing quarter.  The Bank's tangible
and core capital approximated $27.3 million at September 30, 1996, exceeding the
Bank's  tangible  and core  requirements  by $20.4  million  and $13.6  million,
respectively.  At September 30, 1996,  the Bank's  capital  exceeded its current
risk-based minimum capital  requirement by $7.1 million.  The risk-based capital
requirement may increase in the future. 
<PAGE>
Results of Operations

  Comparison of the Years Ended September 30, 1995 and 1996

General

    Net earnings  were $3.7 million for the years ended  September  30, 1995 and
1996.  Included in net earnings for 1996, is a special  assessment from the FDIC
for the  recapitalization of the SAIF of $1,620,000,  and a related reduction in
income  taxes  of  $615,000.  Excluding  this  special  assessment,  net  income
increased 27.0% in 1996. Net interest income increased $2.6 million primarily as
a result of an increase in interest  income of $4.4 million  which was offset by
an increase  in  interest  expense of $1.8  million.  Provision  for loan losses
increased $588,000.  Other income increased from $3.3 million for the year ended
September  30,  1995,  to $4.6  million for the year ended  September  30, 1996.
General and  administrative  expenses  increased  $3.4 million when  compared to
fiscal 1995. Included in general and administrative  expenses in fiscal 1996, is
a $1.6 million special assessment from the FDIC for the  recapitalization of the
SAIF Insurance Fund.

Interest Income

    Interest  income for the year ended  September 30, 1996,  increased 14.5% to
$34.7 million as compared to $30.3 million for the year ended September 30, 1995
primarily due to the increased  yield on assets and a 11.7%  increase in average
interest-earning  assets. The net yield on interest-earning  assets for the year
ended  September  30,  1996,  was 8.46%  compared to a net yield of 8.27% in the
prior year. The increase in net yield  primarily  resulted from the repricing of
adjustable-rate  mortgage loans and growth in commercial real estate loans which
have a higher yield.  The average yield on loans receivable for fiscal year 1996
was 8.57%  compared to 8.39% in 1995.  The yield on  investments  which includes
Investments,  Overnight  Funds and  Federal  Funds,  increased  to 6.55% for the
fiscal year 1996 from 5.14% for fiscal year 1995. Total interest-earning  assets
for fiscal year 1996 averaged $406.2 million  compared to $371.9 million for the
year ended September 30, 1995. 

Interest Expense

    Interest expense on  interest-bearing  liabilities was $19.1 million for the
year ended  September 30, 1996, as compared to $17.3 million in fiscal 1995. The
cost of interest-bearing  liabilities was 4.70% for the year ended September 30,
1996, compared to 4.75% in fiscal year 1995. The increase in interest expense of
10.5%  primarily  resulted  from a growth in deposits  and a slight  increase in
overall market rates paid on deposits. The average cost of deposits for the year
ended  September  30,  1996,  was 4.08%  compared  to 3.96%  for the year  ended
September 30, 1995. The cost of FHLB advances for fiscal 1996 was 6.27% compared
to 6.53% for fiscal 1995. Total average  interest-bearing  liabilities increased
11.7% from $363.7  million at September 30, 1995, to $406.2 million at September
30, 1996. 

Net Interest Income

    Net interest income was $15.6 million for the year ended September 30, 1996,
compared  to $13.1  million  for the year  ended  September  30,  1995.  The net
interest margin  increased to 3.76% for fiscal 1996 compared to 3.52% for fiscal
1995.  Average  interest-earning  assets  increased  $43.5 million while average
<PAGE>
interest-bearing liabilities increased $42.4 million. At September 30, 1996, the
cost of one month advances was  approximately  5.5%,  compared to  approximately
6.7%  which was the yield on the 10 year  treasury  security.  Should  the yield
curve continue to remain relatively flat, the Company may continue to experience
a high  amount  of  loan  prepayments  and  refinancings  and may  experience  a
declining net interest margin in fiscal 1997. 

Provision for Loan Losses

    The Company's  provision for loan losses  increased from $202,000 for fiscal
1995 to $790,000 for fiscal 1996.  The allowance for loan losses as a percentage
of loans was 1.11% at  September  30, 1996,  compared to 1.00% at September  30,
1995.  During  fiscal  1996,  commercial  real  estate  and  construction  loans
increased 16.3%. As a result of the increase in loans which may possess a higher
degree  of risk,  the  Company  increased  its  allowance  for loan  losses as a
percentage of loans.  Loans  delinquent 90 days or more were .12% of total loans
at September 30, 1996, compared to .37% at September 30, 1995. The allowance for
loan  losses was 937% of loans  delinquent  more than 90 days at  September  30,
1996,  compared to 270% at September  30,  1995.  Management  believes  that the
current  level of the  allowance  for loan  losses is adequate  considering  the
composition of the loan portfolio, the portfolio's loss experience,  delinquency
trends,  current regional and local economic conditions and other factors.  Also
see "Nonperforming Assets" and "Allowance for Loan Losses."

Other Income

   In fiscal 1996,  total other income  increased to $4.6 million as compared to
$3.3 million for the period ended  September 30, 1995.  Fees and service charges
on loans and deposit  accounts  increased  $364,000 for the year ended September
30, 1996,  as a result of growth in core  deposits  and loans.  Income from real
estate operations  decreased  $531,000 from the prior fiscal year due to reduced
sales of real estate at the Bank's  subsidiaries.  This was offset by  increased
gains on sales of loans  receivable and  mortgage-backed  securities of $951,000
and  $189,000,  respectively,   primarily  due  to  increased  mortgage  banking
activities of CFM which was acquired in November  1995.  Other income  increased
from $1.3 million for the year ended September 30, 1995, to $1.7 million for the
year ended  September 30, 1996. The increase is attributed to an increase of fee
income  from ATMs of $85,000,  fee income from debit cards of $53,000,  gains on
the sale of assets  of  $44,000,  miscellaneous  income of  $44,000  and  higher
revenues  from  sales  of  alternative  investment  products  at  the  Company's
subsidiary, Coastal Investments Corporation, of $154,000.

Other Expense

    General and  administrative  expenses  were $13.6 million for fiscal 1996 as
compared to $10.2 million for fiscal 1995.  Salaries and employee  benefits were
$6.2 million for fiscal 1996 as compared to $5.3  million for fiscal 1995,  or a
16.3%  increase.  Approximately  a third of this  increase  is  attributable  to
increased  group  insurance  costs,  401K  benefits,  and increased  bonuses and
incentives. In addition, personnel at CFM accounted for approximately a third of
the increase.  Normal salary increases and increased lending personnel accounted
for a significant  portion of the remaining increase.  Net occupancy,  furniture
and fixtures and data processing  expense increased $498,000 for fiscal 1996, as
compared to fiscal 1995 primarily as a result of  enhancements to technology and
the  addition of CFM.  FDIC  insurance  premiums,  excluding  the  special  SAIF
<PAGE>
assessment, increased from $566,000 for fiscal 1995, to $622,000 for fiscal 1996
as a result of the 14.8% growth in deposits.  Other expenses increased from $1.9
million  in 1995 to $2.3  million  in 1996.  In  addition,  in 1996 the  Company
recorded a special assessment from the FDIC for the recapitalization of the SAIF
of $1,620,000.

Income Taxes

    Although fiscal 1996 net income was slightly higher than fiscal 1995, income
taxes were slightly lower due to increased tax exempt interest.

Results of Operations

  Comparison of the Years Ended September 30, 1994 and 1995

General

    Net earnings  decreased  from $3.8 million for the year ended  September 30,
1994,  to net  earnings of $3.7 million for the year ended  September  30, 1995.
Included in net earnings for 1994, is a favorable $664,000  cumulative effect of
the  change  in  accounting  for  income  taxes.  Excluding  the  effect  of the
accounting  change in 1994,  net income  increased  18.2% in 1995.  Net interest
income increased $42,000 primarily as a result of an increase in interest income
of $5.8  million  which was offset by an increase  in  interest  expense of $5.7
million.  Provision for loan losses decreased  $308,000.  Other income increased
from $2.8 million for the year ended September 30, 1994, to $3.3 million for the
year ended September 30, 1995. 

Interest Income

    Interest  income for the year ended  September 30, 1995,  increased 23.5% to
$30.3 million as compared to $24.6 million for the year ended September 30, 1994
primarily due to the increased  yield on assets and a 17.7%  increase in average
interest-earning  assets. The net yield on interest-earning  assets for the year
ended  September  30,  1995,  was 8.27%  compared to a net yield of 7.77% in the
prior year. The increase in net yield  primarily  resulted from the repricing of
adjustable-rate mortgage loans. The average yield on loans receivable for fiscal
year 1995 was 8.39% compared to 7.93% in 1994.  The yield on  investments  which
includes Investments,  Overnight Funds and Federal Funds, increased to 5.14% for
the fiscal  year 1995 from 4.20% for fiscal  year 1994.  Total  interest-earning
assets for fiscal year 1995 averaged  $371.9 million  compared to $316.l million
for the year ended September 30, 1994. 

Interest Expense

    Interest expense on  interest-bearing  liabilities was $17.3 million for the
year ended  September 30, 1995, as compared to $11.5 million in fiscal 1994. The
cost of interest-bearing  liabilities was 4.75% for the year ended September 30,
1995, compared to 3.68% in fiscal year 1994. The increase in interest expense of
49.6%  primarily  resulted  from a growth in deposits and an increase in overall
market  rates paid on deposits and FHLB  advances.  The average rate on deposits
for the year ended  September 30, 1995, was 3.96% compared to 3.29% for the year
ended  September  30, 1994.  The cost of FHLB advances for fiscal 1995 was 6.53%
compared to 5.56% for fiscal 1994. A contributing  factor to the increased costs
of advances was a lengthening  in the average  maturity of the  advances.  Total
average  interest-bearing  liabilities  increased  15.9% from $313.8  million at
September 30, 1994, to $363.7 million at September 30, 1995. 
<PAGE>
Net Interest Income

    Net interest income was $13.1 million for the year ended September 30, 1995,
compared  to $13.0  million  for the year  ended  September  30,  1994.  The net
interest margin  decreased to 3.52% for fiscal 1995 compared to 4.12% for fiscal
1994.  Average  interest-earning  assets  increased  $55.8 million while average
interest-bearing liabilities increased $49.9 million. At September 30, 1995, the
cost of one month  advances was 6.12%,  compared to 6.50% which was the yield on
the 30 year treasury  security.  Should the yield curve continue to remain flat,
the Bank may  continue  to  experience  a high  amount of loan  prepayments  and
refinancings and may experience a declining net interest margin in fiscal 1996.

Provision for Loan Losses

    The Company's  provision for loan losses  decreased from $510,000 for fiscal
1994 to $202,000 for fiscal 1995.  The allowance for loan losses as a percentage
of loans was 1.00% at  September  30, 1995,  compared to 1.01% at September  30,
1994. Loans delinquent 90 days or more were .37% of total loans at September 30,
1995,  compared to .35% at September 30, 1994. The allowance for loan losses was
270.42% of loans delinquent more than 90 days at September 30, 1995, compared to
291.39% at September 30, 1994. Management believes that the current level of the
allowance for loan losses is adequate  considering  the  composition of the loan
portfolio, the portfolio's loss experience, delinquency trends, current regional
and local economic conditions and other factors. Also see "Nonperforming Assets"
and "Allowance for Loan Losses." 

Other Income

    In fiscal 1995,  total other income increased to $3.3 million as compared to
$2.8 million for the period ended  September 30, 1994.  Fees and service charges
on loans and deposit accounts increased $50,000 for the year ended September 30,
1995.  Due to the sale of  certain  real  estate  held for  development  and the
realization of a deferred gain on a previous sale of real estate owned which had
been financed by the Bank, income from real estate operations increased $535,000
for the fiscal year.  This was partially  offset by decreased  gains on sales of
loans  receivable  and  mortgage-backed  securities  of  $372,000  and  $54,000,
respectively,  due  to  decreased  mortgage  banking  activities.  Other  income
increased  from $1.0  million for the year ended  September  30,  1994,  to $1.3
million for the year ended  September 30, 1995. The increase is attributed to an
increase of FHLB stock dividends of $206,000,  income from ATMs of $64,000,  and
miscellaneous income of $44,000. 

Other Expense

    General and  administrative  expenses  were $10.2 million for fiscal 1995 as
compared to $10.3 million for fiscal 1994.  Salaries and employee  benefits were
$5.3 million for fiscal 1995 as compared to $5.2  million for fiscal 1994,  or a
2.2% increase. Throughout fiscal 1995, and into 1996, management has implemented
a number of cost saving  measures to reduce the reliance on full time Associates
and minimize the increase in compensation expense. Net occupancy,  furniture and
fixtures and data  processing  expense  increased  $25,000 for fiscal  1995,  as
compared to fiscal 1994.  FDIC  insurance  premiums  decreased from $619,000 for
fiscal 1994, to $566,000 for fiscal 1995.  Other  expenses  decreased  from $2.2
million in 1994 to $1.9 million in 1995.  The decrease is  attributed to reduced
legal  expenses of $69,000,  recruiting  expenses  services of $36,000 and other
sundry expenses of $136,000. 
<PAGE>
Income Taxes

    Income taxes increased from $1.9 million in fiscal 1994 to $2.2 million in
fiscal as a result of increased earnings before income taxes.

Non-performing Assets

    Non-performing  assets were  $768,000 at September 30, 1996 compared to $2.1
million at September 30, 1995.  Non-accrual loans decreased from $1.3 million at
September  30, 1995,  to $445,000 at September  30, 1996.  Real estate  acquired
through  foreclosure  decreased from $789,000 at September 30, 1995, to $323,000
at September 30, 1996. At September 30, 1996,  approximately 69% of the loans 90
days  past due are  secured  by  residential  mortgage  loans.  All real  estate
acquired through foreclosure is recorded at the lower of cost or fair value less
estimated  selling costs and the Company does not expect any material  losses on
this real  estate.  Loans are reviewed on a regular  basis and an allowance  for
uncollectable interest is established on loans where collection is questionable,
generally  when such loans become 90 days  delinquent.  Loan  balances for which
interest  amounts have been reserved and all loans more than 90 days  delinquent
are considered to be on a non-accrual basis.  Typically,  payments received on a
non-accrual  loan are applied to the  outstanding  principal  or  recognized  as
interest based upon the  collectability of the loan as determined by management.

Allowance for Loan Losses

    The  Company's   management  evaluates  the  need  to  establish  additional
allowances  against  losses on loans  quarterly.  Such an evaluation  includes a
review of all loans for which full  collectability may not be reasonably assured
and considers, among other matters, the estimated market value of the underlying
collateral  of problem  loans,  composition  of the loan  portfolio,  prior loss
experience,  economic  conditions,  etc. The Company established  provisions for
loan losses for the years ended  September 30, 1994, 1995 and 1996, of $510,000,
$202,000 and  $790,000,  respectively.  For the years ended  September 30, 1994,
1995 and 1996,  the  Company  had net  charge-offs  (recoveries)  of  ($90,000),
($23,000) and $196,000,  respectively. At September 30, 1996, the Company had an
allowance for loan losses of $4.2 million, which was 1.11% of net loans compared
to 1.00% at September  30, 1995.  Management  believes that the current level of
the allowance for loan losses is adequate  considering  the  composition  of the
loan portfolio,  the portfolio's loss experience,  delinquency  trends,  current
regional and local economic conditions and other factors.  While management uses
the best information  available to make evaluations,  future  adjustments to the
allowance may be necessary if economic conditions differ  substantially from the
assumptions  used in making the  evaluation.  The  allowance  for possible  loan
losses is subject to periodic  evaluation by various regulatory  authorities and
may be subject to adjustment  upon their  examination. 

Impact of New Accounting Pronouncements

   On June 30, 1995, the Financial  Accounting  Standards  Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of"
which is effective for financial  statements  issued for fiscal years  beginning
after  December 15, 1995.  SFAS No. 121 provides  guidance for  recognition  and
measurement   of   impairment  of  long-lived   assets,   certain   identifiable
intangibles,  and goodwill related both to assets to be held and used and assets
to be disposed of. This statement is not  anticipated to have a material  effect
on the Company.
<PAGE>
    In May  1995,  the  FASB  issued  SFAS No.  122,  "Accounting  for  Mortgage
Servicing Rights, an amendment of SFAS No. 65" which is effective  prospectively
for fiscal years beginning  after December 15, 1995. The statement  requires the
recognition  of an asset for the right to  service  mortgage  loans for  others,
regardless of how those rights were acquired  (either  purchased or originated).
Further,  it amends SFAS 65 to require  assessment of  impairment  based on fair
value.  Based  upon the  Company's  present  mortgage  lending  operation,  this
statement did not have a significant affect on the Company.

    In October 1995, the FASB issued SFAS No. 123,  "Accounting  for Stock Based
Compensation"  which is effective  for  financial  statements  issued for fiscal
years beginning  after December 15, 1995. SFAS No. 123 provides  guidance on the
valuation of compensation  costs arising from both fixed and  performance  stock
compensation  plans.  SFAS No. 123 encourages  but does not require  entities to
account for stock compensation awards based on their estimated fair value on the
date they are  granted.  Entities  can  continue  to follow  current  accounting
requirements,  which  generally  do not  result in an  expense  charge  for most
options. However, they must disclose in a footnote to their financial statements
what the effect on net income and  earnings  per share  would have been had they
used the  fair  value  model.  The  Company  expects  to  continue  its  current
accounting practice. Therefore, this statement will generally not have an effect
on future operating results.

    In June,  1996, the FASB issued SFAS No. 125,  "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This statement
will become  effective for  transactions  occurring  after December 31, 1996 and
supersedes  SFAS No. 122. The Statement uses a "financial  components"  approach
that focuses on control to determine the proper  accounting for financial  asset
transfers.  Under that approach,  after  financial  assets are  transferred,  an
entity  would  recognize  on its  balance  sheet  all  assets  it  controls  and
liabilities  it has  incurred.  The entity would  remove from the balance  sheet
those assets it no longer controls and liabilities it has satisfied. The Company
does not anticipate  that adoption of this standard will have a material  effect
on the Company's financial statements in 1997.

    In November 1995, the FASB issued a guide to  implementation  of SFAS 115 on
accounting for certain  investments in debt and equity  securities  which allows
for  the one  time  transfer  of  certain  investments  classified  as held  for
investment to available for sale.

    In order to increase the Company's ability to manage its liquid assets,  the
Company  reclassified  the majority of its  investments  classified  as held for
investment,  which had an amortized  cost of $14.8 million and a market value of
$15.0 million,  to the available for sale classification in the first quarter of
fiscal 1996. 

Effects of Inflation and Changing Prices

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

    The Bank's capital  standards include (1) a leverage limit requiring all OTS
chartered financial  institutions to maintain core capital in an amount not less
than 3% of the  financial  institution's  total assets;  (2) a tangible  capital
requirement of not less than 1.5% of total assets;  and (3) a risk-based capital
requirement of not less than 8.0% of risk weighted assets.

    The  following  table  summarizes  the capital  requirements  and the Bank's
capital position at September 30, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
                                                                     Percent
                                                         Amount     of Assets
                                                         ------     ---------
<S>                                                     <C>           <C>                                          
Tangible capital (1).................................   $27,271        5.93%
Tangible capital requirement.........................     6,859        1.50
                                                        -------       -----
Excess...............................................    20,412        4.43%
                                                        =======       ===== 
Core capital.........................................   $27,271        5.93%
Core capital requirement.............................    13,719        3.00
                                                        -------       -----
Excess...............................................   $13,552        2.93%
                                                        =======       ===== 
Risk-based capital...................................   $30,777       10.41%
Minimum risk-based capital requirements..............    23,641        8.00
                                                        -------       -----
Excess...............................................   $ 7,136        2.41%
                                                        =======       ===== 


(1) Equals the Bank's stockholders' equity
</TABLE>

   The Act also changed the present  qualified  thrift lender test (QTL).  As of
September  30, 1996,  Coastal  Federal met the  existing QTL test.  Based on the
Bank's current portfolio of assets,  management does not anticipate that the new
QTL regulations will have an adverse effect on the Bank's operations.

   Recently the Federal Regulatory  Agencies have agreed on a new higher capital
leverage limit for many financial  institutions which is 5%. The Bank also meets
this capital standard.

   On September 30, 1996, the Bank recorded a $1,620,000  special  assessment to
the FDIC for the  recapitalization  of the SAIF.  Beginning January 1, 1997, the
Bank is  expected  to begin  paying  6.4  cents  per $100 of  deposits  insured.
Previously the Bank had been paying  approximately 23 cents per $100 of deposits
insured.  It is expected that the Bank Insurance  Fund ("BIF")  members and SAIF
members will begin paying the same amount to the  insurance  fund in fiscal year
2000.
<PAGE>
________________________________________________________________________________

                          INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS
COASTAL FINANCIAL CORPORATION
Myrtle Beach, South Carolina

    We have  audited the  consolidated  statements  of  financial  condition  of
Coastal  Financial  Corporation and subsidiaries (the "Company") as of September
30,  1995 and 1996,  and the  related  consolidated  statements  of  operations,
stockholders'  equity,  and cash  flows for each of the years in the  three-year
period  ended   September  30,  1996.   These   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

    In our opinion,  the  consolidated  financial  statements  referred to above
present fairly, in all material respects,  the financial position of the Company
at September 30, 1995 and 1996,  and the results of their  operations  and their
cash flows for each of the years in the  three-year  period ended  September 30,
1996, in conformity with generally accepted accounting principles.

    As discussed in note 1, the Company changed its method of accounting for
investments to adopt the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting
for Certain Investments in Debt and Equity Securities at October 1, 1994 and
changed its method of accounting for income taxes on October 1, 1993 to adopt
the provisions of SFAS No. 109, Accounting for Income Taxes.

                                             /s/KPMG Peat Marwick LLP
                                             ------------------------
                                                KPMG Peat Marwick LLP
Greenville, South Carolina
October 18, 1996
<PAGE>
<TABLE>
<CAPTION>
                                           COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                                                     September 30, 1995 and 1996


                                                 ASSETS                                                       1995         1996
                                                                                                            --------    --------
                                                                                                               (In thousands)
<S>                                                                                                         <C>         <C>
Cash and amounts due from banks..........................................................................   $  9,318    $ 15,639
Short-term interest-bearing deposits.....................................................................      1,883       5,222
Investment securities held to maturity (market value of $2,297 at September 30, 1995 and $332 at
  September 30, 1996)....................................................................................      2,329         330
Investment securities available for sale.................................................................         --      17,141
Mortgage-backed securities held to maturity (market value of $12,904 at September 30, 1995)..............     12,776          --
Mortgage-backed securities available for sale............................................................         --      27,029
Loans receivable (net of allowance for loan losses of $3,578 at September 30, 1995 and $4,172 at
  September 30, 1996)....................................................................................    356,819     370,368
Loans receivable held for sale...........................................................................      2,393       6,803
Real estate acquired through foreclosure, net............................................................        789         323
Office property and equipment, net.......................................................................      5,415       5,736
Federal Home Loan Bank (FHLB) stock, at cost.............................................................      4,726       5,228
Accrued interest receivable on loans.....................................................................      2,167       2,444
Accrued interest receivable on investment securities.....................................................        250         526
Other assets.............................................................................................      2,336       2,923
                                                                                                            --------    --------
                                                                                                            $401,201    $459,712
                                                                                                            ========    ========
                                  LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Deposits...............................................................................................    273,099     313,430
  Securities sold under agreements to repurchase.........................................................      2,677       3,365
  Advances from FHLB.....................................................................................     93,320     104,553
  Other borrowings.......................................................................................         --       1,968
  Drafts outstanding.....................................................................................      2,289       1,922
  Advances by borrowers for property taxes and insurance.................................................      1,629       1,435
  Accrued interest payable...............................................................................        767         798
  Other liabilities......................................................................................      2,600       4,560
                                                                                                            --------    --------
      Total liabilities..................................................................................    376,381     432,031
                                                                                                            --------    --------
Stockholders' equity:
  Serial preferred stock, 1,000,000 shares authorized and unissued.......................................         --          --
  Common stock $.01 par value, 5,000,000 shares authorized; 3,356,056 shares at September 30, 1995 and
    3,442,616 shares at September 30, 1996 issued and outstanding........................................         34          34
  Additional paid-in capital.............................................................................      8,710       8,710
  Retained earnings, restricted..........................................................................     18,674      20,015
  Treasury stock, at cost (120,169 and 54,161 shares, respectively)......................................     (2,598)     (1,185)
  Unrealized gain on securities available for sale, net of income taxes..................................         --         107
                                                                                                            --------    --------
      Total stockholders' equity.........................................................................     24,820      27,681
                                                                                                            --------    --------
                                                                                                            $401,201    $459,712
                                                                                                            ========    ========
                                    See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                           COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
                                                CONSOLIDATED STATEMENTS OF OPERATIONS
                                            Years ended September 30, 1994, 1995 and 1996


                                                                                                  1994         1995         1996
                                                                                               ----------    ---------    --------- 
                                                                                                      (In thousands, except
                                                                                                            share data)
<S>                                                                                            <C>           <C>          <C>
Interest income:
  Loans receivable..........................................................................   $   23,726       28,671       31,698
  Investment securities.....................................................................          501          381          721
  Mortgage-backed securities................................................................          144          732        1,805
  Other.....................................................................................          191          544          496
                                                                                               ----------    ---------    --------- 
      Total interest income.................................................................       24,562       30,328       34,720
                                                                                               ----------    ---------    --------- 
Interest expense:
  Deposits..................................................................................        8,516        9,890       11,689
  Securities sold under agreements to repurchase............................................           18           63          323
  Advances from FHLB........................................................................        3,014        7,319        7,079
                                                                                               ----------    ---------    --------- 
      Total interest expense................................................................       11,548       17,272       19,091
                                                                                               ----------    ---------    --------- 
      Net interest income...................................................................       13,014       13,056       15,629
Provision for loan losses...................................................................          510          202          790
                                                                                               ----------    ---------    --------- 
      Net interest income after provision for loan losses...................................       12,504       12,854       14,839
                                                                                               ----------    ---------    --------- 
Other income:
  Fees and service charges on loans and deposit accounts....................................        1,001        1,051        1,415
  Gain on sales of loans held for sale......................................................          411           39          990
  Loss on sales of investment securities, net...............................................           --           --           (6)
  Gain on sales of mortgage-backed securities, net..........................................           54           --          189
  Income from real estate acquired through foreclosure......................................           31          224          202
  Income from real estate partnerships......................................................          310          652          143
  Other income..............................................................................        1,022        1,284        1,699
                                                                                               ----------    ---------    --------- 
      Total other income....................................................................        2,829        3,250        4,632
                                                                                               ----------    ---------    --------- 
<PAGE>
<CAPTION>
                                           COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
                                                CONSOLIDATED STATEMENTS OF OPERATIONS
                                            Years ended September 30, 1994, 1995 and 1996
                                                            (continued)

                                                                                                  1994         1995         1996
                                                                                               ----------    ---------    --------- 
                                                                                                      (In thousands, except
                                                                                                            share data)
<S>                                                                                            <C>           <C>          <C>
  
General and administrative expenses:
  Salaries and employee benefits............................................................        5,194        5,307        6,174
  Net occupancy, furniture and fixtures and data processing expense.........................        2,308        2,333        2,831
  FDIC insurance premium....................................................................          619          566          622
  FDIC insurance premium to recapitalize the SAIF...........................................           --           --        1,620
  Other expense.............................................................................        2,158        1,946        2,339
                                                                                               ----------    ---------    --------- 
      Total general and administrative expense..............................................       10,279       10,152       13,586
                                                                                               ----------    ---------    --------- 
      Earnings before income taxes..........................................................        5,054        5,952        5,885
Income taxes................................................................................        1,906        2,232        2,164
                                                                                               ----------    ---------    --------- 
Net income before cumulative effect of adopting SFAS No. 109................................        3,148        3,720        3,721
Cumulative effect of adopting SFAS No. 109..................................................          664           --           --
                                                                                               ----------    ---------    --------- 
Net income..................................................................................   $    3,812        3,720        3,721
                                                                                               ==========    =========    =========
Earnings per common share before cumulative effect of adopting SFAS No. 109.................   $     0.86         1.05         1.04
Cumulative effect of adopting SFAS No. 109..................................................         0.18           --           --
Earnings per common share...................................................................   $     1.04         1.05         1.04
                                                                                               ==========    =========    =========
Weighted average common shares outstanding..................................................    3,661,000    3,555,000    3,595,000
                                                                                               ==========    =========    =========


                                    See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                           COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                            Years ended September 30, 1994, 1995 and 1996

                                                                                                                             Total  
                                                                         Additional                                          Stock- 
                                                               Common     Paid-in      Retained    Treasury                 holders'
                                                               Stock      Capital      Earnings     Stock       Other        Equity 
                                                               -----      -------      --------     -----       -----        ------ 
                                                                                           (In thousands)    
<S>                                                             <C>        <C>         <C>         <C>         <C>         <C>    
Balance at September 30, 1993...............................    $ 33       $6,538      $15,258     $    --     $   --      $21,829 
Exercise of stock options...................................      --           88           --          --         --           88 
Cash paid for fractional shares.............................      --           --           (7)         --         --           (7)
Treasury stock repurchases..................................      --           --           --      (2,001)        --       (2,001)
Cash dividends..............................................      --           --         (617)         --         --         (617)
Net income..................................................      --           --        3,812          --         --        3,812 
                                                                ----       ------      -------     -------     ------      -------  
Balance at September 30, 1994...............................      33        6,626       18,446      (2,001)        --       23,104  
Exercise of stock options...................................      --           96         (215)        241         --          122 
Treasury stock repurchases..................................      --           --           --        (838)        --         (838)
Cash paid for fractional shares.............................      --           --           (6)         --         --           (6)
Cash dividends..............................................      --           --       (1,282)         --         --       (1,282)
Common stock dividend.......................................       1        1,988       (1,989)         --         --           -- 
Net income..................................................      --           --        3,720          --         --        3,720 
                                                                ----       ------      -------     -------     ------      -------  
Balance at September 30, 1995...............................      34        8,710       18,674      (2,598)        --       24,820 
Exercise of stock options...................................      --           --         (863)        970         --          107 
Issuance of shares in acquisition...........................      --           --          (67)        443         --          376 
Cash paid for fractional shares.............................      --           --          (17)         --         --          (17)
Cash dividends..............................................      --           --       (1,433)         --         --       (1,433)
Unrealized gain on securities available for sale,                                                                                   
  net of income taxes.......................................      --           --           --          --        107          107 
Net income..................................................      --           --        3,721          --         --        3,721
                                                                ----       ------      -------     -------     ------      -------  
                                                                $ 34       $8,710      $20,015     $(1,185)   $   107      $27,681 
                                                                ====       ======      =======     =======    =======      ======= 
                                                                                                                         
                                    See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                           COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                            Years ended September 30, 1994, 1995 and 1996


                                                                                                    1994         1995        1996
                                                                                                    ----         ----        ----
                                                                                                           (In thousands)
<S>                                                                                               <C>          <C>         <C>      
Cash flows from operating activities:
  Net earnings before FASB 109 adjustment......................................................   $   3,812       3,720       3,721
  Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
    Income from real estate partnerships.......................................................        (310)       (652)       (143)
    Depreciation...............................................................................         529         552         740
    Provision for loan losses..................................................................         510         202         790
    FHLB stock dividends.......................................................................         (95)         --          --
    Origination of loans receivable held for sale..............................................     (19,626)     (5,199)    (45,082)
    Proceeds from sales of loans receivable held for sale......................................      29,299       2,806      40,672
    (Increase) decrease in:
      Other assets.............................................................................        (589)     (1,266)       (587)
      Accrued interest receivable..............................................................          95        (434)       (553)
    Increase (decrease) in:
      Accrued interest payable.................................................................         146         284          31
      Deferred income taxes payable............................................................        (399)         --          --
      Other liabilities........................................................................       1,128         531       1,960
                                                                                                  ---------    --------    -------- 
        Net cash provided (used) by operating activities.......................................      14,500         544       1,549
                                                                                                  ---------    --------    -------- 
Cash flows from investing activities:
  Proceeds from maturities of investment securities held to maturity...........................       6,325       5,675          --
  Purchases of investment securities held to maturity..........................................      (1,988)       (324)         --
  Proceeds from sale of investment securities available for sale...............................          --          --       7,000
  Proceeds from maturities of investment securities available for sale.........................          --          --       1,999
  Purchases of investment securities available for sale........................................          --          --     (24,331)
  Purchases of loans receivable................................................................         (63)     (6,337)    (12,448)
  Proceeds from sale of mortgage-backed securities available for sale..........................       1,613          --      13,220
  Purchases of mortgage-backed securities available for sale...................................          --      (1,000)    (11,867)
  Principal collected on mortgage-backed securities............................................       1,118         811       4,129
  Origination of loans receivable..............................................................    (155,135)   (135,830)   (115,288)
  Principal collected on loans receivable......................................................     104,589     104,215      93,560
  Proceeds from sales of real estate acquired through foreclosure..............................         765         305         937
  Proceeds from sales of office properties and equipment.......................................          --          --         192
  Purchases of office properties and equipment.................................................        (528)     (1,166)     (1,253)
  Redemptions (purchases) of FHLB stock........................................................        (997)        101        (502)
  Other investing activities, net..............................................................         866         884         447
                                                                                                  ---------    --------    -------- 
      Net cash used by investing activities....................................................     (43,435)    (32,666)    (44,205)
                                                                                                  ---------    --------    -------- 
<PAGE>
<CAPTION>
                                           COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                            Years ended September 30, 1994, 1995 and 1996
                                                            (continued)

                                                                                                    1994         1995        1996   
                                                                                                    ----         ----        ----
                                                                                                           (In thousands)
<S>                                                                                               <C>          <C>         <C>      
  
Cash flows from financing activities:
  Increase (decrease) in deposits..............................................................     (19,470)     25,714      40,331
  Increase in securities sold under agreements to repurchase...................................       1,621         771         688
  Proceeds from FHLB advances..................................................................     101,419     365,120      75,850
  Repayment of FHLB advances...................................................................     (46,500)   (368,340)    (64,617)
  Proceeds from other borrowings...............................................................          --          --       1,968
  Increase (decrease) in advance payments by borrowers for property taxes and insurance........         204          79        (194)
  Increase (decrease) in drafts outstanding, net...............................................         272         411        (367)
  Repurchase of treasury stock, at cost........................................................      (2,001)       (838)         --
  Cash dividends to stockholders and cash for fractional shares................................        (624)     (1,288)     (1,450)
  Exercise of stock options....................................................................          88          57         107
                                                                                                  ---------    --------    -------- 
      Net cash provided by financing activities................................................      35,009      21,686      52,316
                                                                                                  ---------    --------    -------- 
Net increase (decrease) in cash and cash equivalents...........................................       6,074     (10,436)      9,660
                                                                                                  ---------    --------    -------- 
Cash and cash equivalents at beginning of year.................................................      15,563      21,637      11,201
                                                                                                  ---------    --------    -------- 
Cash and cash equivalents at end of year.......................................................   $  21,637      11,201      20,861
                                                                                                  =========    ========    ========
Supplemental information:
  Interest paid................................................................................   $  11,402      16,988      19,060
                                                                                                  =========    ========    ========
  Income taxes paid............................................................................   $   1,684       2,377       3,030
                                                                                                  =========    ========    ========
Supplemental schedule of non-cash investing and financing transactions:
  Securitization of mortgage loans into mortgage-backed securities.............................   $      --      11,793      19,366
                                                                                                  =========    ========    ========
  Transfer of mortgage loans to real estate acquired through foreclosure.......................   $     405         313         471
                                                                                                  =========    ========    ========
  Common stock dividend declared...............................................................   $      --       1,989          --
                                                                                                  =========    ========    ========
  Transfer of investment securities held to maturity to available for sale.....................   $      --          --      14,775
                                                                                                  =========    ========    ========
          See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

  (a) Principles of Consolidation

    The accompanying  consolidated  financial statements include the accounts of
Coastal   Financial   Corporation   (the   "Company"),   and  its   wholly-owned
subsidiaries,  Coastal Federal Mortgage,  Inc., Coastal Investments Corporation,
Coastal Technology Services,  Inc. and Coastal Federal Savings Bank (the "Bank")
and its wholly-owned  subsidiary,  Coastal Mortgage Bankers and Realty Co., Inc.
(and  its  wholly-owned  subsidiaries,  Shady  Forest  Development  Corporation,
Sherwood Development Corporation, Ridge Development Corporation, 501 Development
Corporation, North Beach Investments, Inc. and North Strand Property Management,
Inc.). In consolidation,  all significant intercompany balances and transactions
have been eliminated.  Coastal Financial Corporation is a unitary thrift holding
company organized under the laws of the state of Delaware.

    The Company's subsidiary operations consist primarily of the origination and
sale of  conforming  mortgages and the sales of financial  products.  The Bank's
subsidiary  operations  consist  primarily  of the sale of real estate  acquired
through direct  investments and  investments in partnerships  with others in the
mid 1980's.  Investments in real estate partnerships are accounted for using the
equity method.

  (b) Cash and Cash Equivalents

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

  (c) Investment and Mortgage-backed Securities

    Investment  and  mortgage-backed  securities are accounted for in accordance
with Statement of Financial  Accounting  Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", which was adopted by the
Company on October 1, 1994.  Investments are classified into three categories as
follows:  (1)  Held to  Maturity  -- debt  securities  that the  entity  has the
positive intent and ability to hold to maturity, which are reported at amortized
cost;  (2)  Trading  -- debt and  equity  securities  that are  bought  and held
principally for the purpose of selling them in the near term, which are reported
at fair value,  with  unrealized  gains and losses  included in earnings and (3)
Available for Sale -- debt and equity  securities that may be sold under certain
conditions,  which are reported at fair value,  with unrealized gains and losses
excluded  from  earnings and reported as a separate  component of  stockholders'
equity, net of income taxes.
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued

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

    In November 1995, the FASB issued a guide to  implementation of SFAS No. 115
on accounting for certain investments in debt and equity securities which allows
for the one time transfer of certain investments  classified as held to maturity
to available for sale. The Company  reclassified  its investments  classified as
held to maturity to the available for sale  classification  in the first quarter
of fiscal 1996.

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

    The Bank  maintained  liquid  assets  in excess of the  amount  required  by
regulations  during  all  periods  included  in  these  consolidated   financial
statements.  The required amount is 5% of the average daily balances of deposits
and short-term borrowings.  Liquid assets consist principally of cash, including
time deposits and investment securities.
                
  (d) Allowance for Loan and Real Estate Losses

    The Company provides for loan losses on the allowance  method.  Accordingly,
all loan losses are charged to the allowance and all  recoveries are credited to
the  allowance.  Additions  to the  allowance  for loan  losses are  provided by
charges to operations based on various factors which, in management's  judgment,
deserve current  recognition in estimating  losses.  Such factors  considered by
management  include the market value of the  underlying  collateral,  growth and
composition of the loan  portfolios,  the relationship of the allowance for loan
losses to outstanding loans, loss experience,  delinquency trends, and local and
regional economic  conditions.  Management evaluates the carrying value of loans
periodically  and the allowance is adjusted  accordingly.  While management uses
the best information  available to make evaluations,  future  adjustments to the
allowance may be necessary if economic conditions differ  substantially from the
assumptions  used in making the  evaluation.  The  allowance  for possible  loan
losses is subject to periodic  evaluation by various regulatory  authorities and
may be subject to adjustment upon their examination.
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued

    The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan" on October 1, 1995.  This standard  requires  that all  creditors  value
loans at the  loan's  fair value if it is  probable  that the  creditor  will be
unable to collect all amounts due according to the terms of the loan  agreement.
Fair value may be  determined  based upon the  present  value of  expected  cash
flows,  market  price of the  loan,  if  available,  or value of the  underlying
collateral.  Expected  cash flows are  required to be  discounted  at the loan's
effective  interest  rate.  SFAS No. 114 was  amended by SFAS No. 118 to allow a
creditor to use existing methods for recognizing  interest income on an impaired
loan and by requiring  additional  disclosures  about how a creditor  recognizes
interest  income on an impaired loan. The adoption of the standards  required no
increase  in the  allowance  for loan losses and had no impact on net income for
the year ended September 30, 1996.

    Under  SFAS  No.  114,  as  amended  by SFAS  No.  118,  when  the  ultimate
collectibility of an impaired loan's principal is in doubt, wholly or partially,
all cash receipts are applied to principal. When this doubt does not exist, cash
receipts are applied under the contractual  terms of the loan agreement first to
principal then to interest income.  Once the recorded principal balance has been
reduced to zero,  future cash  receipts are applied to interest  income,  to the
extent that any interest has been  foregone.  Further cash receipts are recorded
as recoveries of any amounts previously charged off.

    A loan is also  considered  impaired if its terms are modified in a troubled
debt  restructuring  after October 1, 1995. For these accruing  impaired  loans,
cash  receipts are  typically  applied to principal  and interest  receivable in
accordance with the terms of the restructured loan agreement. Interest income is
recognized  on these  loans  using  the  accrual  method  of  accounting.  As of
September 30, 1996, the Company had no impaired loans.

  (e) Loans Receivable Held for Sale

    Mortgage loans  originated and intended for sale in the secondary market are
carried at the lower of cost or  estimated  market value in the  aggregate.  Net
unrealized  losses  are  provided  for in a  valuation  allowance  by charges to
operations.  At September 30, 1995 and 1996, the Company had approximately  $2.4
million and $6.8  million in mortgage  loans held for sale.  The market value of
loans receivable held for sale exceeded the carrying value at September 30, 1995
and 1996.

  (f) Real Estate Owned and Investments in Real Estate  Partnerships

    Real estate acquired through  foreclosure is initially recorded at the lower
of cost or estimated fair value.  Subsequent to the date of  acquisition,  it is
carried at the lower of cost or fair value, less selling costs. Market values of
real  estate  owned  are  reviewed  regularly  and  allowances  for  losses  are
established when it is determined that the carrying value of real estate exceeds
the fair value  less  selling  costs.  Costs  relating  to the  development  and
improvement  of such property are  capitalized,  whereas those costs relating to
holding the property are charged to expense.
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued

    Real estate  purchased  for  development  and sale and  investments  in real
estate  partnerships are stated at the lower of cost or estimated net realizable
value.  Costs  directly  related  to such  real  estate  are  capitalized  until
construction  required  to bring these  properties  to a saleable  condition  is
completed.  Capitalized  costs  include real estate taxes,  interest,  and other
direct costs incurred during the improvement period.

    Gains on the sale of real  estate  purchased  for  development  and sale are
recorded  at the time of sale  provided  certain  criteria  relating to property
type,  cash down  payment,  loan  terms,  and other  factors  are met.  If these
criteria are not met at the date of sale,  the gain is deferred  and  recognized
using the installment or cost recovery method until they are satisfied, at which
time the remaining deferred gain is recorded as income.

    Market values of real estate purchased for development and sale are reviewed
regularly and  allowances  for losses are  established  when the carrying  value
exceeds the estimated net realizable  value.  In  determining  the estimated net
realizable  value,  the Company  deducts from the  estimated  selling  price the
projected  cost to complete and dispose of the property and the  estimated  cost
(i.e.  interest,  property taxes, etc.) to hold the property to an expected date
of sale.

  (g) Office Properties and Equipment

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

  (h) Uncollected Interest

    The Company  maintains an  allowance  for the loss of  uncollected  interest
primarily  on loans which are ninety days or more past due.  This  allowance  is
reviewed  periodically  and necessary  adjustments,  if any, are included in the
determination of current interest income.

  (i) Loan Fees and Discounts

    The net of  origination  fees  received  and direct  costs  incurred  in the
origination  of loans are  deferred and  amortized  to interest  income over the
contractual life of the loans adjusted for actual  principal  repayments using a
method approximating a level yield.
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued

  (j) Income Taxes

    Effective  October 1, 1993, the Company  adopted SFAS No. 109 which resulted
in a favorable cumulative adjustment of approximately  $664,000.  Deferred taxes
are  provided  for  differences  in  financial  reporting  bases for  assets and
liabilities  as compared with their tax bases.  A current tax liability or asset
is  established  for taxes  presently  payable or refundable  and a deferred tax
liability or asset is established  for future tax items. A valuation  allowance,
if applicable,  is established for deferred tax assets that may not be realized.
The statement  also  eliminates the tax benefit  associated  with the thrift bad
debt  reserves on a  prospective  basis.  Tax bad debt reserves in excess of the
base year amount  (established  as taxable  years  ending  December  31, 1987 or
later), creates a tax liability.

  (k) Loan Sales

    Gains or losses  on sales of loans are  recognized  when  substantially  all
risks and rewards of ownership are  transferred.  The Company sells and services
loans  under  contracts  providing  for  guaranteed  yields  to  buyers  for the
remaining  lives of the loans  which may differ  from the loan  contract  rates.
Gains or losses on such loan sales are determined based on the estimated present
value of the difference  between  estimated future receipts and normal servicing
costs  incurred by the Company.  The carrying  value of any  resulting  asset is
reviewed periodically and, if necessary,  adjustments are charged or credited to
income to reflect changes in the estimated present value of future cash flows.

  (l) Drafts Outstanding

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

  (m) Securities Sold Under Agreement to Repurchase

    The Company has sold an interest in various U.S.  Government  securities  to
certain  customers  who wish to deposit  amounts  greater than  $100,000.  These
agreements  function similarly to a certificate of deposit in that the agreement
is for a fixed length of time at a fixed interest rate. However,  these deposits
are not  insured  by the FDIC but are  insured  by a  security  interest  in the
security. The Company has classified these amounts separately from deposits.

  (n) Reclassifications

    Certain amounts in the 1994 and 1995 consolidated  financial statements have
been reclassified to conform with the 1996 presentation.
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(2) INVESTMENT SECURITIES
    The  amortized  cost and  market  value  of  investment  securities  held to
maturity at September 30, 1995 is summarized as follows:
<TABLE>
<CAPTION>
                                                                                    1995
                                                             -----------------------------------------------
                                                                            Gross         Gross
                                                             Amortized    Unrealized    Unrealized    Market
                                                               Cost         Gains         Losses      Value
                                                               ----         -----         ------      -----
                                                                             (In thousands)
<S>                                                           <C>              <C>          <C>       <C>
U.S. Government and agency obligations:
  Due within one year.....................................    $ 1,329          --            (1)      1,328
  Due after one but within five years.....................      1,000          --           (31)        969
                                                              -------         ---           ---       -----
                                                              $ 2,329          --           (32)      2,297
                                                              =======                       ===       =====
</TABLE>
    The amortized cost and market value of investment  securities  available for
sale at September 30, 1996 is summarized as follows:
<TABLE>
<CAPTION>
                                                                                  1996
                                                             -----------------------------------------------
                                                                            Gross         Gross
                                                             Amortized    Unrealized    Unrealized    Market
                                                               Cost         Gains         Losses      Value
                                                               ----         -----         ------      -----
                                                                             (In thousands)
<S>                                                           <C>              <C>          <C>       <C>
U.S. Government and agency obligations:
  Due within one year.....................................    $    --          --            --          --
  Due after one but within five years.....................     13,037          --          (150)      12,887
  Due after five years....................................      4,297          --           (43)       4,254
                                                              -------         ---           ---       -----
                                                              $17,334          --          (193)      17,141
                                                              =======                      ====       ======
</TABLE>

    There were no  investment  securities  available  for sale at September  30,
1995.

    There were no realized  gains or losses during the year ended  September 30,
1995. The Company had gross realized  losses of $18,000 and gross realized gains
of $12,000 for the year ended September 30, 1996.

    Certain  investment  and  mortgage-backed  securities  are pledged to secure
other borrowed money and customer deposits in excess of FDIC insurance coverage.
The  carrying  value  of the  securities  pledged  at  September  30,  1996  was
$4,784,246 with a market value of $4,832,237. 
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(3) MORTGAGE-BACKED SECURITIES

    Mortgage-backed  securities held to maturity at September 30, 1995 consisted
of the following:
<TABLE>
<CAPTION>
                                                                                    1995
                                                             -----------------------------------------------
                                                                            Gross         Gross
                                                             Amortized    Unrealized    Unrealized    Market
                                                               Cost         Gains         Losses      Value
                                                               ----         -----         ------      -----
                                                                             (In thousands)
<S>                                                           <C>              <C>          <C>       <C>
FNMA......................................................    $   538          --            (9)         529
GNMA......................................................        992          --           (11)         981
FHLMC.....................................................     11,246         148            --       11,394
                                                              -------         ---           ---       ------
                                                              $12,776         148           (20)      12,904
                                                              =======         ===           ===       ======
</TABLE>
    Mortgage-backed   securities  available  for  sale  at  September  30,  1996
consisted of the following:
<TABLE>
<CAPTION>
                                                                                    1996
                                                             -----------------------------------------------
                                                                            Gross         Gross
                                                             Amortized    Unrealized    Unrealized    Market
                                                               Cost         Gains         Losses      Value
                                                               ----         -----         ------      -----
                                                                             (In thousands)
<S>                                                           <C>              <C>          <C>       <C>
FNMA......................................................    $ 2,469          12            --        2,481
GNMA......................................................      5,330          --           (98)       5,232
FHLMC.....................................................     18,861         455            --       19,316
                                                              -------         ---           ----      ------
                                                              $26,660         467           (98)      27,029
                                                              =======         ===           ===       ======
</TABLE>
    The Company had gross realized gains of $54,000 on sales of  mortgage-backed
securities and no realized losses on sales in 1994. There were no realized gains
or losses for the year ended  September 30, 1995.  For the year ended  September
30, 1996, there were gross realized gains of $189,000 and no realized losses.
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(4) LOANS RECEIVABLE, NET

    Loans receivable, net at September 30 consisted of the following:
<TABLE>
<CAPTION>


                                                                                       1995       1996
                                                                                     ---------   -------
                                                                                       (In thousands)
<S>                                                                                  <C>         <C>
First mortgage loans:
  Single family to 4 family units.................................................   $ 226,488   224,570
  Other...........................................................................      54,401    61,180
  Construction loans..............................................................      27,905    34,566
Consumer and commercial loans:
  Installment consumer loans......................................................      34,123    31,601
  Mobile home loans...............................................................       1,204     1,103
  Savings account loans...........................................................         705       436
  Equity lines of credit..........................................................      13,210    12,441
  Commercial and other loans......................................................      19,610    26,946
                                                                                     ---------   -------
                                                                                       377,646   392,843
Less:
  Allowance for loan losses.......................................................       3,578     4,172
  Deferred loan fees (costs)......................................................          71      (286)
  Undisbursed portion of loans in process.........................................      17,178    18,589
                                                                                     ---------   -------
                                                                                     $ 356,819   370,368
                                                                                     =========   =======
</TABLE>
    The changes in the allowance  for loan losses for the years ended  September
30 consisted of the following:
<TABLE>
<CAPTION>
                                                                                   1944     1995     1996
                                                                                  ------    -----    -----
                                                                                       (In thousands)
<S>                                                                                  <C>         <C>

Beginning allowance............................................................   $2,753    3,353    3,578
Provision for loan losses......................................................      510      202      790
Loan recoveries................................................................      230      255       82
Loan charge-offs...............................................................     (140)    (232)    (278)
                                                                                  ------    -----    -----
                                                                                  $3,353    3,578    4,172
                                                                                  ======    =====    =====

</TABLE>
    Non-accrual  loans  totaled  approximately  $1.3  million  and  $445,000  at
September 30, 1995 and 1996, respectively.
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(4) LOANS RECEIVABLE, NET -- Continued
    Directors  and  officers  of the Company  are  customers  of the Bank in the
ordinary  course of business.  Deposits and loans of directors and officers bear
interest  at  rates  and have  terms  consistent  with  those  offered  to other
customers.  Loans to officers  and  directors of the Company for the years ended
September 30, are summarized as follows:
<TABLE>
<CAPTION>
                                                                                   1994     1995     1996
                                                                                  ------    -----    -----
                                                                                       (In thousands)
<S>                                                                               <C>       <C>      <C>
Beginning balance..............................................................   $1,915    1,805    1,598
New loans......................................................................      304       --       --
Repayments.....................................................................     (414)    (207)    (256)
                                                                                  ------    -----    -----
Ending balance.................................................................   $1,805    1,598    1,342
                                                                                  ======    =====    =====

</TABLE>

    The carrying  amounts and fair values of loans  receivable  at September 30,
1995 and 1996 are as follows (In thousands):
<TABLE>
<CAPTION>
                                                                     1995                        1996
                                                           ------------------------      ----------------------
                                                           Carrying      Calculated      Carrying    Calculated
                                                            Amount       Fair Value       Amount     Fair Value
                                                           --------        -------       -------       -------
<S>                                                        <C>             <C>           <C>           <C>
Mortgage loans..........................................   $291,545        297,543       321,951       330,025
Consumer loans..........................................     36,032         35,578        24,098        23,520
Equity lines of credit..................................     13,210         13,479        12,441        12,715
Commercial loans........................................     19,610         20,892        16,050        16,082
Allowance for loan losses...............................     (3,578)        (3,578)       (4,172)       (4,172)
                                                           --------        -------       -------       -------
                                                           $356,819        363,914       370,368       378,170
                                                           ========        =======       =======       =======
</TABLE>
    Management  has made  estimates of fair value  discount  rates and estimated
prepayment  rates that it believes to be  reasonable  based upon present  market
conditions.  However,  because  there is no active  market for many of the above
financial instruments,  management believes such information is of limited value
and has no basis to determine  whether the fair value  presented  above would be
indicative  of the value  which  could be  negotiated  during  an  actual  sale.
Furthermore,  this information is as of September 30, 1995 and 1996.  Changes in
market  interest and  prepayment  rates since  September 30, 1995 and 1996 would
have  significant  impact on the fair value  presented  and should be considered
when analyzing this financial data.

    A portion of the credit lines and commercial loans have interest rate floors
which may increase  the value of these  loans.  No increase in fair market value
was assigned for these interest rate floors.
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(4) LOANS RECEIVABLE, NET -- Continued

    At September 30, 1996,  excluding single family home loans and the fact that
the majority of the loan portfolio is located in the Company's  immediate market
area,  there were no  concentrations  of loans in any type of industry,  type of
property,  or to one  borrower  that  exceeded 10% of the  Company's  total loan
portfolio.  The  Company  does have 200 loans  aggregating  approximately  $12.3
million which were originated on individual  income producing  condominium units
in two projects in which the Bank's  subsidiaries  were a partner.  At September
30, 1996, none of these loans were over sixty days  delinquent.  The majority of
these loans have been  outstanding  greater than four years and management  does
not  believe  that they  represent  a  significant  risk in the loan  portfolio.
Approximately  $700,000  of  these  loans  have  been  sold to  other  financial
institutions.

    At September 30, 1995 and 1996, the Company had  commitments  outstanding to
originate  loans  totaling   approximately   $19.0  million  and  $9.0  million,
respectively,  (excluding undisbursed portion of loans in process).  Commitments
on loan  originations  are made at prevailing  market  interest  rates,  and are
generally  limited  to 60  days  from  date  of  application.  Additionally,  at
September 30, 1995 and 1996, the Company had undisbursed  equity lines of credit
of approximately $17.1 million and $15.6 million, respectively.

    Loans serviced for the benefit of others  amounted to  approximately  $109.4
million, $110.7 million and $115.1 million at September 30, 1994, 1995 and 1996,
respectively.

    As  disclosed  in note 9,  certain  mortgage  loans  are  pledged  to secure
advances from the Federal Home Loan Bank of Atlanta ("FHLB").
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(5) INVESTMENT IN REAL ESTATE PARTNERSHIPS

    The Bank's  subsidiaries are general  partners in real estate  partnerships,
with  ownership  interests  ranging  up to  50%,  originally  organized  for the
purposes of  constructing  and marketing  residential  real estate.  Since 1988,
these  subsidiaries  have not entered into any new partnerships and the activity
of these partnerships has primarily consisted of selling the remaining interests
in  their  investments.   Condensed  combined  financial   information  for  the
partnerships at or for the year ended at September 30 is summarized as follows:
<TABLE>
<CAPTION>
                                                                                          1995       1996
                                                                                          ----       ----
                                                                                           (In thousands)
<S>                                                                                        <C>         <C>
Assets (principally land and improvements, at cost), net...............................    $222        113
                                                                                           ====        ===
Liabilities -- principally deferred revenue on land sold in 1994 in the amount of $233.      76          5
                                                                                           ----        --- 
Partners' equity:
  Bank's subsidiaries..................................................................      73         46
  Others...............................................................................      73         62
                                                                                           ----        --- 
                                                                                            146        108
                                                                                           ----        --- 
    Liabilities and partners' equity...................................................    $222        113
                                                                                           ====        ===
</TABLE>
<TABLE>
<CAPTION>
                                               1994       1995       1996
                                               ----       ----       ----
                                                    (In thousands)
<S>                                           <C>         <C>        <C>
Sales......................................   $1,767      2,016       523
Cost of sales..............................    1,213        885       140
                                              ------      -----      ----
  Gross profit on sales....................      554      1,131       383
Other (expense) income, net................       47         78      (223)
                                              ------      -----      ----
  Net income...............................   $  601      1,209       160
                                              ======      =====       ===
Bank's equity in partnership's income......   $  310        611       115
                                              ======        ===       ===
</TABLE>
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(6) OFFICE PROPERTY AND EQUIPMENT, NET

    Office  property  and  equipment,  net  at  September  30  consisted  of the
following:
<TABLE>
<CAPTION>
                                                              1995        1996
                                                              ----        ----
                                                               (In thousands)
<S>                                                         <C>          <C>
Land.....................................................   $ 1,314       1,132
Building and improvements................................     4,447       4,990
Furniture, fixtures and equipment........................     5,267       5,964
                                                            -------      ------
                                                             11,028      12,086
Less accumulated depreciation............................     5,613       6,350
                                                            -------      ------
                                                            $ 5,415       5,736
                                                            =======       =====
</TABLE>

    The Company leases office space and various equipment.  Total rental expense
for the  years  ended  September  30,  1994,  1995 and  1996  was  approximately
$547,000,  $121,000,  and  $86,000  respectively.  The rental  expense  for 1994
included a one-time  charge of $150,000 as a result of a lease  buyout  penalty.
This charge was due to the decision to convert from an in-house  computer system
to a data processing center.

    Future  minimum  rental  payments  for  operating  leases  having  remaining
noncancelable  lease  terms in excess of one year at  September  30, 1996 are as
follows (In thousands):
<TABLE>
<CAPTION>

      <S>                                              <C>
      1997............................................ $ 29
      1998............................................   27
      1999............................................   18
      2000............................................   --
      2001............................................   --
                                                       ----
                                                       $ 74
                                                       ====

</TABLE>
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(7) INVESTMENT REQUIRED BY LAW

    Investment   in   stock   of  the   FHLB  is   required   by  law  of  every
Federally-insured savings institution. No ready market exists for this stock and
it has no quoted market value. However, redemption of this stock has been at par
value.

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

(8) DEPOSITS

    Deposits at September 30, consisted of the following:
<TABLE>
<CAPTION>
                                                    1995                   1996
                                            -------------------------------------------
                                                        Weighted               Weighted
                                              Amount      Rate       Amount       Rate
                                            --------------------    -------------------
                                                       (Dollars in thousands)
<S>                                         <C>           <C>       <C>           <C>
Transaction accounts:
  Noninterest bearing.......................$ 16,494        --%     $ 19,926        --%
  NOW.......................................  29,852      1.53        35,654      1.23
  Money market checking.....................  41,516      4.38        84,997      4.85
                                            --------      ----      --------      ----
    Total transaction accounts..............  87,862      2.59       140,577      3.24
                                            --------      ----      --------      ----
Passbook accounts:
  Regular passbooks.........................  42,664      2.55        39,287      2.67
  Money market..............................   3,757      2.44         3,553      2.44
                                            --------      ----      --------      ----
    Total passbook accounts.................  46,421      2.54        42,840      2.66
                                            --------      ----      --------      ----
Certificate accounts:
   0.00 -  5.99%............................  76,939                 113,871
   6.00 -  8.00%............................  61,402                  15,623
   8.01 - 10.00%............................     124                     130
  10.01 - 12.00%............................     351                     389
                                            --------      ----      --------      ----
    Total certificate accounts.............. 138,816      6.08       130,013      5.64
                                            --------      ----      --------      ----
                                            $273,099      4.35%     $313,430      4.12%
                                            ========      ====      ========      ==== 

</TABLE>
    The  aggregate  amount of deposit  accounts with a minimum  denomination  of
$100,000 or more was $56,391,948 and $60,405,591 at September 30, 1995 and 1996,
respectively.
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(8) DEPOSITS -- Continued

    The amounts and scheduled  maturities of  certificate  accounts at September
30, are as follows:
<TABLE>
<CAPTION>
                                                      1995        1996
                                                   ---------    -------
                                                       (In thousands)
<S>                                                <C>          <C>
Within 1 year...................................   $ 117,724     94,651
After 1 but within 2 years......................       8,749     28,241
After 2 but within 3 years......................       8,449      5,484
Thereafter......................................       3,894      1,637
                                                   ---------    -------
                                                   $ 138,816    130,013
                                                   =========    =======

</TABLE>
    Interest  expense on deposits for the years ended  September 30 consisted of
the following:
<TABLE>
<CAPTION>
                                              1994        1995         1996
                                              ----        ----         ----
                                                      (In thousands)
<S>                                        <C>           <C>         <C>
Transaction accounts....................   $ 1,310       1,925        3,162
Passbook accounts.......................     1,895       1,581        1,599
Certificate accounts....................     5,311       6,384        6,928
                                           -------       -----       ------
                                           $ 8,516       9,890       11,689
                                           =======       =====       ======
</TABLE>
    The fair  value of demand  deposit  accounts  is $134.3  million  and $183.4
million which was the amount  currently  payable at September 30, 1995 and 1996,
respectively.  The fair value of  certificate  accounts  was $139.6  million and
$130.3  million  compared to a book value of $138.8 and $130.0 and was estimated
by discounting the amounts payable at the  certificate  rates currently  offered
for deposits of similar remaining maturities. The fair value estimates above did
not include the  substantial  benefit  that  results  from the low cost  funding
provided by the deposit  liabilities  compared to the cost of borrowing funds in
the market.
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

 (9) ADVANCES FROM FHLB

    Advances from the FHLB at September 30 consisted of the following:
<TABLE>
<CAPTION>
                                                      1995                    1996
                                              ---------------------   ----------------------
                                                           Weighted                Weighted
                                               Amount        Rate       Amount       Rate
                                              ---------------------   ----------------------
                                                               (In thousands)
<S>                                           <C>            <C>      <C>            <C>                                           
Fiscal Year Maturity
1996........................................  $36,989        6.40%    $     --         -- %
1997........................................   12,368        6.87       54,404       5.68
1998........................................   21,634        6.62       20,120       5.90
1999........................................    5,905        7.57       13,105       6.35
2000........................................    7,461        6.44        6,861       6.46
2001 or greater.............................    8,963        7.05       10,063       6.90
                                              -------        ----     --------       ----
                                              $93,320        6.65%    $104,553       5.97 %
</TABLE>
    Stock  in  the  FHLB  of  Atlanta  and  specific  first  mortgage  loans  of
approximately  $160,947,000  and  $223,400,000  at September  30, 1995 and 1996,
respectively, are pledged as collateral for these advances. The Bank has adopted
the policy of pledging  excess  collateral to  facilitate  future  advances.  At
September 30, 1996,  the excess first  mortgage loan  collateral  pledged to the
FHLB will support additional borrowings of approximately $63 million.

    The estimated fair value of the FHLB advances at September 30, 1995 and 1996
is $93.7  million and $104.2  million.  This  estimate  is based on  discounting
amounts  payable at  contractual  rates using current  market rates for advances
with similar maturities.
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(10) INCOME TAXES
    Income  tax  expense  for the years  ended  September  30  consisted  of the
following:
<TABLE>
<CAPTION>
                                               Current    Deferred    Total
                                               -------    --------    -----
<S>                                             <C>         <C>       <C>
1994:
  Federal...................................    1,569         72      1,641
  State.....................................      256          9        265
                                                -----       ----      -----
                                                1,825         81      1,906
                                                =====         ==      =====
1995:
  Federal...................................    1,697        229      1,926
  State.....................................      268         38        306
                                                -----       ----      -----
                                                1,965        267      2,232
                                                =====        ===      =====
1996:
  Federal...................................    2,528       (646)     1,882
  State.....................................      403       (121)       282
                                                -----       ----      -----
                                                2,931       (767)     2,164
                                                =====       ====      =====
</TABLE>
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(10) INCOME TAXES -- Continued

    The tax effect of the Company's temporary  differences between the financial
statement  carrying  amounts and tax basis of assets and  liabilities  that give
rise to the net deferred tax asset at September 30, 1995 and 1996 related to the
following:
<TABLE>
<CAPTION>
                                                                                         1995       1996
                                                                                         ----       ----
                                                                                         (In thousands)
<S>                                                                                     <C>         <C>
Deferred tax assets:
  Allowance for loan losses..........................................................   $1,373      1,600
  Accrued medical reserves...........................................................       54         79
  Other real estate reserves and deferred gains on other real estate.................       76         75
  Accrued FDIC premiums..............................................................       --        615
  Net operating loss carryforwards...................................................      138        138
  Other..............................................................................       38         99
                                                                                        ------      -----
Total deferred tax assets............................................................    1,679      2,606
Less valuation allowance.............................................................     (138)      (138)
                                                                                        ------      -----
Net deferred tax assets..............................................................    1,541      2,468
                                                                                         =====      =====
Deferred tax liabilities:
  Tax bad debt reserve in excess of base year amount.................................      499        552
  Property and equipment principally due to differences in depreciation..............      185        190
  FHLB stock, due to stock dividends not recognized for tax purposes.................      356        356
  Investment in Joint Venture........................................................      150         86
  Unrealized gain on securities available for sale...................................       --         69
  Deferred loan fees.................................................................       --        204
  Other..............................................................................      170        134
                                                                                        ------      -----
Total deferred tax liabilities.......................................................    1,360      1,591
                                                                                        ------      -----
Net deferred tax asset...............................................................   $  181        877
                                                                                        ======        ===

</TABLE>
    The net deferred  tax asset is included in other assets in the  consolidated
financial  statements.  The  valuation  allowance  relates  to  the  state  loss
carryforwards  which  may not be  ultimately  realized  to  reduce  taxes of the
Company.  A portion  of the  change in the net  deferred  tax asset  relates  to
unrealized  gains and losses on securities  available for sale. A current period
deferred tax expense of $69,000 for the unrealized gains on securities available
for sale has been recorded directly to stockholders'  equity. The balance of the
change in the deferred tax asset  results from the current  period  deferred tax
benefit of $767,000.
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(10) INCOME TAXES -- Continued

    Income taxes of the Company differ from the amounts computed by applying the
Federal  income tax rate of 34% for the years  ended  September  30 to  earnings
before income taxes as follows:
<TABLE>
<CAPTION>
                                                        1994     1995     1996
                                                        ----     ----     ----
                                                            (In thousands)
<S>                                                    <C>       <C>      <C>
Computed federal income taxes........................  $1,718    2,024    2,001
State tax, net of federal benefit....................     175      201      173
Other, net...........................................      13        7      (10)
                                                       ------    -----    -----
Total income tax expense.............................  $1,906    2,232    2,164
                                                       ======    =====    =====
</TABLE>
    The Bank has been  permitted  under the  Internal  Revenue Code to deduct an
annual addition to the tax reserve for bad debts in determining  taxable income,
subject to certain limitations.  This addition may differ significantly from the
bad debt expense for financial  reporting purposes and was based on either 8% of
taxable income (the  "Percentage of Taxable Income  Method") or actual loan loss
experience  (the  "Experience  Method") for the years ended  September 30, 1994,
1995 and 1996. As a result of recent tax legislation,  the Bank will be required
to recapture  tax bad debt reserves in excess of pre-1988 base year amounts over
a period of  approximately  eight  years.  In  addition,  for the period  ending
September  30, 1997,  the Bank will be required to change its overall tax method
of  accounting  for bad debts to either the  experience  method or the  specific
charge-off method.

    Retained  earnings  at  September  30, 1995 and 1996  include  approximately
$5,200,000  representing  pre-1988  tax bad debt base year  reserve  amounts for
which no deferred  income tax liability has been provided  since these  reserves
are not  expected  to reverse  until  indefinite  future  periods  and may never
reverse. Circumstances that would require an accrual of a portion or all of this
unrecorded tax liability are a reduction in qualifying  loan levels  relative to
the end of 1987, failure to meet the tax definition of a bank, dividend payments
in excess of current year or  accumulated  tax  earnings  and profits,  or other
distributions in dissolution, liquidation or redemption of the Bank's stock.

(11) BENEFIT PLANS

    The Company participates in a multiple-employer defined benefit pension plan
covering  substantially  all employees.  Separate  actuarial  valuations are not
available  for each  participating  employer,  nor are plan  assets  segregated.
Pension expense for the years ended September 30, 1994, 1995 and 1996 was minor.
Plan assets exceeded the present value of accumulated  plan benefits at June 30,
1996, the latest actuarial valuation date.

    The Company has a defined contribution plan covering substantially all
employees. The Company matches employee contributions based upon the Company
meeting certain operating results. Matching contributions made by the Company
were approximately $40,000, $28,000 and $149,000 for fiscal years 1994, 1995 and
1996, respectively.
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
 
(12) REGULATORY MATTERS

    At  September  30,  1996,  the  Bank's   loans-to-one   borrower  limit  was
approximately  $4.6 million.  At September  30, 1996,  the Bank is in compliance
with the core,  tangible and risk-based  capital  requirements  and loans-to-one
borrower limits.

    The regulatory requirements for the Bank and the Bank's compliance with such
requirements at September 30, 1996 is as follows.
<TABLE>
<CAPTION>
                                                                                                 Percent
                                                                                     Amount     of Assets
                                                                                     ------     ---------
                                                                                        (In thousands)
<S>                                                                                  <C>          <C>
Stockholders' equity for the Bank.................................................   $27,318       5.94%
Reduction for investments in and advances to "Nonincludable" subsidiaries.........       (47)      (.01)
                                                                                     -------      -----
Tangible capital..................................................................    27,271       5.93
Tangible capital requirement......................................................     6,859       1.50
                                                                                     -------      -----
Excess............................................................................   $20,412       4.43%
                                                                                     =======       ==== 
Core capital......................................................................    27,271       5.93
Core capital requirement..........................................................    13,719       3.00
                                                                                     -------      -----
Excess............................................................................   $13,552       2.93%
                                                                                     =======       ==== 
Risk-based capital................................................................    30,777      10.41
Risk-based capital requirements...................................................    23,641       8.00
                                                                                     -------      -----
Excess............................................................................   $ 7,136       2.41%
                                                                                     =======       ==== 
</TABLE>

(13) LIQUIDATION ACCOUNT

    In  conjunction  with the Bank's  conversion  and sale of common  stock,  as
required  by Office of Thrift  Supervision  regulations,  on October 6, 1990 the
Bank  established a  liquidation  account and will maintain this account for the
benefit of the remaining  eligible account holders.  The initial balance of this
liquidation account was equal to the Bank's net worth defined by OTS regulations
as of the date of the latest statement of financial  condition  contained in the
final offering circular. In the event of a complete liquidation of the Bank (and
only in such  event)  each  eligible  holder  shall be  entitled  to  receive  a
liquidation  distribution  from this  account in the amount of the then  current
adjusted balance for deposits then held, before any liquidation distribution may
be  made to the  stockholders.  The  Bank  is  prohibited  from  declaring  cash
dividends or repurchasing its capital stock if it would cause a reduction in the
Bank's net worth below either the liquidation account or the statutory net worth
requirements set by the OTS. 
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(14) EARNINGS PER SHARE

    Earnings per share for the years ended September 30, 1994, 1995 and 1996 are
computed by dividing net earnings by the weighted average number of common share
equivalents  outstanding during the year. Common share equivalents  include,  if
applicable,  dilutive  stock option share  equivalents  determined  by using the
treasury  stock  method.  All share and per share  data have been  retroactively
restated for all common stock dividends.

(15) STOCK OPTION PLAN

    The  Company's  stock option plan  provides for stock  options to be granted
primarily to directors,  officers and other key employees. Options granted under
the stock  option plan may be incentive  stock  options or  non-incentive  stock
options.  The  remaining  shares of stock  reserved for the stock option plan at
September 30, 1996 amounted to  approximately  35,000  shares.  All  outstanding
options  have been  retroactively  restated to reflect the effects of the common
stock dividends.  The stock option plan is administered by three  non-management
directors of the  Company.  At September  30, 1996,  the Bank had the  following
options outstanding:
<TABLE>
<CAPTION>
                                                                   Options
                                                     Options    Available for    Option
Grant Date                                           Granted      Exercise       Price      Expiration Date
----------                                           -------      --------       -----      ---------------
<S>                                                 <C>             <C>        <C>         <C>
September 26, 1990................................  119,703         100%       $ 1.42      September 26, 2000
November 28, 1990.................................      238          100          1.42     November 28, 2000
May 29, 1991......................................    4,988          100          1.96     May 29, 2001
August 4, 1992....................................   17,904           80          3.77     August 4, 2002
January 21, 1994..................................    2,461           40         11.89     January 21, 2004
April 20, 1994....................................    2,461           40         13.41     April 20, 2004
June 30, 1994.....................................    4,102           40         11.89     June 30, 2004
September 16, 1994................................    6,603           40         12.19     September 16, 2004
September 28, 1994................................      820           40         12.19     September 28, 2004
November 14, 1994.................................    1,542           20         11.89     November 14, 2004
March 22, 1995....................................    3,117           20         12.19     March 22, 2005
May 1, 1995.......................................   32,813           20         10.98     May 1, 2005
September 27, 1995................................   39,064           20         12.16     September 27, 2005
November 2, 1995..................................   31,250           --         12.80     November 2, 2005
November 15, 1995.................................   15,626           --         12.80     November 15, 2005
May 6, 1996.......................................    3,125           --         15.60     May 6, 2006
</TABLE>
    During the years ended September 30, 1994, 1995 and 1996, options for
47,760, 34,027, and 57,647 shares, at an average of $1.93, $1.43, and $1.95 per
share, respectively, were exercised.
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(16) COMMON STOCK DIVIDENDS

    On January  27,  1993,  August 18,  1993 and  January 7, 1994,  the  Company
declared a 3 for 2 stock split in the form of common stock dividends aggregating
327,330,  495,084 and 745,179 shares. On May 30, 1995, the Company declared a 5%
common  stock  dividend   aggregating  102,003  shares  at  a  market  value  of
approximately  $2  million.  On January 9, 1996 and June 20,  1996,  the Company
declared  a five for four  stock  split  in the  form of a 25%  stock  dividend,
aggregating  approximately  542,000 and 687,000 shares  respectively.  All share
data  has  been  retroactively  restated  to give  effect  to the  common  stock
dividends. 

(17) CASH DIVIDENDS

    On June 28, 1994,  September 16, 1994,  December 14, 1994 and March 22, 1995
the Company  declared a quarterly  cash dividend of $.09 per share.  On June 21,
1995,  September  27, 1995,  December  27, 1995 and March 27, 1996,  the Company
declared a  quarterly  cash  dividend  of $.10 per share.  On June 27,  1996 and
September 25, 1996, the Company declared quarterly cash dividends of $.11,
respectively.

(18) LEGAL MATTERS

    The legal  proceedings  against the Company are generally  incidental to its
business. Based upon the present status of these cases, management believes that
liabilities  arising from these proceedings,  if any, will not have a materially
adverse effect on the consolidated  financial  position or results of operations
of the Company.
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(19) QUARTERLY FINANCIAL DATA (UNAUDITED)

    Quarterly  operating data for the years ended  September 30 is summarized as
follows (In thousands, except share data):
<TABLE>
<CAPTION>
                                                                          First        Second        Third       Fourth
                                                                         Quarter       Quarter      Quarter      Quarter
                                                                         -------       -------      -------      -------
<S>                                                                     <C>           <C>          <C>          <C>
1995:
  Total interest income..............................................   $    6,984        7,483        7,885        7,976
  Total interest expense.............................................        3,693        4,272        4,669        4,638
                                                                        ----------   ----------    ---------    ---------    
  Net interest income................................................        3,291        3,211        3,216        3,338
  Provision for loan losses..........................................           75           20           50           57
                                                                        ----------   ----------    ---------    ---------    
  Net interest income after provision for loan losses................        3,216        3,191        3,166        3,281
  Other income.......................................................          825          787          723          914
  General and administrative expenses................................        2,569        2,594        2,399        2,590
                                                                        ----------   ----------    ---------    ---------    
  Earnings before income taxes.......................................        1,472        1,384        1,490        1,605
  Income taxes.......................................................          530          529          544          629
                                                                        ----------   ----------    ---------    ---------    
  Net earnings.......................................................   $      942          855          946          976
                                                                        ==========   ==========    =========    =========
  Earnings per common share..........................................   $      .26          .24          .27          .28
                                                                        ==========   ==========    =========    =========
  Weighted average shares outstanding................................    3,592,000    3,553,000    3,550,000    3,523,000
                                                                        ==========   ==========    =========    =========
</TABLE>
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(19) QUARTERLY FINANCIAL DATA (UNAUDITED)  -- Continued
<TABLE>
<CAPTION>

                                                                          First        Second        Third       Fourth
                                                                         Quarter       Quarter      Quarter      Quarter
                                                                         -------       -------      -------      -------
<S>                                                                     <C>           <C>          <C>          <C>
1996:
  Total interest income..............................................   $    8,408        8,577        8,748        8,987
  Total interest expense.............................................        4,757        4,685        4,661        4,988
                                                                        ----------   ----------    ---------    ---------    
  Net interest income................................................        3,651        3,892        4,087        3,999
  Provision for loan losses..........................................          115          225          300          150
                                                                        ----------   ----------    ---------    ---------    
  Net interest income after provision for loan losses................        3,536        3,667        3,787        3,849
  Other income.......................................................          935        1,132        1,291        1,273
  General and administrative expenses*...............................        2,792        2,955        3,115        4,723
                                                                        ----------   ----------    ---------    ---------    
  Earnings before income taxes.......................................        1,679        1,844        1,963          399
  Income taxes*......................................................          621          676          729          137
                                                                        ----------   ----------    ---------    ---------    
  Net earnings.......................................................   $    1,058        1,168        1,234          262
                                                                        ==========   ==========    =========    =========
  Earnings per common share..........................................   $      .30          .32          .34          .07
                                                                        ==========   ==========    =========    =========
  Weighted average shares outstanding................................    3,558,000    3,595,000    3,598,000    3,628,000
                                                                        ==========   ==========    =========    =========
</TABLE>
 
* The three month period ended September 30, 1996 includes a special  assessment
  from the  FDIC  for the  recapitalization  of the  SAIF of  $1,620,000,  and a
  related  reduction  in  income  taxes  of  $615,000.  Excluding  this  special
  assessment,  net income for the three months ended would have been $1,267,000,
  or $0.35 per share.
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

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

    The following is condensed financial information of Coastal Financial
Corporation  (parent company only), the primary asset of which is its investment
in its bank subsidiary, for the periods indicated. (In thousands):
<TABLE>
<CAPTION>
                         Coastal Financial Corporation
                            Condensed Balance Sheets
                          September 30, 1995 and 1996
                                                                   1995      1996
                                                                   ----      ----
<S>                                                              <C>        <C>
Assets
Cash..........................................................   $   442       145
Investment in subsidiaries....................................    24,749    27,855
Deferred tax asset............................................        86        36
Other assets..................................................        11        34
                                                                 -------    ------
      Total assets............................................   $25,288    28,070
                                                                 =======    ======
Liabilities and Stockholders' Equity
Accounts payable (principally dividends)......................       468       389
Total stockholders' equity....................................    24,820    27,681
                                                                 -------    ------
      Total liabilities and stockholders' equity..............   $25,288    28,070
                                                                 =======    ======
</TABLE>
<TABLE>
<CAPTION>
                               Coastal Financial Corporation
                             Condensed Statement of Operations
                   For the years ended September 30, 1994, 1995 and 1996

                                                                   1994     1995     1996
                                                                   ----     ----     ----
<S>                                                              <C>       <C>      <C>
Income:
  Management fees..............................................  $   --      230      108
  Dividends from subsidiary....................................   3,100    1,725    1,090
  Equity in undistributed earnings of subsidiaries.............     871    2,013    2,616
                                                                 ------    -----    -----
      Total income.............................................   3,971    3,968    3,814
                                                                 ------    -----    -----
Expenses:
  Amortization of organization cost............................       8        8       14
  Professional fees............................................     181      177       38
  Supplies and printing........................................      26       40        7
  Other expenses...............................................      26       25       32
  Income tax (benefit) expense.................................     (82)      (2)       2
                                                                 ------    -----    -----
      Total expenses...........................................     159      248       93
                                                                 ------    -----    -----
Net income.....................................................  $3,812    3,720    3,721
                                                                 ======    =====    =====
</TABLE>
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(20) COASTAL FINANCIAL CORPORATION FINANCIAL STATEMENTS (PARENT COMPANY ONLY) 
     -- Continued
<TABLE>
<CAPTION>
                         Coastal Financial Corporation
                       Condensed Statement of Cash Flows
             For the years ended September 30, 1994, 1995 and 1996

                                                                                  1994       1995      1996
                                                                                  ----       ----      ----
<S>                                                                             <C>        <C>       <C>
Operating activities:
  Net income.................................................................   $ 3,812     3,720     3,721
  Adjustments to reconcile net income to net cash (used) provided by:
    Equity in undistributed net income of subsidiary.........................      (871)   (2,013)   (2,616)
    Increase (decrease) in other assets......................................        41       (46)       27
    Increase (decrease) in other liabilities.................................       308        82       (79)
                                                                                -------    ------    ------
      Total cash provided by operating activities............................     3,290     1,743     1,053
                                                                                -------    ------    ------
Financing activities:
  Purchase of Treasury Stock.................................................    (2,001)     (838)       --
  Capital contributions to subsidiary........................................        --      (150)       --
  Cash dividend to shareholders..............................................      (617)   (1,282)   (1,433)
  Proceeds from stock options................................................        88        56       107
  Other financing activities, net............................................        (6)       59       (24)
                                                                                -------    ------    ------
      Total cash used by financing activities................................    (2,536)   (2,155)   (1,350)
                                                                                -------    ------    ------
Net increase (decrease) in cash and cash equivalents.........................       754      (412)     (297)
Cash and cash equivalents at beginning of the year...........................       100       854       442
                                                                                -------    ------    ------
Cash and cash equivalents at end of the year.................................   $   854       442       145
                                                                                =======       ===       ===

</TABLE>
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

(21)CARRYING  AMOUNTS  AND FAIR  VALUE OF  FINANCIAL  INSTRUMENTS 

    The carrying amounts and fair value of financial instruments as of September
30, 1995 and 1996 are summarized below:
<TABLE>
<CAPTION>
                                                                       1995                      1996
                                                             -------------------------------------------------
                                                              Carrying    Estimated     Carrying    Estimated
                                                               Amount     Fair Value     Amount     Fair Value
                                                             -----------------------    ----------------------
                                                                  (In thousands)            (In thousands)
<S>                                                           <C>          <C>          <C>           <C>
Financial Assets
  Cash and cash equivalents................................   $ 11,201       11,201     $ 20,861       20,861
  Investment securities....................................      2,329        2,297       17,471       17,473
  Mortgage-backed securities...............................     12,776       12,904       27,029       27,029
  Loans receivable held for sale...........................      2,393        2,453        6,803        6,905
  Loans receivable, net....................................    356,819      363,914      370,368      378,170
  FHLB stock...............................................      4,726        4,726        5,228        5,228
                                                              --------      -------     --------      -------
                                                              $390,244      397,495     $447,760      455,666
                                                              ========      =======     ========      =======
Financial Liabilities
  Deposits:
    Demand accounts........................................    134,283      134,283      183,417      183,417
    Certificate accounts...................................    138,816      139,565      130,013      130,303
  Advances from Federal Home Loan Bank.....................     93,320       93,718      104,553      104,241
  Securities sold under agreements to repurchase...........      2,677        2,677        3,365        3,365
  Other borrowings.........................................         --           --        1,922        1,922
                                                              --------      -------     --------      -------
                                                              $369,096      370,243     $423,270      423,248
                                                              ========      =======     ========      =======
</TABLE>
    The Company had $41.0 million of off-balance sheet financial  commitments as
of  September  30, 1996,  which are  commitments  to originate  loans and unused
consumer lines of credit. Since these obligations are generally based on current
market rates,  the carrying amount is considered to be a reasonable  estimate of
fair value.

    Fair value estimates are made at a specific point in time, based on relevant
market  information  and  information  about  the  financial  instrument.  These
estimates do not reflect any premium or discount that could result from offering
for sale the Company's  entire  holdings of a particular  financial  instrument.
Because no active  market  exists  for a  significant  portion of the  Company's
financial  instruments,  fair value  estimates are based on judgments  regarding
future expected loss experience,  current economic conditions,  current interest
rates  and  prepayment  trends,   risk   characteristics  of  various  financial
instruments,  and other  factors.  These  estimates are subjective in nature and
involve  uncertainties and matters of significant  judgment and therefore cannot
be  determined  with  precision.  Changes  in any of these  assumptions  used in
calculating fair value would also significantly  affect the estimates.  Further,
the fair value  estimates were  calculated as of September 30, 1996.  Changes in
market interest rates and prepayment  assumptions could significantly change the
fair value.
<PAGE>
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

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

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

(22) ACQUISITION

    On November 2, 1995, the Company  acquired  Granger-O'Harra  Mortgage,  Inc.
Granger-O'Harra  is a mortgage  brokerage  company  located in  Florence,  South
Carolina  with  assets  of   approximately   $1.0   million.   In  fiscal  1995,
Granger-O'Harra  originated  approximately  $20 million in mortgage  loans.  The
Company  exchanged  approximately  17,500  shares  of its stock for the stock of
Granger-O'Harra. In 1996, Granger-O'Harra Mortgage, Inc. was merged into Coastal
Federal Mortgage, Inc. The transaction was accounted for as a purchase and there
were no material intangibles resulting from the transaction.

(23) COMMITMENTS AND CONTINGENCIES

    The Company has a $8 million  outstanding  line of credit with a  commercial
bank.  The  line of  credit  is  secured  by 51% of the  stock of the  Bank.  At
September 30, 1996, there was no outstanding balance on this line of credit.
<PAGE>
                               BOARD OF DIRECTORS
                 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

COASTAL FINANCIAL CORPORATION

DIRECTORS

James C. Benton
President, C. L. Benton &
Sons, Inc.

G. David Bishop
Chairman, WCI Management Group Inc.

Harold D. Clardy
President, Chapin Company

James T. Clemmons
Chairman
Coastal Financial Corporation

James P. Creel
President, Creel Corporation

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

Samuel A. Smart
Retired, United States Department of Defense

Wilson B. Springs
Owner, H. B. Springs Company

ADVISORY DIRECTORS

James H. Dusenbury
Dusenbury, Hendrix & Little
Attorneys at Law

William J. Sigmon, Sr.
Former President and Chief Executive Officer
Burroughs &
Chapin Company
<PAGE>
COASTAL FEDERAL SAVINGS BANK

DIRECTORS

James C. Benton
President, C. L. Benton &
Sons, Inc.

G. David Bishop
Chairman, WCI Management Group Inc.

Harold D. Clardy
President, Chapin Company

James T. Clemmons
Chairman
Coastal Federal Savings Bank

James P. Creel
President, Creel Corporation

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

Samuel A. Smart
Retired, United States Department of Defense

Wilson B. Springs
Owner, H. B. Springs Company

DIRECTOR EMERITUS

William J. Sigmon, Sr.
Former President and Chief
Executive Officer
Burroughs & Chapin Company

ADVISORY DIRECTOR

James H. Dusenbury
Dusenbury, Hendrix & Little
Attorneys at Law
<PAGE>

COASTAL INVESTMENTS
CORPORATION

DIRECTORS

James C. Benton
President, C. L. Benton &
Sons, Inc.

G. David Bishop
Chairman, WCI Management Group Inc.

James P. Creel
President, Creel Corporation

James H. Dusenbury
Attorney
Dusenbury, Hendrix & Little
Attorneys at Law

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

J. Pinckney Kellett, IV
President and Chief Executive Officer
Coastal Investments Corporation

Jerry L. Rexroad, CPA
Chief Financial Officer
Coastal Investments Corporation

COASTAL TECHNOLOGY SOLUTIONS

DIRECTORS

James T. Clemmons
Chairman
Coastal Financial Corporation

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

Jimmy R. Graham
President and Chief
Executive Officer
Coastal Technology Solutions

Jerry L. Rexroad, CPA
Chief Financial Officer
Coastal Technology Solutions

Samuel A. Smart
Retired, United States
Department of Defense
<PAGE>

COASTAL FEDERAL MORTGAGE

DIRECTORS

James T. Clemmons
Chairman
Coastal Financial Corporation

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

Richard L. Granger
President and Chief Executive Officer
Coastal Federal Mortgage

Robert S. O'Harra
Executive Vice President and
Chief Operating Officer
Coastal Federal Mortgage

Jerry L. Rexroad, CPA
Chief Financial Officer
Coastal Federal Mortgage

Wilson B. Springs
Owner, H.B. Springs Company

Phillip G. Stalvey
Executive Vice President
Coastal Financial Corporation
<PAGE>
                                LEADERSHIP GROUP
                          COASTAL FEDERAL SAVINGS BANK

Dana J. Berry
Deposit Sales Group Leader
North Myrtle Beach

James W. Boyd
Vice President
Credit Administration Group Leader

Denise F. Brown
Deposit Sales Group Leader
Surfside

O. Kendall Buckner
Vice President
Regional Sales Group Leader
South Strand Region

Cynthia L. Buffington
Item Processing Group Leader

Glenn T. Butler
Vice President
Management Information Systems
Group Leader

Edward F. Cagle
Senior Vice President
Corporate Communications Group Leader

Pamela D. Collins
Deposit Sales Group Leader
Dunes

Susan J. Cooke
Vice President
Corporate Support Group Leader

Patty A. Coveno
Deposit Sales Group Leader
Conway

Robert D. Douglas
Senior Vice President
Human Resources Group Leader

James T. Faulk
Assistant Vice President
Collections Group Leader

Rita E. Fecteau
Vice President
Controller
<PAGE>
Trina S. Ferguson
Assistant Vice President
Residential Loan Administration
Group Leader

J. Daniel Fogle
Vice President
Regional Sales Group Leader
Conway Region

Mary L. Geist
Vice President
Computer Services Group Leader

Michael C. Gerald
President and Chief Executive Officer

Belinda B. Gillespie
Assistant Vice President
Office Sales Group Leader
Florence

Jimmy R. Graham
Executive Vice President
Information Systems Group Leader

Allen W. Griffin
Executive Vice President
Sales Servicing Group Leader

Don C. Hamilton
Assistant Vice President
Loan Sales Group Leader

Lisa B. James
Assistant Vice President
Deposit Servicing Group Leader

Ruth S. Kearns
Senior Vice President
Marketing Group Leader

Cecil H. Kennedy
Corporate Services Group Leader

Libby H. Kronenwetter
Assistant Vice President
Business Development Officer
North Strand Region

Debra M. Lambe
Newcomer Sales Officer

Scott W. Lander
Vice President
Regional Sales Group Leader
North Carolina
<PAGE>
Regina H. Lewis
Assistant Vice President
Community Relations Officer

Edward L. Loehr
Vice President
Budgeting and Treasury

Sherry A. Maloni
Assistant Vice President
Office Sales Group Leader
Waccamaw Medical Park

Margie A. Marlowe
Customer Delight Group Leader

William H. McCormick
Office Sales Group Leader
Socastee

Lauren E. Miller
Staff Development Coordinator

Erin P. Mitchell
Assistant Vice President
Commercial Sales Officer

David C. Murray
Office Sales Group Leader
Oak Street

Jerry L. Rexroad, CPA
Executive Vice President
Chief Financial Officer

Doug E. Shaffer
Vice President
Regional Sales Group Leader
North Strand Region

Cathe P. Singleton
Office Sales Group Leader
Murrells Inlet

J. Marcus Smith, Jr.
Vice President
Account Servicing Group Leader

Phillip G. Stalvey
Executive Vice President
Sales Group Leader

H. Delan Stevens
Loan Sales Group Leader
Conway

Donna P. Todd
Sales Support Officer
<PAGE>
Jeff A. Usher
Assistant Vice President
Loan Sales Group Leader
Surfside

Jerry A. Vereen
Vice President
Regional Sales Group Leader
Corporate Region

Cindy L. Walsh
Loan Servicing Group Leader

Douglas W. Walters
Loan Sales Group Leader
North Myrtle Beach

David E. Williams
Office Sales Group Leader
Dunes
<PAGE>
                      COASTAL FEDERAL SAVINGS BANK OFFICES
                                 (803) 692-BANK

Oak Street Branch*
2619 North Oak Street
Myrtle Beach, SC 29577-3129
(803) 448-5151

Conway Branch*
310 Highway 378
Conway, SC 29526
(803) 444-0225

Dunes Branch*
7500 North Kings Highway
Myrtle Beach, SC 29572
(803) 444-0241

Florence Branch*
1385 Alice Drive
Florence, SC 29505
(803) 444-1299

Murrells Inlet Branch*
Highway 17 South & Inlet Crossing
Murrells Inlet, SC 29576
(803) 444-0200

North Myrtle Beach Branch*
521 Main Street
North Myrtle Beach, SC 29582
(803) 444-0265

Socastee Branch*
4801 Socastee Boulevard
Myrtle Beach, SC 29575
(803) 444-0281

Surfside Branch*
112 Highway 17 South &
Glenns Bay Road
Surfside Beach, SC 29575
(803) 444-0250

Waccamaw Medical Park Branch*
112 Waccamaw Medical Park Drive
Conway, SC 29526
(803) 444-0216

North Carolina Consumer Loan Office
7290 Beach Drive, South West
Sunset Beach, NC 28468
P.O. Box 6188
South Brunswick, NC 28470
(910) 579-8160

* COASTAL BANKER EXPRESS
 24-Hour Drive-Up Automatic Teller
 Machine Locations
<PAGE>
                        COASTAL INVESTMENTS CORPORATION
                                 (803) 626-0491

Genie R. Blanton
Chief Compliance Officer
Conway Investment Center
(803) 444-0229

Victoria J. Damore
Registered Assistant
Myrtle Beach Investment Center
(803) 626-0491

Shirley A. English, CFP
Investment Services Representative
North Strand Investment Center
(803) 444-0269

Christopher A. Fulmer
Investment Service Representatives
South Strand Investment Center
(803) 444-0203

Shelby S. Hardee
Investment Services Representative
West Region Investment Center
(803) 444-0229

John Michael Hill
Investment Services Representative
Myrtle Beach Investment Center
(803) 626-0491

J. Pinckney Kellett, IV
President and Chief Executive Officer
Myrtle Beach Investment Center
(803) 626-0491

Jerry L. Rexroad, CPA
Chief Financial Officer
Myrtle Beach Investment Center
(803) 448-5151
<PAGE>
                            COASTAL FEDERAL MORTGAGE
                                 (803) 662-2273



Richard L. Granger           
President and                
Chief Executive Officer      
                             
Edward F. Hurley             
Vice President               
                             
Robert S. O'Harra
Executive Vice President and
Chief Operating Officer
                                      
Jerry L. Rexroad, CPA
Chief Financial Officer

Nancy L. Watts
Assistant Vice President
                                      
                          COASTAL TECHNOLOGY SOLUTIONS
                                 (803) 626-0460
                                                           
Glenn T. Butler
Senior Vice President
          
Jimmy R. Graham
President and Chief Executive
Officer

Jerry L. Rexroad, CPA      
Chief Financial Officer    
<PAGE>
                             CORPORATE INFORMATION

    Common Stock and Dividend  Information The common stock of Coastal Financial
Corporation is quoted through the NASDAQ Stock Market under the symbol CFCP. For
information   contact  J.C.  Bradford  at   1-800-829-4522,   Trident  Financial
Corporation at  1-800-222-2618,  Robinson-Humphrey  at  1-800-241-0077,  Herzog,
Heine,  Geduld,  Inc. at  1-800-523-4936,  Raymond James &  Associates,  Inc. at
1-800-441-4103 or Wheat First Butcher & Singer Securities at 1-800-678-3232.  As
of November 30, 1996 the Corporation had 766  Shareholders  and 3,447,187 shares
of common  stock  outstanding.  This does not  reflect  the number of persons or
entities  who hold  stock in nominee  or  "street  name."  The prices  have been
adjusted to reflect the stock dividends discussed below.

                          Market Price of Common Stock

    The table below  reflects  the high and low bid stock  prices  published  by
NASDAQ for each quarter.
<TABLE>
<CAPTION>
                                            High      Low
Fiscal Year 1995:                           Bid       Bid
                                          ------    ------
<S>                                       <C>       <C>
  First Quarter........................   $13.40    $11.58
  Second Quarter.......................    12.19     11.58
  Third Quarter........................    12.48     10.97
  Fourth Quarter.......................    13.12     11.84
Fiscal Year 1996:
  First Quarter........................    13.44     12.16
  Second Quarter.......................    16.60     12.48
  Third Quarter........................    17.80     15.20
  Fourth Quarter.......................    21.00     17.60
</TABLE>
                                   Form 10-K

    A copy of Coastal  Financial  Corporation's  Annual  Report on Form 10-K, as
filed with the Securities  Exchange  Commission for the year ended September 30,
1996, may be obtained  without a charge by writing to the Shareholder  Relations
Officer at the Corporate Address.

                         Annual Meeting of Shareholders

    The Annual Meeting of Shareholders of Coastal Financial  Corporation will be
held at the Myrtle Beach Martinique,  7100 North Ocean Boulevard,  Myrtle Beach,
South Carolina, on Monday, January 27, 1997 at 2:00 p.m., Eastern Standard Time.
<PAGE>
                             Additional Information

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

Corporate Offices

Coastal Financial Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577
803-692-BANK

Transfer Agent and Registrar
 
Registrar and Transfer Company 
P.O. Box 1010
Cranford,  NJ 07016 
(800) 866-1340

Independent Certified Public Accountants

KPMG Peat Marwick LLP
P.O.  Box 10529 
Greenville, South Carolina 29603

General Counsel

James H. Dusenbury
Dusenbury,  Hendrix & Little
602 27th Avenue 
Myrtle Beach,  South  Carolina  29577 

Special  Counsel 

Breyer & Aggugia
1300 I Street,  N.W.  
Suite 470 East  
Washington,  DC 20005 

Shareholder Relations Officer

Susan J. Cooke
Coastal  Financial  Corporation
2619 Oak Street
Myrtle Beach, South Carolina 29577 
803-692-BANK 

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






























                         COASTAL FINANCIAL CORPORATION







                                Corporate Office
                                2619 Oak Street
                          Myrtle Beach, SC 29577-3129
                                 (803) 448-5151