UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                         ------------------------------

                                    FORM 10-Q

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

            For the quarterly period ended December 31, 2004

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

            For the transition period from ________ to __________

                         Commission File Number: 0-19684

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

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

     2619 OAK STREET, MYRTLE BEACH, S. C.                          29577
--------------------------------------------------------------------------------
  (Address of principal executive offices)                      (Zip Code)

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

      Indicate by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the  Securities  Exchange Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                  YES |X|       NO |_|

      Indicate by check mark whether the registrant is an accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act)

                  YES |X|       NO |_|

      Indicate  the  number of shares  outstanding  of each of the  registrant's
classes of common stock, as of December 31, 2004.

Common Stock $.01 Par Value Per Share               15,941,459 Shares
---------------------------------------------------------------------
               (Class)                                (Outstanding)*

*On December  15, 2004,  the Company  declared a 10% stock  dividend.  The stock
dividend was January 20, 2005 to Shareholders of record on January 6, 2005.


                                       1
<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2004

TABLE OF CONTENTS                                                           PAGE
-----------------                                                           ----

PART I- Financial Information
Item
     1. Consolidated Financial Statements (unaudited):

        Consolidated Statements of Financial Condition
        as of September 30, 2004 and December 31, 2004                         3

        Consolidated Statements of Operations for the three
        months ended December 31, 2003 and 2004                                4

        Consolidated Statements of Stockholders' Equity
        and Comprehensive Income for the three months ended
        December 31, 2003 and 2004                                             5

        Consolidated Statements of Cash Flows for the three
        months ended December 31, 2003 and 2004                              6-7

        Notes to Consolidated Financial Statements                          8-13

     2. Management's Discussion and Analysis of
        Financial Condition and Results of Operations                      13-23

     3. Quantitative and Qualitative Disclosures About                        23
        Market Risk

     4. Controls and Procedures                                               24

Part II - Other Information
Item
     1. Legal Proceedings                                                     24

     2. Unregistered Sales of Equity Securities and Use of Proceeds           24

     3. Defaults Upon Senior Securities                                       24

     4. Submission of Matters to a Vote of Securities Holders                 24

     5. Other Information                                                     24

     6. Exhibits                                                              25

Signatures                                                                    26

Exhibits

    31(a) Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)    27

      (b) Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)    28

    32(a) Section 1350 Certification (Chief Executive Officer)                29

      (b) Section 1350 Certification (Chief Financial Officer)                30


                                       2
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                   September 30,      December 31,
                                                      2004                 2004
                                                      ----                 ----
                                                             (Unaudited)
                                                            (In thousands,
                                                          except share data)
<S>                                                 <C>               <C>
ASSETS:
Cash and amounts due from banks                     $    28,401       $    16,647
Short-term interest-bearing deposits                      1,251             2,085
Investment securities available for sale                 23,449            23,311
Mortgage-backed securities available for sale           374,283           438,112
Investment securities held to maturity                    7,840            10,000
Loans receivable (net of allowance for
   loan losses of $11,077 at September 30,
   2004 and $11,412 at December 31, 2004)               790,730           804,574
Loans receivable held for sale                            8,246            12,937
Real estate acquired through foreclosure                    785               674
Office property and equipment, net                       18,844            19,718
Federal Home Loan Bank stock, at cost                    16,900            20,328
Accrued interest receivable on loans                      2,877             3,137
Accrued interest receivable on securities                 2,473             2,378
Cash value of life insurance                             21,627            21,867
Other assets                                              7,779             7,832
                                                    -----------       -----------
                                                    $ 1,305,485       $ 1,383,600
                                                    ===========       ===========

LIABILITIES AND STOCKHOLDERS' EQUITY:

LIABILITIES:
Deposits                                            $   753,379       $   746,966
Securities sold under agreements to repurchase          107,173           120,910
Advances from Federal Home Loan Bank                    328,507           397,207
Junior subordinated debt                                 15,464            15,464
Drafts outstanding                                        2,792             1,199
Advances by borrowers for property taxes
  and insurance                                           1,750               538
Accrued interest payable                                  1,502             1,628
Other liabilities                                         9,570            10,437
                                                    -----------       -----------
  Total liabilities                                   1,220,137         1,294,349
                                                    -----------       -----------

STOCKHOLDERS' EQUITY:
Serial preferred stock, 1,000,000 shares
   authorized and unissued                                   --                --
Common stock, $.01 par value, 25,000,000
   shares authorized; 15,897,076 shares at
   September 30, 2004 and 15,941,459 shares
   at December 31, 2004 issued and outstanding              159               159
Additional paid-in capital                               10,640            10,769
Retained earnings                                        73,533            76,547
Treasury stock, at cost (108,557 shares at
   September 30, 2004 and 64,174 shares at
   December 31, 2004)                                    (1,182)             (753)
Accumulated other comprehensive income,
   net of tax                                             2,198             2,529
                                                    -----------       -----------
   Total stockholders' equity                            85,348            89,251
                                                    -----------       -----------
                                                    $ 1,305,485       $ 1,383,600
                                                    ===========       ===========
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       3
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2004

<TABLE>
<CAPTION>
                                                                 2003                2004
                                                                 ----                ----
                                                                          (Unaudited)
                                                                        (In thousands,
                                                                      except share data)
<S>                                                           <C>                <C>
Interest income:
   Loans receivable                                           $     11,077       $     12,740
   Investment securities                                               479              1,144
   Mortgage-backed securities                                        3,959              4,006
   Other                                                                20                 67
                                                              ------------       ------------
   Total interest income                                            15,535             17,957
                                                              ------------       ------------

Interest expense:
   Deposits                                                          2,594              2,507
   Securities sold under agreements to
     repurchase                                                        566                567
   Advances from Federal Home Loan Bank                              2,404              3,168
   Other borrowings                                                    161                200
                                                              ------------       ------------
   Total interest expense                                            5,725              6,442
                                                              ------------       ------------
   Net interest income                                               9,810             11,515
   Provision for loan losses                                           550                350
                                                              ------------       ------------
   Net interest income after provision
     for loan losses                                                 9,260             11,165
                                                              ------------       ------------

Other income:
   Fees and service charges on loan and deposit accounts               902              1,090
   Gain on sales of loans held for sale                                441                310
   Gain (loss) on sales of investment securities
     available for sale and mortgage-backed
     securities available for sale                                    (200)               158
   Loss from real estate owned                                         (39)               (39)
   Income from sales of non-depository products                        553                460
   Federal Home Loan Bank stock dividends                              109                137
   Other income                                                        560                651
                                                              ------------       ------------
                                                                     2,326              2,767
                                                              ------------       ------------
General and administrative expenses:
   Salaries and employee benefits                                    3,994              4,423
   Net occupancy, furniture and fixtures
     and data processing expense                                     1,530              1,756
   FDIC insurance premium                                               27                 27
   FHLB prepayment penalties                                             9                 --
   Marketing expense                                                   181                511
   Other expense                                                       873              1,063
                                                              ------------       ------------
                                                                     6,614              7,780
                                                              ------------       ------------
Income before income taxes                                           4,972              6,152
Income taxes                                                         1,653              2,107
                                                              ------------       ------------

Net income                                                    $      3,319       $      4,045
                                                              ============       ============

Net income per common share
     Basic                                                    $        .19       $        .23
                                                              ============       ============
     Diluted                                                  $        .18       $        .22
                                                              ============       ============

Weighted average common shares outstanding
     Basic                                                      17,218,000         17,510,000
                                                              ============       ============
     Diluted                                                    18,315,000         18,513,000
                                                              ============       ============

Dividends per share                                           $        .04       $       .045
                                                              ============       ============
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       4
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2004

<TABLE>
<CAPTION>
                                                                                                     Accumulated
                                                                                                        Other
                                                                                                        Compre-
                                                        Additional                                      hensive         Total
                                            Common       Paid-In      Retained         Treasury         Income       Stockholders'
                                            Stock        Capital      Earnings           Stock          (Loss)          Equity
                                           --------     ---------     --------         --------        --------        --------
                                                                            (Unaudited)
                                                                           (In thousands)
<S>                                       <C>            <C>           <C>             <C>             <C>             <C>
Balance at September
  30, 2003                                $    156       $ 10,208      $ 63,030        $ (3,375)       $  3,688        $ 73,707
Net income                                      --             --         3,319              --              --           3,319
Other comprehensive
 income:
 Unrealized gains arising
 during period, net of
 taxes of $704                                  --             --            --              --            (561)             --
 Less: reclassification
 adjustment for gains
 included in net income,
 net of taxes of $81                            --             --            --              --             124              --
                                                                                                       --------
Other comprehensive income                      --             --            --              --            (437)           (437)
                                                                                                       --------        --------
Comprehensive income                            --             --            --              --              --           2,882
                                                                                                                       --------
Exercise of stock
  options                                        1            144          (193)            461              --             413
Cash dividends                                  --             --          (713)             --              --            (713)
                                          --------       --------      --------        --------        --------        --------
Balance at December
  31, 2003                                $    157       $ 10,352      $ 65,443        $ (2,914)       $  3,251        $ 76,289
                                          ========       ========      ========        ========        ========        ========

Balance at September
  30, 2004                                $    159       $ 10,640      $ 73,533        $ (1,182)       $  2,198        $ 85,348
Net income                                      --             --         4,045              --              --           4,045
Other comprehensive
 income:
 Unrealized gains arising
 during period, net of
 taxes of $266                                  --             --            --              --             429              --
 Less: reclassification
 adjustment for gains
 included in net income,
 net of taxes of $60                            --             --            --              --             (98)             --
                                                                                                       --------
Other comprehensive income                      --             --            --              --             331             331
                                                                                                       --------        --------
Comprehensive income                            --             --            --              --              --           4,376
                                                                                                                       --------
Exercise of stock
  options                                       --            129          (242)            429              --             316
Cash dividends                                  --             --          (789)             --              --            (789)
                                          --------       --------      --------        --------        --------        --------
Balance at December
  31, 2004                                $    159       $ 10,769      $ 76,547        $   (753)       $  2,529        $ 89,251
                                          ========       ========      ========        ========        ========        ========
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       5
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2004

<TABLE>
<CAPTION>
                                                               2003           2004
                                                               ----           ----
                                                                   (Unaudited)
                                                                 (In thousands)
<S>                                                         <C>            <C>
Cash flows from operating activities:
  Net income                                                $   3,319      $   4,045
  Adjustments to reconcile net income to net
        cash provided by operating activities:
  Depreciation                                                    552            598
  Provision for loan losses                                       550            350
  (Gain) loss on sale of investment securities
        available for sale and mortgage-backed
        securities available for sale                             200           (158)
  Origination of loans receivable held for sale               (13,544)       (19,653)
  Proceeds from sales of loans receivable held for sale         3,640          4,084
  Loss on early extinguishment of debt                              9             --
  Increase in:
        Cash value of life insurance                             (239)          (240)
        Other assets                                           (1,831)           (53)
        Accrued interest receivable                              (291)          (165)
  Increase (decrease) in:
        Accrued interest payable                                   (8)           126
        Other liabilities                                       1,328            660
                                                            ---------      ---------

        Net cash used in operating activities                  (6,315)       (10,406)
                                                            ---------      ---------

Cash flows from investing activities:
  Proceeds from sales of investment of investment
        securities available for sale                              --            739
  Proceeds from maturities of investment
        securities available for sale                              --          1,950
  Proceeds from issuer call of investment
        securities held to maturity                                --          7,840
  Purchases of investment securities available                   (314)        (2,150)
        for sale
  Purchases of investment securities held to maturity              --        (10,000)
  Proceeds from sales of mortgage-backed securities
        available for sale                                     94,017         29,662
  Purchases of mortgage-backed securities
        available for sale                                   (124,608)      (103,328)
  Principal collected on mortgage-backed
        securities available for sale                          32,293         21,010
  Origination of loans receivable, net                       (105,891)      (139,522)
  Proceeds from sale of loan participations                        --          5,842
  Principal collected on loans receivable                      81,365        119,073
  Purchase of bank-owned life insurance                        (4,500)            --
  Proceeds from sales of real estate
        acquired through foreclosure                              374            524
  Purchases of office properties and equipment                   (714)        (1,472)
  Purchases of FHLB stock, net                                 (2,005)        (3,428)
                                                            ---------      ---------

         Net cash used in investing activities                (29,983)       (73,260)
                                                            ---------      ---------
</TABLE>

                                                                     (CONTINUED)


                                       6
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2004 (CONTINUED)

<TABLE>
<CAPTION>
                                                                  2003            2004
                                                                  ----            ----
                                                                        (Unaudited)
                                                                      (In thousands)
<S>                                                             <C>            <C>
Cash flows from financing activities:
  Decrease in deposits, net                                     $ (14,770)     $  (6,413)
  Increase (decrease) in securities sold under
     agreement to repurchase, net                                 (19,171)        13,737
  Proceeds from FHLB advances                                     213,300        195,500
  Repayment of FHLB advances                                     (137,500)      (126,800)
  Prepayment penalties on early extinguishment of debt                 (9)            --
  Decrease in advance payments by borrowers
     for property taxes and insurance, net                         (1,005)        (1,212)
  Decrease in drafts outstanding, net                                (359)        (1,593)
  Cash dividends to stockholders                                     (713)          (789)
  Exercise of stock options                                           413            316
                                                                ---------      ---------

       Net cash provided by financing activities                   40,186         72,746
                                                                ---------      ---------

       Net increase (decrease) in cash and cash equivalents         3,888        (10,920)
                                                                ---------      ---------
Cash and cash equivalents at beginning
     of the period                                                 21,575         29,652
                                                                ---------      ---------
Cash and cash equivalents at end
     of the period                                              $  25,463      $  18,732
                                                                =========      =========

Supplemental information:
     Interest paid                                              $   5,733      $   6,316
                                                                =========      =========

     Income taxes paid                                          $      30      $      --
                                                                =========      =========

Supplemental schedule of non-cash investing
     and financing transactions:

  Securitization of mortgage loans into
     mortgage-backed securities                                 $  14,054      $  10,878
                                                                =========      =========

  Transfer of mortgage loans to real
     estate acquired through foreclosure                        $      82      $     413
                                                                =========      =========
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       7
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) BASIS OF PRESENTATION

The accompanying  unaudited  consolidated  financial statements were prepared in
accordance with  instructions for Form 10-Q and,  therefore,  do not include all
disclosures  necessary  for a  complete  presentation  of  financial  condition,
results  of  operations,  cash  flows and  changes  in  stockholders'  equity in
conformity with accounting principles generally accepted in the United States of
America. All adjustments, consisting only of normal recurring accruals, which in
the opinion of management  are necessary  for fair  presentation  of the interim
financial  statements,  have been  included.  The results of operations  for the
three-month period ended December 31, 2004 are not necessarily indicative of the
results  that may be  expected  for the  entire  fiscal  year.  These  unaudited
consolidated  financial  statements  should be read in conjunction  with Coastal
Financial  Corporation and  Subsidiaries' the ("Company")  audited  consolidated
financial  statements  and related notes for the year ended  September 30, 2004,
included in the  Company's  2004 Annual  Report to  Stockholders.  The principal
business of the Company is conducted  by its  wholly-owned  subsidiary,  Coastal
Federal Bank (the "Bank"). The information presented herein, therefore,  relates
primarily to the Bank.

Certain prior period amounts have been  reclassified  to conform to current year
presentation.

(2) INVESTMENT SECURITIES AVAILABLE FOR SALE

The unrealized losses on investment securities were attributable to increases in
interest rates, rather than credit quality.  The unrealized losses are comprised
of four  securities  at  September  30, 2004 and December 31, 2004 that have had
continuous losses of less than 12 months. There were ten securities at September
30, 2004 and six  securities  at December 31, 2004,  with  continuous  losses 12
months or longer. None of the individual investment securities had an unrealized
loss that exceeded 5% of its amortized cost in either period.

(3) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE

Gross unrealized losses on mortgage-backed securities and the length of time the
securities have been in a continuous loss position were as follows:

<TABLE>
<CAPTION>
                                                                    September 30, 2004
                             -----------------------------------------------------------------------------------------------
                                  Less than 12 Months               12 Months or Longer                     Total
                             ---------------------------       ---------------------------       ---------------------------
                                 Fair         Unrealized          Fair          Unrealized          Fair          Unrealized
                                Value           Losses            Value           Losses            Value           Losses
                                -----           ------            -----           ------            -----           ------
<S>                          <C>                    <C>            <C>              <C>             <C>               <C>
Collateralized Mortgage      $   29,362             (221)           2,113              (98)          31,475             (319)
  Obligations
FNMA                             21,027             (116)          22,117             (545)          43,144             (661)
GNMA                              6,456               (5)              --               --            6,456               (5)
FHLMC                            46,457             (226)          20,829             (567)          67,286             (793)
                             ----------       ----------       ----------       ----------       ----------       ----------
                             $  103,302             (568)          45,059           (1,210)         148,361           (1,778)
                             ==========       ==========       ==========       ==========       ==========       ==========

<CAPTION>
                                                                    December 31, 2004
                             -----------------------------------------------------------------------------------------------
                                  Less than 12 Months               12 Months or Longer                     Total
                             ---------------------------       ---------------------------       ---------------------------
                                 Fair         Unrealized          Fair          Unrealized          Fair          Unrealized
                                Value           Losses            Value           Losses            Value           Losses
                                -----           ------            -----           ------            -----           ------
<S>                          <C>                    <C>            <C>              <C>             <C>               <C>
Collateralized Mortgage      $   40,014             (216)           4,274              (30)          44,288             (246)
  Obligations
FNMA                             27,908             (454)          13,579             (192)          41,487             (646)
GNMA                                976               (1)              --               --              976               (1)
FHLMC                            39,364             (192)          23,792             (504)          63,156             (696)
                             ----------       ----------       ----------       ----------       ----------       ----------
                             $  108,262             (863)          41,645             (726)         149,907           (1,589)
                             ==========       ==========       ==========       ==========       ==========       ==========
</TABLE>


                                       8
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONTINUED

(3) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE - CONTINUED

The  unrealized  losses  on  mortgage-backed  securities  were  attributable  to
increases in interest rates,  rather than credit quality.  The unrealized losses
are  comprised of 25 securities at September 30, 2004 and December 31, 2004 that
have had  continuous  losses of less than 12 months.  There were 8 securities at
September  30, 2004 and 10  securities  at December  31, 2004,  with  continuous
losses 12 months or longer. None of the individual  investment securities had an
unrealized loss that exceeded 5% of its amortized cost in either period.

(4) LOANS RECEIVABLE, NET

Loans receivable, net consists of the following:

                                                 September 30,    December 31,
                                                     2004             2004
                                                 -------------    ------------
                                                          (Unaudited)
                                                         (In thousands)
First mortgage loans:
   Single family to four family units             $ 329,287        $ 334,670
   Land and land development                         99,697           89,449
   Residential lots                                  29,839           30,896
   Other, primarily commercial real estate          182,924          195,487
   Residential construction loans                    82,789           88,754
   Commercial construction loans                     10,503            8,753

Consumer and commercial loans:
   Installment consumer loans                        18,024           19,562
   Mobile home loans                                  4,618            4,641
   Savings account loans                              2,058            2,196
   Equity lines of credit                            30,906           32,305
   Commercial and other loans                        32,101           32,987
                                                  ---------        ---------
                                                    822,746          839,700
Less:
   Allowance for loan losses                         11,077           11,412
   Deferred loan costs, net                            (674)            (586)
   Undisbursed portion of loans in process           21,613           24,300
                                                  ---------        ---------

                                                  $ 790,730        $ 804,574
                                                  =========        =========

The changes in the allowance for loan losses consist of the following for the
three months ended:

                                                Three Months Ended December 31,
                                                -------------------------------
                                                    2003              2004
                                                    ----              ----
                                                          (Unaudited)
                                                    (Dollars in thousands)

Allowance at beginning of period                  $   9,832        $  11,077
Provision for loan losses                               550              350
                                                  ---------        ---------
Recoveries:
 Residential loans                                       --               --
 Commercial loans                                        67               14
 Consumer loans                                          17               33
                                                  ---------        ---------
   Total recoveries                                      84               47
                                                  ---------        ---------

Charge-offs:
 Residential loans                                       --               --
 Commercial loans                                        40                5
 Consumer loans                                         109               57
                                                  ---------        ---------
   Total charge-offs                                    149               62
                                                  ---------        ---------
   Net charge-offs                                       65               15
                                                  ---------        ---------
 Allowance at end of period                       $  10,317        $  11,412
                                                  =========        =========


                                       9
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED

(4) LOANS RECEIVABLE, NET - CONTINUED

Ratio of allowance to total net loans
 outstanding at the end of the period                           1.43%      1.40%
                                                                ====       ====

Ratio of net charge-offs to average
 total loans outstanding during the period (annualized)          .04%       .01%
                                                                ====       ====

Non-accrual  loans,  which are  primarily  loans over  ninety  days  delinquent,
totaled  approximately  $7.0  million and $5.6  million at December 31, 2003 and
2004,  respectively.  For the three  months  ended  December  31, 2004 and 2003,
interest income,  which would have been recorded,  would have been approximately
$126,000  and  $70,000,  respectively,  had  non-accruing  loans been current in
accordance with their original terms.

At December 31, 2004,  impaired  loans  totaled  $4.0  million.  There were $4.2
million in impaired  loans at December 31, 2003.  Included in the  allowance for
loan losses at December 31, 2004 was $409,000 related to impaired loans compared
to $362,000 at December 31, 2003.  The average  recorded  investment in impaired
loans for the three months ended December 31, 2004 was $3.6 million  compared to
$4.6 million for the three months ended  December 31, 2003.  Interest  income of
$35,000 was  recognized  on impaired  loans for the quarter  ended  December 31,
2004.  Interest  income of $108,000  was  recognized  on impaired  loans for the
quarter ended December 31, 2003.

(5) DEPOSITS

Deposits consist of the following:

                                    September 30, 2004        December 31, 2004
                                   -------------------       -------------------
                                              Weighted                  Weighted
                                               Average                   Average
                                   Amount       Rate         Amount       Rate
                                   ------       ----         ------       ----
                                                    (Unaudited)
                                               (Dollars in thousands)

Transaction accounts              $457,596       0.79%      $446,636      0.82%
Statement savings accounts          55,205       0.80         65,255      0.82%
Certificate accounts               240,578       2.49        235,075      2.57%
                                  --------                  --------
                                  $753,379       1.33%      $746,966      1.37%
                                  ========                  ========

(6) ADVANCES FROM FEDERAL HOME LOAN BANK

Advances from Federal Home Loan Bank ("FHLB") consist of the following:

                                    September 30, 2004        December 31, 2004
                                   -------------------       -------------------
                                              Weighted                  Weighted
                                               Average                   Average
                                   Amount       Rate         Amount       Rate
                                   ------       ----         ------       ----
Maturing within:                                     (Unaudited)
                                               (Dollars in thousands)

1 year                            $ 64,500       2.78%      $133,200      2.72%
2 years                              4,177       2.79          4,377      2.79
3 years                             11,560       2.23         11,860      2.27
4 years                              3,977       3.18          3,477      3.15
5 years                             31,803       2.36         32,303      2.39
After 5 years                      212,490       4.20        211,990      4.20
                                  --------                  --------
                                  $328,507       3.64%      $397,207      3.47%
                                  ========                  ========


                                       10
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED

(6) ADVANCES FROM FEDERAL HOME LOAN BANK- CONTINUED

At September  30,  2004,  and  December  31,  2004,  the Bank had pledged  first
mortgage  loans  and   mortgage-backed   securities   with  unpaid  balances  of
approximately $357.3 million and $432.5 million, respectively, as collateral for
FHLB advances.  At December 31, 2004,  included in the one, two, three, five and
after five years maturities were $219.0 million, with a weighted average rate of
3.92%, of advances subject to call provisions. Callable advances at December 31,
2004 are summarized as follows:  $93.0 million  callable in fiscal 2005,  with a
weighted  average rate of 5.33%;  $29.0 million  callable in fiscal 2006, with a
weighted  average rate of 2.37%;  $35.0 million  callable in fiscal 2007, with a
weighted  average rate of 3.00%;  $37.0 million  callable in fiscal 2008, with a
weighted  average rate of 2.98%; and $25.0 million callable in fiscal 2009, with
a  weighted  average  rate of  3.13%.  Call  provisions  are more  likely  to be
exercised by the FHLB when interest rates rise.

(7) EARNINGS PER SHARE

Basic  earnings per share for the three months ended  December 31, 2003 and 2004
are  computed by  dividing  net income by the  weighted  average  common  shares
outstanding  during the respective  periods.  Diluted earnings per share for the
three  months  ended  December  31, 2003 and 2004 are  computed by dividing  net
earnings  by  the  weighted  average  dilutive  shares  outstanding  during  the
respective periods.

The  following  is a  reconciliation  of  average  shares  outstanding  used  to
calculate basic and fully diluted earnings per share.

<TABLE>
<CAPTION>
                                                   For the Quarter Ended December 31,
                                                               (Unaudited)

                                         2003                  2003      2004                  2004
                                         --------------------------      --------------------------
                                         BASIC              DILUTED      BASIC              DILUTED
                                         --------------------------      --------------------------
<S>                                      <C>             <C>             <C>             <C>
Weighted average shares outstanding      17,218,000      17,218,000      17,510,000      17,510,000

Effect of dilutive securities-
Stock options                                    --       1,097,000              --       1,003,000
                                         --------------------------      --------------------------
                                         17,218,000      18,315,000      17,510,000      18,513,000
                                         ==========================      ==========================
</TABLE>

(8) STOCK BASED COMPENSATION

At December  31,  2004,  the Company had a stock  option plan that  provides for
stock  options to be granted  primarily  to  directors,  officers  and other key
Associates.  The  plan is more  fully  described  in  Note  17 of the  Notes  to
Consolidated  Financial  Statements  included in the Company's Annual Report for
the year ended  September 30, 2004. The Company  accounts for the plan under the
recognition  and measurement  principles of APB Opinion No. 25,  "Accounting for
Stock Issued to Employees", and related interpretations. No stock-based employee
or director compensation cost is reflected in net income, as all options granted
under the plan had an exercise price equal to the market value of the underlying
common stock on the date of grant.


                                       11
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED

(8) STOCK BASED COMPENSATION - CONTINUED

The following table  illustrates the effect on net income and earnings per share
if the  Company  had  applied  the fair  value  recognition  provisions  of FASB
Statement  123,  "Accounting  for  Stock-Based  Compensation",   to  stock-based
employee and non-employee compensation.

<TABLE>
<CAPTION>
                                                          Three Months Ended December 31,
                                                          -------------------------------
                                                             2003              2004
                                                             ----              ----

                                                                   (Unaudited)
                                                              (Dollars in thousands)
<S>                                                         <C>             <C>
Net income, as reported                                     $    3,319      $    4,045
Deduct: Total stock-based employee and director
         compensation expense determined under
         fair value based method for all awards,
         net of related tax effects                               (131)           (176)
                                                            ----------      ----------
Pro forma net income                                        $    3,188      $    3,869
                                                            ==========      ==========

Basic earnings per share:
     As reported                                            $      .19      $      .23
                                                            ==========      ==========
     Pro forma                                              $      .19      $      .22
                                                            ==========      ==========

Diluted earnings per share:
     As reported                                            $      .18      $      .22
                                                            ==========      ==========
     Pro forma                                              $      .17      $      .21
                                                            ==========      ==========
</TABLE>

(9) COMMON STOCK DIVIDEND

On February 18, 2004, July 30, 2004 and December 15, 2004, the Company  declared
10%  stock  dividends,   aggregating  approximately  1,308,000,   1,442,000  and
1,594,000  shares,  respectively.  The most recent  common  stock  dividend  was
payable  January 20, 2005 to  shareholders  of record as of January 6, 2005. All
share  and per  share  data  have  been  retroactively  restated  for the  stock
dividends.

(10) GUARANTEES

Standby  letters  of credit  obligate  the  Company  to meet  certain  financial
obligations of its customers,  if, under the contractual terms of the agreement,
the  customers  are unable to do so.  Payment  is only  guaranteed  under  these
letters of credit upon the borrower's  failure to perform its obligations to the
beneficiary.  The  Company  can  seek  recovery  of the  amounts  paid  from the
borrower;   however,   these  standby   letters  of  credit  are  generally  not
collateralized. Commitments under standby letters of credit are usually one year
or less.  At December  31, 2004,  the Company has recorded no liability  for the
current  carrying  amount of the  obligation to perform as a guarantor,  as such
amounts  are  not  considered   material.   The  maximum   potential  amount  of
undiscounted  future  payments  related to standby letters of credit at December
31, 2004 was $7.3 million.

(11) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITES

The Bank originates  certain fixed rate residential  loans with the intention of
selling these loans. Between the time that the Bank enters into an interest rate
lock or a commitment to originate a fixed rate residential loan with a potential
borrower  and the time the  closed  loan is sold,  the  Company  is  subject  to
variability  in the market  prices  related to these  commitments.  The  Company
believes that it is prudent to limit the  variability of expected  proceeds from
the sales through forward sales of "to be issued" mortgage-backed securities and
loans  ("forward  sales  commitments").  The commitment to originate  fixed rate
residential  loans and forward sales  commitments  are  freestanding  derivative
instruments.  Since  such  instruments  do  not  qualify  for  hedge  accounting
treatment,  their  fair  value  adjustments  are  recorded  through  the  income
statement  in net gains on sales of loans  held for  sale.  The  commitments  to
originate fixed rate conforming loans totaled $4.5 million at December 31, 2004.
The fair value of the loan commitments was an asset of approximately  $39,000 at
December 31, 2004. As of December 31, 2004, the Company had sold $7.0 million in
forward commitments to deliver fixed rate mortgage-backed securities, which were
recorded as a derivative liability of $8,000.

                                       12
<PAGE>

PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following  discussion and analysis  should be read in  conjunction  with the
consolidated   financial   statements  of  Coastal  Financial   Corporation  and
Subsidiaries and the notes thereto.

FORWARD LOOKING STATEMENTS
--------------------------

This report may contain certain "forward-looking  statements" within the meaning
of  Section  27A of the  Securities  Exchange  Act of  1934,  as  amended,  that
represent the Company's  expectations or beliefs  concerning future events.  All
forward-looking  statements  are  based on  assumptions  and  involve  risks and
uncertainties,  many of which are  beyond  our  control  and which may cause our
actual  results,  performance  or  achievements  to differ  materially  from the
results,   performance  or  achievements  contemplated  by  the  forward-looking
statements.  Forward-looking  statements can be identified by the fact that they
do not relate strictly to historical or current facts.  They often include words
such as "believe," "expect," "anticipate," "intend," "plan," "estimate" or words
of similar  meaning,  or future or  conditional  verbs such as "will,"  "would,"
"should," "could" or "may." Forward-looking statements speak only as of the date
they are made. Such risks and uncertainties include, among other things:

      o     Competitive   pressures   among   depository  and  other   financial
            institutions in our market areas may increase significantly.

      o     Adverse  changes  in the  economy  or  business  conditions,  either
            nationally or in our market  areas,  could  increase  credit-related
            losses and expenses and/or limit growth.

      o     Increases in defaults by  borrowers  and other  delinquencies  could
            result in increases in our provision for losses on loans and related
            expenses.

      o     Our inability to manage growth effectively, including the successful
            expansion of our Customer support, administrative infrastructure and
            internal management  systems,  could adversely affect our results of
            operations and prospects.

      o     Fluctuations  in interest  rates and market  prices could reduce our
            net interest margin and asset valuations and increase our expenses.

      o     The  consequences of continued bank  acquisitions and mergers in our
            market  areas,  resulting  in fewer but much larger and  financially
            stronger  competitors,  could  increase  competition  for  financial
            services to our detriment.

      o     Our continued growth will depend in part on our ability to enter new
            markets successfully and capitalize on other growth opportunities.

      o     Changes in legislative or regulatory  requirements  applicable to us
            and our subsidiaries  could increase costs, limit certain operations
            and adversely affect results of operations.


                                       13
<PAGE>

PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED

FORWARD LOOKING STATEMENTS - CONTINUED
--------------------------------------

      o     Changes in tax  requirements,  including tax rate  changes,  new tax
            laws  and  revised  tax law  interpretations  may  increase  our tax
            expense or adversely affect our Customers' businesses.

      o     Company  initiatives  now in place or introduced in the future,  not
            producing  results  consistent with historic growth rates or results
            which justify their costs.

      In light of these risks,  uncertainties  and  assumptions,  you should not
      place undue reliance on any forward-looking  statements in this report. We
      undertake  no  obligation  to  publicly  update or  otherwise  revise  any
      forward-looking statements, whether as a result of new information, future
      events or otherwise.

OVERVIEW
--------

Coastal Financial  Corporation is a unitary thrift holding company  incorporated
in Delaware with one wholly-owned banking subsidiary,  Coastal Federal Bank (the
"Bank" or "Coastal  Federal").  The Company also owns Coastal  Planners  Holding
Corporation, whose subsidiary Coastal Retirement, Estate and Tax Planners, Inc.,
offers fee-based financial planning and tax preparation services.  The Company's
primary  business  activities  are conducted by the Bank. The Company and Bank's
principal executive offices are located in Myrtle Beach, South Carolina.

Coastal  Federal  Bank is a full  service  financial  services  company  with 19
branches  located  in four  counties  throughout  the  coastal  regions of South
Carolina and North Carolina.  The Bank has twelve offices in Horry County, South
Carolina;  one office in Georgetown  County,  South  Carolina;  three offices in
Brunswick County, North Carolina; and three offices in New Hanover County, North
Carolina.

The Bank's primary  market areas are located along the coastal  regions of South
Carolina and North Carolina and predominately center around the Metro regions of
Myrtle  Beach,  South  Carolina  and  Wilmington,   North  Carolina,  and  their
surrounding  counties.  Coastal Federal's primary market is Horry County,  South
Carolina  where the Bank has the number one market  share of deposits as of June
30, 2004 with 16.4% of  deposits  as  reported  by the FDIC  Summary of Deposits
Report.  The Bank also has the third highest market share of deposits as of June
30, 2004 in Brunswick  County,  North Carolina with 8.9% of deposits as reported
by the FDIC Summary of Deposits Report.

The primary business  activities in Horry County are centered around the tourism
industry.  To the extent that Horry  County  businesses  rely heavily on tourism
business,  decreased tourism would have a significant  adverse effect on Coastal
Federal's primary deposit base and lending area. Moreover, the Bank would likely
experience a higher  degree of loan  delinquencies  should the local  economy be
materially and adversely affected.

Coastal Federal's  principal  business consists of attracting core deposits from
Customers  in its  primary  market  locations  and using these funds to meet the
lending needs of its Customers as well as providing  numerous financial products
and services for its Customers.

Through  its  branch  locations,  the Bank  provides  a wide  range  of  banking
products, including interest-bearing and non-interest bearing checking accounts;
business sweep accounts;  business cash management  services;  statement savings
accounts;  money market accounts;  certificate  of deposit accounts;  individual
retirement accounts;  merchant services;  commercial,  business,  personal, real
estate,  residential  mortgage and home equity loans;  safe deposit  boxes;  and
electronic banking services.  The Bank has six ATMs at off-site locations and an
ATM at each  branch.  The Bank also makes  available  a wide range of  financial
products  through  its  relationship  with  Raymond  James  Financial  Services,
including stocks,  bonds,  mutual funds,  annuities,  insurance,  and retirement
products.


                                       14
<PAGE>

PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED

OVERVIEW - CONTINUED
--------------------

In the fourth fiscal  quarter of 2004, the Bank began two new  initiatives.  The
first was The Experience of FANtastic! Customer Service. This initiative focuses
on  Customer  service  and  convenience.   The  Bank  intends  to  redesign  its
infrastructure  and purchase  software and products to improve  Customer service
and convenience  and Associate  productivity.  In addition,  in the first fiscal
quarter of 2005, in order to improve  Customer  service and convenience the Bank
introduced an expanded  hours Call Center that employs 20 to 25  Associates.  In
the  second  fiscal  quarter  of 2005,  the Bank  plans  to  introduce  extended
operating hours.  The Bank experienced  increased salary and benefit expenses in
the first  fiscal  quarter of 2005 and  anticipates  these  expenses  continuing
thereafter  associated  with the hiring,  training  and  placement  of these new
Associates.

The second  initiative was Totally Free Checking With a Gift that was introduced
in  September  2004.  The  Bank  has  incurred,  and  will  continue  to  incur,
significant  marketing costs associated with this campaign.  In the first fiscal
quarter of 2005,  marketing  expenses were $511,000  compared to $181,000 in the
comparable 2004 period.  The Bank expects to realize  significant  benefits from
this strategy  consisting of increased Bank lobby traffic,  increased  number of
personal  checking  accounts and higher fee income as a result of those checking
accounts. In the first fiscal quarter of 2005,  approximately 3,900 new checking
accounts had been opened.  This rate of growth could  necessitate  the hiring of
additional Associates to open and service these accounts.

The Associates  being hired for these two initiatives are expected to have total
compensation averaging between $28,000 and $35,000 per Associate.

CRITICAL ACCOUNTING POLICIES
----------------------------

The Company's  accounting policies are in accordance with accounting  principles
generally  accepted in the United  States of America and with  general  practice
within the banking industry.  In order to understand our financial condition and
results  of  operations,  it  is  important  to  understand  our  more  critical
accounting  policies and the extent to which we use  judgment  and  estimates in
applying  those  policies.  The Company  considers  its policies  regarding  the
allowance  for loan losses and income taxes to be its most  critical  accounting
policies  due to the  significant  degree  of the  levels  of  subjectivity  and
management   judgment   necessary  to  account  for  these  matters.   Different
assumptions  in the  application  of these  policies  could  result in  material
changes  in the  Company's  consolidated  financial  statements.  The  Company's
accounting  policies  are set  forth  in  Note 1 of the  Notes  to  Consolidated
Financial  Statements in the Company's 2004 Annual Report to  Stockholders.  For
additional  discussion  concerning  the Company's  allowance for loan losses and
related  matters,  see  "Allowance  for Loan Losses" and see "Income  Taxes" for
additional  discussion  concerning  income  taxes in the  Company's  2004 Annual
Report to Stockholders.

OFF-BALANCE SHEET ARRANGEMENTS
------------------------------

In the  normal  course of  operations,  the  Company  engages  in a  variety  of
financial  transactions that, in accordance with generally  accepted  accounting
principles, are recorded in amounts that differ from the notional amounts. These
transactions involve, to varying degrees, elements of credit, interest rate, and
liquidity risk. Such  transactions are used by the Company for general corporate
purposes or to satisfy customer needs.  Corporate purpose  transactions are used
to help manage  customers'  requests for funding.  The Bank's  off-balance sheet
arrangements, which principally include lending commitments and derivatives, are
described below. At December 31, 2004 and September 30, 2004, the Company had no
interests in non-consolidated special purpose entities.

Lending  Commitments.  Lending  Commitments  include loan  commitments,  standby
letters of credit,  unused business and personal  credit card lines,  and unused
business and personal lines of credit. These instruments are not recorded in the
consolidated  balance sheet until funds are advanced under the commitments.  The
Bank  provides  these lending  commitments  to customers in the normal course of
business. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the  commitments  expire
without  being  drawn  upon,  the total  commitment  amounts do not  necessarily
represent  future cash  requirements.  The Company applies  essentially the same
credit  policies  and  standards  as it does in the lending  process when making
these loans.


                                       15
<PAGE>

PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED

OFF-BALANCE SHEET ARRANGEMENTS - CONTINUED
------------------------------------------

For business customers,  commercial loan commitments  generally take the form of
revolving   credit   arrangements   to  finance   customers'   working   capital
requirements.  For personal  customers,  loan commitments are generally lines of
credit which are unsecured or are secured by residential  property.  At December
31, 2004,  unfunded  business and personal lines of credit  commitments  totaled
$57.0 million.  Unused  business and personal  credit card lines,  which totaled
$14.1 million at December 31, 2004, are generally for short-term borrowings. The
Company also had commitments to originate $17.4 million in residential  mortgage
loans at December 31, 2004.

Standby  letters  of credit  obligate  the  Company  to meet  certain  financial
obligations of its customers,  if, under the contractual terms of the agreement,
the  customers  are unable to do so.  Payment  is only  guaranteed  under  these
letters of credit upon the borrower's  failure to perform its obligations to the
beneficiary.  The  Company  can  seek  recovery  of the  amounts  paid  from the
borrower;   however,   these  standby   letters  of  credit  are  generally  not
collateralized. Commitments under standby letters of credit are usually one year
or less.  At December  31, 2004,  the Company has recorded no liability  for the
current  carrying  amount of the  obligation to perform as a guarantor,  as such
amounts  are  not  considered   material.   The  maximum   potential  amount  of
undiscounted  future  payments  related to standby letters of credit at December
31, 2004 was $7.3 million.

Derivatives  and Hedging  Activities.  The Bank  originates  certain  fixed rate
residential  loans with the intention of selling  these loans.  Between the time
that the Bank enters into an interest  rate lock or a commitment  to originate a
fixed rate  residential  loan with a potential  borrower and the time the closed
loan is sold, the Company is subject to variability in the market prices related
to these  commitments.  The  Company  believes  that it is  prudent to limit the
variability of expected  proceeds from the sales through forward sales of "to be
issued" mortgage-backed securities and loans ("forward sales commitments").  The
commitment  to  originate  fixed  rate  residential   loans  and  forward  sales
commitments are freestanding  derivative  instruments.  When such instruments do
not qualify for hedge  accounting  treatment,  their fair value  adjustments are
recorded  through  the  income  statement  in net  gains on sale of  loans.  The
commitments  to originate  fixed rate  conforming  loans totaled $4.5 million at
December  31,  2004.  The fair  value of the  loan  commitments  was an asset of
approximately $39,000 at December 31, 2004. As of December 31, 2004, the Company
had  sold  $7.0   million  in  forward   commitments   to  deliver   fixed  rate
mortgage-backed  securities,  which were  recorded as a derivative  liability of
$8,000.

DISCUSSION OF FINANCIAL CONDITION CHANGES FROM SEPTEMBER 30, 2004 TO DECEMBER
-----------------------------------------------------------------------------
31, 2004
--------

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

Historically,  the Company has  maintained  its liquidity at levels  believed by
management  to be  adequate  to meet  the  requirements  of  normal  operations,
potential  deposit  out-flows and strong loan demand and still allow for optimal
investment of funds and return on assets. The principal sources of funds for the
Company  are cash flows from  operations,  consisting  mainly of loan  payments,
Customer  deposits,   advances  from  the  FHLB,  securitization  of  loans  and
subsequent  sales,  and  loan  sales.  The  principal  use of cash  flows is the
origination  of loans  receivable  and purchase of  investment  securities.  The
Company originated loans receivable of $119.4 million for the three months ended
December  31,  2003,  compared  to $159.2  million  for the three  months  ended
December 31, 2004.  Loan principal  repayments  amounted to $81.4 million in the
first  quarter of 2003  compared to $124.9  million for the three  months  ended
December 31, 2004. In addition, the Company sells certain loans in the secondary
market to finance future loan originations. In the first quarter of fiscal 2004,
the Company sold loans or securitized and sold loans totaling $17.7 million that
compares to $15.0  million in the first three  months  ended  December 31, 2004.
Generally,  these loans have consisted only of mortgage  loans,  which have been
originated within the prior twelve months.

During the three-month  period ended December 31, 2004, the Company  securitized
$10.9  million of mortgage  loans and  concurrently  sold these  mortgage-backed
securities  to  outside  third  parties  and  recognized  a net  gain on sale of
$315,000, which included


                                       16
<PAGE>

PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED

LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
------------------------------------------

$212,000 related to mortgage  servicing rights. The gain is included in gains on
sales of loans held for sale in the  consolidated  statement of operations.  The
proceeds  from sale are  included  in  proceeds  from  sales of  mortgage-backed
securities  available for sale in the consolidated  statement of cash flows. The
Company has no retained  interest  in the  securities  that were sold other than
servicing rights.

For the three-month period ended December 31, 2003, the Company purchased $124.9
million in investment and mortgage-backed securities. For the three-month period
ended December 31, 2004, the Company  purchased $115.5 million in investment and
mortgage-backed securities.  These purchases during the three-month period ended
December  31, 2004 were  primarily  funded by  borrowings,  repayments  of $21.0
million within the securities portfolio and sales of mortgage-backed  securities
of $29.7 million.

During the  three-month  periods ended  December 31, 2004 and 2003,  the Company
sold loan participations totaling $5.8 million and $0, respectively.

The Company places significant emphasis on growth in checking accounts. Checking
accounts have increased from  approximately $149 million at December 31, 2003 to
$214  million at December 31,  2004,  an increase of $65 million or 43.6%.  When
compared to fiscal year-end balances, checking slightly increased. Core deposits
(defined as  transaction  and statement  savings  accounts)  have increased from
$422.1  million at December 31, 2003 to $511.9  million at December 31, 2004, an
increase  of 21.3%.  When  compared  to fiscal  year-end  balances,  the Company
experienced a slight decrease in core deposits of .2%.

Total deposits  decreased $6.4 million  between  September 30, 2004 and December
31, 2004. The Company  generally  experiences a decline in deposits in its first
and second  quarters  of each fiscal  year since it is very  dependent  upon the
tourism industry, which is much slower in the winter months.

At December 31, 2004, the Company had $207.2 million of certificates of deposits
that were due to mature within one year. Based on past  experience,  the Company
believes that the majority of these certificates of deposits will renew with the
Company.  At December 31, 2004, the Company had  commitments to originate  $17.4
million in residential mortgage loans, $57.0 million in undisbursed business and
retail lines of credit and $14.1 million in unused  business and personal credit
card  lines,  which the  Company  expects  to fund from  normal  operations.  At
December 31, 2004, the Company had $52.7 million available in FHLB advances.


Additionally,  at December 31, 2004, the Company had outstanding available lines
for federal funds of $20.0 million.

As a result of $4.0  million  in net  income,  less the cash  dividends  paid to
stockholders of approximately $789,000,  proceeds of approximately $316,000 from
the  exercise  of stock  options,  and the net  increase in  unrealized  gain on
securities  available  for sale,  net of income tax of  $331,000,  stockholders'
equity  increased  from $85.3  million at September 30, 2004 to $89.3 million at
December 31, 2004.

OTS  regulations  require  that  the  Bank  calculate  and  maintain  a  minimum
regulatory capital requirement on a quarterly basis and satisfy such requirement
as of the calculation  date and throughout the quarter.  The Bank's capital,  as
calculated  under OTS regulations,  is approximately  $100.9 million at December
31, 2004,  exceeding the core capital  requirement by $59.4 million. At December
31, 2004, the Bank's risk-based capital of approximately $110.3 million exceeded
its current  risk-based  capital  requirement  by $46.4  million.  (For  further
information see Regulatory Capital Matters).


                                       17
<PAGE>

PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED

LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
------------------------------------------


The table below summarizes future contractual obligations as of December 31,
2004:

<TABLE>
<CAPTION>
                                                      Payments Due by Period
                            --------------------------------------------------------------------------
                                             Less than          1-3             4-5           After 5
                               Total          1 Year           Years           Years           Years
                            ----------      ----------      ----------      ----------      ----------
<S>                         <C>             <C>             <C>             <C>             <C>
Time deposits               $  235,075      $  207,212      $   27,049      $      119      $      695
Short-term borrowings          254,110         254,110              --              --              --
Long-term debt                 279,471              --          16,237          35,780         227,454
Operating leases                   559             120             183              25             231
                            ----------      ----------      ----------      ----------      ----------
Total contractual cash
     obligations            $  769,215      $  461,442      $   43,469      $   35,924      $  228,380
                            ==========      ==========      ==========      ==========      ==========
</TABLE>

Purchase commitments. The Company has entered into various contracts to purchase
equipment and software  products to improve  productivity,  Customer service and
convenience.  At December 31, 2004,  the total  original  purchase  commitments,
excluding  recurring annual  maintenance  fees,  totaled $1.9 million,  of which
$800,000 had been spent.  The Company  expects to complete the  purchases in the
second  quarter of fiscal 2005. The annual  maintenance  fees are expected to be
approximately $160,000.

EARNINGS SUMMARY
----------------

Net income increased from $3.3 million, or $.18 per diluted share, for the three
months ended  December 31, 2003 to $4.0  million,  or $.22 per diluted share for
the three months ended  December  31,  2004.  This 21.9%  increase in net income
resulted from increased net interest income of $1.7 million, or 17.4%, decreased
provision  for loan losses of  $200,000,  increased  other  income of  $441,000,
offset by increased general and administrative expenses of $1.5 million.

The net interest margin increased from 3.51% for the three months ended December
31, 2003 to 3.66% for the three months ended  December 31, 2004.  As a result of
growth in loans receivable and investments, net interest income increased 17.4%.
The increase in net interest income is primarily  attributable to an increase in
average earning assets of $140.4  million,  or 12.6%.  Average loans  receivable
increased  $115.8  million for the three months ended December 31, 2004 compared
to December 31, 2003. In addition,  average  balances of  investment  securities
increased  approximately $23.0 million. The investment securities were primarily
funded with FHLB advances.  The Company's  advances with a maturity greater than
five years  increased from $189.8 million at December 31, 2003 to $212.0 million
at December 31, 2004.

Provision  for loan losses  decreased by $200,000  primarily  due to  criticized
loans and loans delinquent ninety days or more at December 31, 2004, as compared
to December 31, 2003. The allowance for loan losses as a percentage of net loans
was 1.40% at December 31, 2004 compared to 1.43% at December 31, 2003.

Other income increased from $2.3 million for the quarter ended December 31, 2003
to $2.8 million for the quarter ended December 31, 2004. This was a result of an
increase in fees and service  charges on loan and deposit  accounts of $188,000,
offset by a decrease in gains on sales of loans held for sale of $131,000.  The
Company also had gains on sales of securities available for sale of $158,000 for
the quarter  ended  December  31,  2004,  compared to losses of $200,000 for the
quarter ended December 31, 2003.

General and  administrative  expenses  increased from $6.6 million for the three
months  ended  December  31,  2003 to $7.8  million for the three  months  ended
December  31,  2004.  Compensation  increased  from $4.0  million  for the first
quarter  of fiscal  2004 to $4.4  million in the first  quarter of fiscal  2005,
primarily  due to an  increase in the number of banking  Associates  in business
banking,  Associates in the Company's expanded hours call center, and Associates
in new  branches.  Marketing  expenses  were $181,000 for the three months ended
December 31, 2003,  compared to $511,000 for the three months ended December 31,
2004.  This is primarily  attributed to the Bank's "Totally Free Checking With a
Gift" initiative. Other expense was $873,000 for the three months ended December
31, 2003, compared to $1.1 million for the three months ended December 31, 2004.


                                       18
<PAGE>

PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED


MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------------------
DECEMBER 31, 2003 AND 2004
--------------------------

INTEREST INCOME
---------------

Interest income for the three months ended December 31, 2004, increased to $18.0
million as compared to $15.5  million for the three  months  ended  December 31,
2003.  The earning asset yield for the three months ended December 31, 2004, was
5.73% compared to a yield of 5.58% for the three months ended December 31, 2003.
The average yield on loans  receivable  for the three months ended  December 31,
2004,  was 6.15% compared to 6.21% for three months ended December 31, 2003. Due
to a decline in amortization of premiums on investment  securities due to slower
prepayments in fiscal 2005, the yield on investments  increased to 4.91% for the
three  months ended  December  31,  2004,  from 4.45% for the three months ended
December 31, 2003. Total average  interest-earning  assets were $1.3 billion for
the quarter ended  December 31, 2004 as compared to $1.1 billion for the quarter
ended  December 31, 2003.  The  increase in average  interest-earning  assets is
primarily due to an increase in average loans receivable of approximately $115.8
million   resulting  from  increased  lending  and  an  increase  in  investment
securities  of  approximately  $24.6  million,  primarily  funded by borrowings.

INTEREST EXPENSE
----------------

Interest expense on interest-bearing  liabilities was $6.4 million for the three
months ended December 31, 2004, as compared to $5.7 million for the three months
ended December 31, 2003. The average cost of deposits for the three months ended
December  31,  2004,  was 1.31%  compared  to 1.48% for the three  months  ended
December 31, 2003. The cost of  interest-bearing  liabilities  was 2.07% for the
three  months  ended  December  31,  2004 and 2003.  The cost of FHLB  advances,
repurchase/reverse  repurchase  agreements and other  borrowings was 3.67% 1.87%
and 5.33%,  respectively,  for the three months ended December 31, 2004. For the
three  months   ended   December   31,   2003,   the  cost  of  FHLB   advances,
repurchase/reverse  repurchase  agreements and other borrowings was 4.00%, 1.51%
and 4.27%,  respectively.  Total average interest-bearing  liabilities increased
from $1.1 billion at December 31, 2003 to $1.2 billion at December 31, 2004. The
increase  in  average  interest-bearing  liabilities  is due to an  increase  in
average  deposits of  approximately  $63.4  million as a result of the Company's
focus on checking growth, increased average FHLB advances of $105.1 million used
to fund loan and investment  securities  growth and increased  average  Customer
repurchase  agreements of $19.6 million. This increase was partially offset by a
decrease in average reverse repurchase agreements of $48.3 million.

NET INTEREST INCOME
-------------------

Net interest  income was $11.5  million for the three months ended  December 31,
2004, as compared to $9.8 million for the three months ended  December 31, 2003.
The net interest  margin was 3.66% for the three months ended December 31, 2004,
compared to 3.51% for the three months ended December 31, 2003.


                                       19
<PAGE>

PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------------------
DECEMBER 31, 2003 AND 2004 - CONTINUED
--------------------------------------

NET INTEREST INCOME - CONTINUED
-------------------------------

<TABLE>
<CAPTION>
                                                           Three Months Ended December 31,
                                                           -------------------------------
                                                     2004                                        2003
                                                     ----                                        ----
                                    Average         Income/      Yield/         Average         Income/       Yield/
                                  Balance (1)       Expense       Rate        Balance (1)       Expense        Rate
                                  ----------      ----------     ------       ----------      ----------      -------
<S>                               <C>             <C>              <C>        <C>             <C>              <C>
Assets
Earning assets
  Loans (2)                       $  828,793      $   12,740       6.15%      $  713,003      $   11,077       6.21%
  Investment
    Securities, MBS
    Securities and
    Other (3)                        425,130           5,217       4.91%         400,540           4,458       4.45%
                                  ----------      ----------                  ----------      ----------
Total earning assets              $1,253,923      $   17,957       5.73%      $1,113,543      $   15,535       5.58%
                                  ==========      ----------                  ==========      ----------

Liabilities
  Interest-bearing
    deposits                         764,536           2,507       1.31%         701,135           2,594       1.48%
  Borrowings                         481,957           3,935       3.27%         405,656           3,131       3.09%

Total interest-bearing            ----------      ----------                  ----------      ----------
  liabilities                     $1,246,493           6,442       2.07%      $1,106,791           5,725       2.07%
                                  ==========      ----------                  ==========      ----------
Net interest income                               $   11,515                                  $    9,810
                                                  ==========                                  ==========
Net interest margin                                                3.66%                                       3.51%
Net yield on earning assets                                        3.67%                                       3.52%
</TABLE>

(1)   The average balances are derived from monthly balances.

(2)   Nonaccrual loans are included in average balances for yield computations.

(3)   Investment  securities  include  taxable and  tax-exempt  securities.  Net
      interest income has not been adjusted to produce a tax-equivalent yield.

PROVISION FOR LOAN LOSSES
-------------------------

The Company's  provision for loan losses  decreased  from $550,000 for the three
months ended  December 31, 2003, to $350,000 for the three months ended December
31, 2004 primarily due to criticized loans and loans  delinquent  ninety days or
more at December 31, 2004 as compared to December 31, 2003.  The  allowance  for
loan losses as a percentage  of loans was 1.40% at December 31, 2004 as compared
to 1.43% at  December  31,  2003.  Loans  delinquent  90 days or more  were $5.6
million or .69% of total loans at December 31, 2004, compared to $7.0 million or
..97% of total loans at December 31, 2003. The allowance for loan losses was 203%
of loans delinquent more than 90 days at December 31, 2004,  compared to 147% at
December 31, 2003. Net  charge-offs for the three months ended December 31, 2004
were $15,000  compared to $65,000 for the three months ended  December 31, 2003.
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.


                                       20
<PAGE>

PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------------------
DECEMBER 31, 2003 AND 2004 - CONTINUED
--------------------------------------

OTHER INCOME
------------

For the three  months ended  December  31,  2004,  other income was $2.8 million
compared to $2.3 million for the three months ended December 31, 2003.  Fees and
service  charges  from deposit  accounts  were $1.1 million for the three months
ended  December  31,  2004,  compared to  $902,000  for the three  months  ended
December 31, 2003.  During the three months ended December 31, 2003, the Company
securitized loans into mortgage-backed  securities ("MBS") and then sold the MBS
and sold loans  aggregating  $17.7  million of loans held for sale  compared  to
$15.0  million for the three  months ended  December  31, 2004.  Gain on sale of
loans was $310,000 for the quarter ended December 31, 2004, compared to $441,000
for the quarter  ended  December 31,  2003.  Gains on sales of  securities  were
$158,000 for the quarter ended December 31, 2004, compared to losses of $200,000
for the quarter ended December 31, 2003. Other income was $651,000 for the three
months ended  December  31,  2004,  as compared to $560,000 for the three months
ended December 31, 2003.

GENERAL AND ADMINISTRATIVE EXPENSES
-----------------------------------

General and  administrative  expenses  were $6.6  million for the quarter  ended
December 31, 2003  compared to $7.8 million for the quarter  ended  December 31,
2004.  Salaries  and  employee  benefits  were $4.0 million for the three months
ended  December 31, 2003, as compared to $4.4 million for the three months ended
December 31,  2004,  an increase of 10.7%,  primarily  due to an increase in the
number of banking  Associates in business  banking,  Associates in the Company's
expanded  hours call center,  and  Associates in new  branches.  The Company has
added several  Associates in a Banking Group that is focused on growing small to
medium sized business banking  relationships.  Also as a result of new branches,
net occupancy,  furniture and fixtures and data  processing  expenses  increased
$226,000 when  comparing the two periods.  Marketing  expenses were $181,000 for
the three  months ended  December  31, 2003,  compared to $511,000 for the three
months  ended  December 31, 2004.  This is  primarily  attributed  to the Bank's
"Totally  Free Checking With a Gift"  initiative.  Other  expenses were $873,000
million for the quarter ended December 31, 2003 compared to $1.1 for the quarter
ended December 31, 2004.

INCOME TAXES
------------

Income  taxes were $1.7  million for the three  months  ended  December 31, 2003
compared to $2.1  million for the three months  ended  December  31,  2004.  The
effective income tax rate as a percentage of pretax income was 33.25% and 34.25%
for the quarters ended December 31, 2003 and 2004,  respectively.  The effective
income  tax rate  differs  from  the  statutory  rate  primarily  due to  income
generated by bank-owned  life  insurance,  municipal  securities that are exempt
from federal and certain  state taxes,  and the increase in the current  quarter
earnings  over the  comparable  prior year  earnings  that are subject to higher
incremental tax rates.

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


                                       21
<PAGE>

PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED

REGULATORY CAPITAL MATTERS
--------------------------

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

<TABLE>
<CAPTION>
                                                                                       Categorized as "Well
                                                                                       Capitalized" under
                                                                 For Capital            Prompt Corrective
                                          Actual              Adequacy Purposes         Action Provision
                                          ------              -----------------         ----------------

                                   Amount       Ratio        Amount        Ratio       Amount      Ratio
                                   ------       -----        ------        -----       ------      -----
                                                           (Dollars In Thousands)
<S>                               <C>           <C>         <C>            <C>        <C>           <C>
As of December 31, 2004:
 Total Capital:                   $110,289      13.80%      $ 63,936       8.00%      $ 79,920      10.00%
   (To Risk Weighted Assets)
 Tier 1 Capital:                  $100,892      12.62%           N/A        N/A       $ 47,952       6.00%
   (To Risk Weighted Assets)
 Tier 1 Capital:                  $100,892       7.30%      $ 41,461       3.00%      $ 69,237       5.00%
   (To Total Assets)
 Tangible Capital:                $100,892       7.30%      $ 20,771       1.50%           N/A        N/A
   (To Total Assets)
</TABLE>

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
------------------------------------------

In March 2004, the Financial Accounting Standards Board ("FASB") issued EITF No.
03-1 ("EITF  03-1"),  "the Meaning of  Other-Than-Temporary  Impairment  and Its
Application  of Certain  Investments,"  which  provided  guidance for evaluating
whether an investment is other-than-temporarily  impaired and its application to
investments  classified as either  available for sale or held to maturity  under
FASB Statement No. 115,  "Accounting for Certain  Investments in Debt and Equity
Securities,"  and  investments  accounted for under the cost or equity method of
accounting.  In September 2004, the FASB issued FASB Staff Position ("FSP") EITF
No. 03-1-1,  a delay of the effective date for the  measurement  and recognition
guidance  contained in paragraphs 10-20 of EITF 03-1 until the FASB issues final
guidance, expected in the first quarter of 2005.

Paragraphs  10 through 20 of EITF 03-1 provide  guidance on when  impairment  of
debt and equity  securities  is considered  other-than-temporary.  This guidance
generally states impairment is considered other-than-temporary unless the holder
of the security  has both the intent and ability to hold the security  until the
fair value recovers and evidence  supporting the recovery  outweighs evidence to
the contrary.

The  Company  adopted  the  guidance of EITF 03-1,  excluding  paragraphs  10-20
effective as of September  30, 2004. As a result of this  adoption,  the Company
provides  additional  disclosures,  which  are  found  in  Notes 2 and 3 of this
report. The initial adoption of this issue, which excludes  paragraphs 10-20 did
not have a material  impact on the financial  condition or results of operations
of the Company.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------

In December 2004, the FASB issued  Statement of Financial  Accounting  Standards
("SFAS") No. 123 (Revised  2004),  "Share-Based  Payment"  ("SFAS  123R").  This
standard requires expensing of stock options and other share-based  payments and
supersedes SFAS No. 123 that had allowed  companies to choose between  expensing
stock options or showing  proforma  disclosure  only. This standard is effective
for the  Company  as of July 1,  2005 and  will  apply  to all  awards  granted,
modified,  cancelled or  repurchased  after that date.  The Company is currently
evaluating  the expected  impact that the adoption of SFAS 123R will have on its
financial condition or results of operations.


                                       22
<PAGE>

PART I. FINANCIAL INFORMATION
Item 2. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED

EFFECT ON INFLATION AND CHANGING PRICES
---------------------------------------

The accompanying  unaudited 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 effects of  inflation.  Interest
rates do not necessarily  change in the same magnitude as the price of goods and
services.

PART I.  FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------

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

Net portfolio value (NPV) represents the market value of portfolio equity and is
equal to the market value of assets minus the market value of liabilities, which
adjustments made for off-balance  sheet items over a range of assumed changes in
market  interest  rates.  The Bank's Board of Directors  has adopted an interest
rate risk policy which  establishes  maximum  allowable  decreases in NPV in the
event of a sudden and sustained one hundred to four hundred basis point increase
or decrease in market  interest  rates.  The following table presents the Bank's
change  in NPV as  computed  by the OTS for  various  rate  shock  levels  as of
December 31, 2004.

<TABLE>
<CAPTION>
                                     Board             Board            Market            Market
                                     Limit             Limit            Value             Value
                                  Minimum NPV         Maximum         Of Assets         Portfolio        NPV
 Change in interest rates            Ratio        Decline in NPV       12/31/04          12/31/04        Ratio
---------------------------       ------------    --------------      -----------       -----------    ---------
<C>                                  <C>              <C>              <C>                <C>            <C>
300 basis point rise                 5.00%            400 BPS          $1,373,361         $124,131        9.04%
200 basis point rise                 6.00%            300 BPS          $1,395,712         $136,532        9.78%
100 basis point rise                 6.00%            250 BPS          $1,420,882         $150,193       10.57%
No change                            6.00%                             $1,441,031         $160,400       11.13%
100 basis point decline              6.00%            250 BPS          $1,453,070         $163,428       11.25%
200 basis point decline              6.00%            300 BPS                 N/A              N/A          N/A
300 basis point decline              6.00%            350 BPS                 N/A              N/A          N/A
</TABLE>

The  preceding  table  indicates  that at December 31,  2004,  in the event of a
sudden and sustained  increase in prevailing  market interest rates,  the Bank's
NPV would be expected to decrease, and that in the event of a sudden decrease in
prevailing  market interest rates,  the Bank's NPV would be expected to increase
minimally.  Values for the 200 and 300 basis point decline are not indicated due
to the level of interest  rates at December 31, 2004. At December 31, 2004,  the
Bank's estimated changes in NPV were within the limits  established by the Board
of Directors.

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


                                       23
<PAGE>

PART I. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES - CONTINUED

Item 4. CONTROLS AND PROCEDURES
-------------------------------

      The Company's  management,  including the  Company's  principal  executive
officer and principal financial officer, have evaluated the effectiveness of the
Company's  "disclosure controls and procedures," as such term is defined in Rule
13a-15(e)  under the Securities  Exchange Act of 1934, as amended (the "Exchange
Act").  Based  upon  their  evaluation,  the  principal  executive  officer  and
principal  financial officer concluded that, as of the end of the period covered
by this report, the Company's  disclosure controls and procedures were effective
for the purpose of ensuring that the information required to be disclosed in the
reports  that the  Company  files or  submits  under the  Exchange  Act with the
Securities  and  Exchange  Commission  (the "SEC") (1) is  recorded,  processed,
summarized and reported within the time periods specified in the SEC's rules and
forms,  and (2) is accumulated  and  communicated  to the Company's  management,
including  its  principal  executive  and  principal   financial  officers,   as
appropriate  to  allow  timely  decisions  regarding  required  disclosure.   In
addition, based on that evaluation,  no change in the Company's internal control
over  financial  reporting  occurred  during the three months ended December 31,
2004 that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.

PART II. OTHER INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

Item 1. Legal Proceedings
        -----------------

The Company is a defendant  in one lawsuit  related to  activities  in the Bank,
arising  out of the  normal  course  of  business.  The  subsidiaries  are  also
defendants in lawsuits arising out of the normal course of business.  Based upon
current  information  received  from  counsel  representing  the Company and its
subsidiaries in these matters,  the Company  believes none of the lawsuits would
have a material impact on the Company's financial status.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
        -----------------------------------------------------------

      Not Applicable.

Item 3. Defaults Upon Senior Securities
        -------------------------------

      Not Applicable.

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

      Not Applicable.

Item 5. Other Information
        -----------------

      Not Applicable.


                                       24
<PAGE>

PART II. OTHER INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES - CONTINUED

Item 6. Exhibits
        --------

            Exhibits

              3 (a)     Certificate of Incorporation of Coastal Financial
                        Corporation (1)

                (b)     Certificate of Amendment to Certificate of Incorporation
                        of Coastal Financial Corporation (5)

                (c)     Bylaws of Coastal Financial Corporation (1)

             10 (a)     Employment Agreement with Michael C. Gerald (7)

                (b)     Employment Agreement with Jerry L. Rexroad (7)

                (c)     Employment Agreement with Phillip G. Stalvey (7)

                (d)     Employment Agreement with Jimmy R. Graham (7)

                (e)     Employment Agreement with Steven J. Sherry (7)

                (f)     1990 Stock Option Plan (2)

                (g)     Directors Performance Plan (3)

                (h)     Loan Agreement with Bankers Bank (4)

                (i)     Coastal Financial Corporation 2000 Stock Option Plan (6)

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

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

             32 (a)     Section 1350 Certification (Chief Executive Officer)

                (b)     Section 1350 Certification (Chief Financial Officer)

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

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

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

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

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

      (6)    Incorporated by reference to the definitive proxy statement for the
             2000 Annual Meeting of Stockholders filed December 22, 1999.

      (7)    Incorporated by reference to 2003 Form 10-K filed with Securities
             and Exchange Commission on December 22, 2003.


                                       25
<PAGE>

                                   SIGNATURES

Pursuant to the requirement of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

                                           COASTAL FINANCIAL CORPORATION


       February 9, 2005                    /s/ Michael C. Gerald
       -----------------                   ----------------------
       Date                                Michael C. Gerald
                                           President and Chief Executive Officer


       February 9, 2005                    /s/ Jerry L. Rexroad
       -----------------                   ---------------------
       Date                                Jerry L. Rexroad
                                           Executive Vice President and
                                           Chief Financial Officer


                                       26