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 June 30, 2005

            |_|   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 July 31, 2005.

Common Stock $.01 Par Value Per Share                         17,671,273 Shares
--------------------------------------------------------------------------------
(Class)                                                          (Outstanding)

<PAGE>

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2005

<TABLE>
<CAPTION>
TABLE OF CONTENTS                                                              PAGE
-----------------                                                              ----
<S>                                                                           <C>
PART I- Financial Information
Item
     1.  Consolidated Financial Statements (unaudited):

         Consolidated Statements of Financial Condition
         as of September 30, 2004 and June 30, 2005                               3

         Consolidated Statements of Operations for the three
         months ended June 30, 2004 and 2005                                      4

         Consolidated Statements of Operations for the nine
         months ended June 30, 2004 and 2005                                      5

         Consolidated Statements of Stockholders' Equity
         and Comprehensive Income for the nine months ended
         June 30, 2004 and 2005                                                   6

         Consolidated Statements of Cash Flows for the nine
         months ended June 30, 2004 and 2005                                    7-8

         Notes to Consolidated Financial Statements                            9-14

     2.  Management's Discussion and Analysis of
               Financial Condition and Results of Operations                  15-28

     3.  Quantitative and Qualitative Disclosures About                       28-29
         Market Risk

     4.  Controls and Procedures                                                 29

Part II - Other Information
Item
     1.  Legal Proceedings                                                       29

     2.  Unregistered Sales of Equity Securities and Use of Proceeds             29

     3.  Defaults Upon Senior Securities                                         29

     4.  Submission of Matters to a Vote of Securities Holders                   30

     5. Other Information                                                        30

     6.  Exhibits                                                                30

Signatures                                                                       31

Exhibits

     31(a)   Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)    32

       (b)   Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)    33

     32(a)   Section 1350 Certification (Chief Executive Officer)                34

       (b)   Section 1350 Certification (Chief Financial Officer)                35
</TABLE>


                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                            September 30,          June 30,
                                                                2004                 2005
                                                                ----                 ----
                                                                         (Unaudited)
                                                                        (In thousands,
                                                                      Except share data)
<S>                                                         <C>                 <C>
ASSETS:
Cash and amounts due from banks                             $      28,383       $      37,807
Short-term interest-bearing deposits                                1,251              19,743
Fed funds sold                                                         18               1,842
Investment securities available for sale                           23,449              21,876
Mortgage-backed securities available for sale                     374,283             403,736
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
  $11,854 at June 30, 2005)                                       790,730             902,702
Loans receivable held for sale                                      8,246               9,126
Real estate acquired through foreclosure                              785                 522
Office property and equipment, net                                 18,844              21,828
Federal Home Loan Bank stock, at cost                              16,900              15,527
Accrued interest receivable on loans                                2,877               3,622
Accrued interest receivable on securities                           2,473               2,290
Cash value of life insurance                                       21,627              22,336
Other assets                                                        7,779              13,101
                                                            -------------       -------------
                                                            $   1,305,485       $   1,486,058
                                                            =============       =============

LIABILITIES AND STOCKHOLDERS' EQUITY:

LIABILITIES:
Deposits                                                    $     753,379       $   1,007,606
Securities sold under agreements to repurchase                    107,173              65,018
Advances from Federal Home Loan Bank                              328,507             283,507
Junior subordinated debt                                           15,464              15,464
Drafts outstanding                                                  2,792               4,162
Advances by borrowers for property taxes and insurance              1,750               1,414
Accrued interest payable                                            1,502               2,730
Other liabilities                                                   9,570              10,328
                                                            -------------       -------------
                                                                1,220,137           1,390,229
                                                            -------------       -------------

STOCKHOLDERS' EQUITY:
Serial preferred stock, 1,000,000 shares authorized
  and unissued                                                         --                  --
Common stock, $.01 par value, 25,000,000 shares
  authorized; 17,486,784 shares at September 30, 2004
  and 17,668,277 shares at June 30, 2005 issued
  and outstanding                                                     175                 177
Additional paid-in capital                                         10,624              11,170
Retained earnings, restricted                                      73,533              82,998
Treasury stock, at cost (108,557 shares at
  September 30, 2004 and zero at June 30, 2005)                    (1,182)                 --
Accumulated other comprehensive income,
  net of tax                                                        2,198               1,484
                                                            -------------       -------------
  Total stockholders' equity                                       85,348              95,829
                                                            -------------       -------------
                                                            $   1,305,485       $   1,486,058
                                                            =============       =============
</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 JUNE 30, 2004 AND 2005

<TABLE>
<CAPTION>
                                                                  2004               2005
                                                                  ----               ----
                                                                          (Unaudited)
                                                                        (In thousands,
                                                                       Except per share)
<S>                                                           <C>                <C>
Interest income:
   Loans receivable                                           $     11,783       $     14,807
   Investment securities                                               750              1,277
   Mortgage-backed securities                                        4,107              4,147
   Other                                                                21                106
                                                              ------------       ------------
Total interest income                                               16,661             20,337
                                                              ------------       ------------

Interest expense:
   Deposits                                                          2,445              3,856
   Securities sold under agreements to repurchase                      486                760
   Advances from Federal Home Loan Bank                              2,800              2,981
   Other borrowings                                                    161                234
                                                              ------------       ------------
Total interest expense                                               5,892              7,831
                                                              ------------       ------------
   Net interest income                                              10,769             12,506
Provision for loan losses                                              200                550
                                                              ------------       ------------
   Net interest income after provision for loan losses              10,569             11,956
                                                              ------------       ------------

Other income:
   Fees and service charges on loan and deposit accounts               964              1,611
   Gain on sales of loans held for sale                                315                215
   Loss on sales of investment securities available
     for sale and mortgage-backed securities available
     for sale                                                         (440)              (127)
   Gain(loss) from real estate owned, net                               96                (28)
   Income from sales of non-depository products                        416                441
   Federal Home Loan Bank stock dividends                              132                183
   Other income                                                        638                806
                                                              ------------       ------------
                                                                     2,121              3,101
                                                              ------------       ------------

General and administrative expenses:
   Salaries and employee benefits                                    4,003              4,612
   Net occupancy, furniture and fixtures and data
     processing expenses                                             1,482              1,968
   FDIC insurance premium                                               26                 26
   Marketing expenses                                                  247                463
   Other expense                                                     1,015              1,351
                                                              ------------       ------------
                                                                     6,773              8,420
                                                              ------------       ------------
Income before income taxes                                           5,917              6,637
Income taxes                                                         2,018              2,281
                                                              ------------       ------------
Net income                                                    $      3,899       $      4,356
                                                              ============       ============

Net income per common share:
   Basic                                                      $        .22       $        .25
                                                              ============       ============
   Diluted                                                    $        .21       $        .23
                                                              ============       ============

Weighted average common shares outstanding:
   Basic                                                        17,430,000         17,657,000
                                                              ============       ============
   Diluted                                                      18,356,000         18,634,000
                                                              ============       ============

Dividends per share                                           $       .041       $        .05
                                                              ============       ============
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       4
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 2004 AND 2005

<TABLE>
<CAPTION>
                                                                    2004               2005
                                                                    ----               ----
                                                                          (Unaudited)
                                                                         (In thousands,
                                                                       Except per share)
<S>                                                             <C>                <C>
Interest income:
   Loans receivable                                             $     34,182       $     40,911
   Investment securities                                               2,062              3,652
   Mortgage-backed securities                                         12,048             12,403
   Other                                                                  60                229
                                                                ------------       ------------
Total interest income                                                 48,352             57,195
                                                                ------------       ------------

Interest expense:
   Deposits                                                            7,510              9,290
   Securities sold under agreements to repurchase                      1,662              2,074
   Advances from Federal Home Loan Bank                                7,811              9,277
   Other borrowings                                                      483                637
                                                                ------------       ------------
Total interest expense                                                17,466             21,278
                                                                ------------       ------------
   Net interest income                                                30,886             35,917
Provision for loan losses                                              1,250              1,525
                                                                ------------       ------------
   Net interest income after provision for loan losses                29,636             34,392
                                                                ------------       ------------

Other income:
   Fees and service charges on loan and deposit accounts               2,746              4,124
   Gain on sales of loans held for sale                                1,115                769
   Gain (loss) on sales of investment securities available
     for sale and mortgage-backed securities available
     for sale                                                           (707)               119
   Gain on investment security held to maturity
     called by issuer                                                     --                160
   Gain(loss) from real estate owned                                       5                (72)
   Income from sales of non-depository products                        1,441              1,371
   Federal Home Loan Bank stock dividends                                362                534
   Other income                                                        1,917              2,199
                                                                ------------       ------------
                                                                       6,879              9,204
                                                                ------------       ------------

General and administrative expenses:
   Salaries and employee benefits                                     12,006             13,532
   Net occupancy, furniture and fixtures and data
     processing expenses                                               4,547              5,567
   FDIC insurance premium                                                 79                 79
   FHLB prepayment penalties                                              77                 --
   Marketing expenses                                                    625              1,456
   Other expense                                                       2,784              3,886
                                                                ------------       ------------
                                                                      20,118             24,520
                                                                ------------       ------------
Income before income taxes                                            16,397             19,076
Income taxes                                                           5,502              6,541
                                                                ------------       ------------
Net income                                                      $     10,895       $     12,535
                                                                ============       ============

Net income per common share:
   Basic                                                        $        .63       $        .71
                                                                ============       ============
   Diluted                                                      $        .60       $        .68
                                                                ============       ============

Weighted average common shares outstanding:
   Basic                                                          17,293,000         17,558,000
                                                                ============       ============
   Diluted                                                        18,266,000         18,545,000
                                                                ============       ============

Dividends per share                                             $       .124       $        .14
                                                                ============       ============
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       5
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED JUNE 30, 2004 AND 2005

<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                                   $    172       $ 10,192       $ 63,030        $ (3,375)     $  3,688        $ 73,707
Net income                                         --             --         10,895              --            --          10,895
Other comprehensive
 income:
 Unrealized losses arising
 during period, net of
 tax benefit of $2,990                             --             --             --              --        (4,878)             --
 Less: reclassification
 adjustment for losses
 included in net income,
 net of tax benefit of $269                        --             --             --              --          (438)             --
                                                                                                         --------
Other comprehensive loss                           --             --             --              --        (5,316)         (5,316)
                                                                                                         --------        --------
Comprehensive income                               --             --             --              --            --           5,579
                                                                                                                         --------
Exercise of stock
  options                                           2            296         (1,176)          1,867            --             989
Cash dividends                                     --             --         (2,153)             --            --          (2,153)
                                             --------       --------       --------        ------        --------        --------
Balance at June
  30, 2004                                   $    174       $ 10,488       $ 70,596        $ (1,508)     $ (1,628)       $ 78,122
                                             ========       ========       ========        ========      ========        ========

Balance at September
  30, 2004                                   $    175       $ 10,624       $ 73,533        $ (1,182)     $  2,198        $ 85,348
Net income                                         --             --         12,535              --            --          12,535
Other comprehensive
 income:
 Unrealized losses arising
 during period, net of
 tax benefit of $543                               --             --             --              --          (887)             --
 Less: reclassification
 adjustment for gains
 included in net income,
 net of taxes of $106                              --             --             --              --           173              --
                                                                                                         --------
Other comprehensive income                         --             --             --              --          (714)           (714)
                                                                                                         --------        --------
Comprehensive income                               --             --             --              --            --          11,821
                                                                                                                         --------
Exercise of stock
  options                                           2            546           (602)          1,182            --           1,128
Cash dividends                                     --             --         (2,468)             --            --          (2,468)
                                             --------       --------       --------        ------        --------        --------
Balance at June
  30, 2005                                   $    177       $ 11,170       $ 82,998        $     --      $  1,484        $ 95,829
                                             ========       ========       ========        ========      ========        ========
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       6
<PAGE>

Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2004 AND 2005

<TABLE>
<CAPTION>
                                                                              2004              2005
                                                                              ----              ----
                                                                                  (Unaudited)
                                                                                 (In thousands)
<S>                                                                        <C>               <C>
Cash flows from operating activities:
   Net income                                                              $   10,895        $   12,535
   Adjustments to reconcile net income to net cash
     Used in operating activities:
     Depreciation                                                               1,611             2,010
     Provision for loan losses                                                  1,250             1,525
     (Gain) loss on sale of investment securities
       available for sale and mortgage-backed securities
       available for sale                                                         707              (119)
     Gain on call of investment security called
       by issuer                                                                   --              (160)
     Gain on sale of real estate acquired through foreclosure                      --               (11)
     Loss on disposal of office properties and equipment                           --               124
   Prepayment penalties on FHLB advances                                           77                --
   Origination of loans receivable held for sale                              (42,896)          (46,843)
   Proceeds from sales of loans receivable held for sale                       22,465            12,306
   Recovery from write-down of mortgage
     servicing rights                                                             (81)             (223)
   (Increase) decrease in:
       Cash value of life insurance                                              (720)             (709)
       Accrued interest receivable                                               (346)             (562)
       Other assets                                                            (3,984)           (5,098)
   Increase (decrease) in:
       Accrued interest payable                                                    80             1,228
       Other liabilities                                                         (572)            1,314
                                                                           ----------        ----------
Net cash used in operating activities                                         (11,514)          (22,683)
                                                                           ----------        ----------

Cash flows from investing activities:
   Proceeds from sales of investment securities available
     for sale                                                                   1,893             3,643
   Proceeds from issuer call of investment securities
     available for sale                                                         2,000             1,950
   Proceeds from issuer call of investment securities held
     to maturity                                                                   --             8,000
   Purchases of investment securities available for sale                       (5,371)           (3,659)
   Purchases of investment securities held to maturity                             --           (10,000)
   Proceeds from sales of mortgage-backed securities
     available for sale                                                       143,190           179,049
   Purchases of mortgage-backed securities available for sale                (206,612)         (243,250)
   Principal collected on mortgage-backed securities
     available for sale                                                        91,008            66,892
   Origination of loans receivable, net                                      (424,686)         (587,153)
   Proceeds from sale of commercial loan participations                            --            19,456
   Principal collected on loans receivable                                    329,366           453,382
   Purchase of bank-owned life insurance                                       (4,500)               --
   Proceeds from sales of real estate acquired through
     foreclosure, net                                                           1,087             1,092
   Purchases of office properties and equipment                                (3,147)           (5,118)
   Proceeds from sales of office properties and equipment                          58                --
   Purchase of feds fund sold                                                      --            (1,824)
   Change in FHLB stock, net                                                     (661)            1,373
                                                                           ----------        ----------
Net cash used in investing activities                                         (76,375)         (116,167)
                                                                           ----------        ----------
</TABLE>

                                                                     (CONTINUED)


                                       7
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2004 AND 2005 (CONTINUED)

<TABLE>
<CAPTION>
                                                                         2004                2005
                                                                         ----                ----
                                                                                (Unaudited)
                                                                               (In thousands)
<S>                                                                  <C>                 <C>
Cash flows from financing activities:
   Increase in deposits                                              $    66,978         $   254,227
   Decrease in securities sold under agreements
     to repurchase, net                                                   (9,583)            (42,155)
   Proceeds from FHLB advances                                           533,176             544,400
   Repayment of FHLB advances                                           (493,248)           (589,400)
   Repayment of other borrowings                                             (81)                 --
   Prepayment penalties on early extinguishment of debt                      (77)                 --
   Decrease in advance payments by borrowers for
     Property taxes and insurance, net                                      (333)               (336)
   Increase in drafts outstanding, net                                       630               1,370
   Cash dividends to stockholders                                         (2,153)             (2,468)
   Proceeds from exercise of stock options                                   989               1,128
                                                                     -----------         -----------
Net cash provided by financing activities                                 96,298             166,766
                                                                     -----------         -----------
Net increase (decrease) in cash and cash equivalents                       8,409              27,916
Cash and cash equivalents at beginning of period                          21,575              29,634
                                                                     -----------         -----------
Cash and cash equivalents at end of period                           $    29,984         $    57,550
                                                                     ===========         ===========

Supplemental information:
   Interest paid                                                     $    17,386         $    20,050
                                                                     ===========         ===========
   Income taxes paid                                                 $     5,638         $     5,040
                                                                     ===========         ===========

Supplemental schedule of non-cash investing and
   financing transactions:

   Securitization of mortgage loans into mortgage-backed
     Securities                                                      $    31,736         $    33,657
                                                                     ===========         ===========

   Transfer of mortgage loans to real estate acquired
     Through foreclosure                                             $       515         $       818
                                                                     ===========         ===========

   Increase in other assets and junior subordinated debt
     resulting from deconsolidation under FIN 46R                    $       464         $        --
                                                                     ===========         ===========

   Unrealized gain (loss) in investment securities and
     mortgage-backed securities available for sale,
     net of tax                                                      $    (4,878)        $      (887)
                                                                     ===========         ===========
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       8
<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  and the nine-month  periods ended June 30, 2005 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  deterioration.  Securities  with
continuous  losses less than 12 months at September  30, 2004  consisted of four
securities with an aggregate unrealized loss of $3,000. There were no securities
with continuous losses less than twelve months at June 30, 2005. Securities with
continuous  losses 12 months or longer at  September  30, 2004  consisted of ten
securities  with an  aggregate  unrealized  loss  of  $81,000.  Securities  with
continuous  losses  12  months  or  longer  at June 30,  2005  consisted  of six
securities with an aggregate unrealized loss of $27,000.  None of the individual
investment  securities had an unrealized  loss that exceeded 5% of its amortized
cost at either date.

(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
                                -------------------------       -------------------------       -------------------------
                                                                     (Unaudited)
                                                               (Dollars in thousands)
                                   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>
                                                                   June 30, 2005
                                -----------------------------------------------------------------------------------------
                                    Less than 12 Months             12 Months or Longer                   Total
                                -------------------------       -------------------------       -------------------------
                                                                     (Unaudited)
                                                               (Dollars in thousands)
                                   Fair         Unrealized        Fair          Unrealized         Fair         Unrealized
                                  Value           Losses          Value            Losses         Value            Losses
                                  -----           ------          -----            ------         -----            ------
<S>                             <C>                  <C>           <C>               <C>          <C>              <C>
Collateralized Mortgage         $  34,183            (101)         14,140            (122)         48,323            (223)
  Obligations
FNMA                               25,846            (140)         36,548            (538)         62,394            (678)
GNMA                               32,751            (158)          2,051              (2)         34,802            (160)
FHLMC                              29,398            (190)         23,032            (280)         52,430            (470)
                                ---------       ---------       ---------       ---------       ---------       ---------
                                $ 122,178            (589)         75,771            (942)        197,949          (1,531)
                                =========       =========       =========       =========       =========       =========
</TABLE>


                                       9
<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  deterioration.  The
unrealized  losses are  comprised of 25  securities at September 30, 2004 and 31
securities  at June 30,  2005  that have had  continuous  losses of less than 12
months.  There were 8 securities at September 30, 2004 and 21 securities at June
30, 2005,  with  continuous  losses 12 months or longer.  None of the individual
investment  securities had an unrealized  loss that exceeded 5% of its amortized
cost at either date.

(4) LOANS RECEIVABLE, NET

Loans receivable, net consists of the following:

<TABLE>
<CAPTION>
                                                        September 30,            June 30,
                                                             2004                  2005
                                                        -------------          -----------
                                                                   (Unaudited)
                                                              (Dollars in thousands)
<S>                                                      <C>                   <C>
First mortgage loans:
   Single family to four family units                    $   329,287           $   356,757
   Land and land development                                  99,697               108,952
   Residential lots                                           29,839                33,183
   Other, primarily commercial real estate                   182,924               214,824
   Construction loans on residential properties               82,789               119,735
   Construction loans on commercial properties                10,503                10,998

Consumer and commercial loans:
   Installment consumer loans                                 18,024                19,591
   Mobile home loans                                           4,618                 4,213
   Savings account loans                                       2,058                 1,910
   Equity lines of credit                                     30,906                34,170
   Commercial and other loans                                 32,101                37,037
                                                         -----------           -----------
                                                             822,746               941,370
Less:
   Allowance for loan losses                                  11,077                11,854
   Deferred loan costs, net                                     (674)                 (408)
   Undisbursed portion of loans in process                    21,613                27,222
                                                         -----------           -----------

                                                         $   790,730           $   902,702
                                                         ===========           ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                             Nine months Ended June 30,
                                                             --------------------------
                                                             2004                  2005
                                                             ----                  ----
                                                                     (Unaudited)
                                                                (Dollars in thousands)
<S>                                                      <C>                   <C>
Allowance at beginning of period                         $     9,832           $    11,077
Provision for loan losses                                      1,250                 1,525
                                                         -----------           -----------
Recoveries:
 Residential loans                                                --                    --
 Commercial loans                                                149                    22
 Consumer loans                                                   41                    66
                                                         -----------           -----------
   Total recoveries                                              190                    88
                                                         -----------           -----------
Charge-offs:
 Residential loans                                                --                    --
 Commercial loans                                                109                   504
 Consumer loans                                                  321                   332
                                                         -----------           -----------
   Total charge-offs                                             430                   836
                                                         -----------           -----------
   Net charge-offs                                               240                   748
                                                         -----------           -----------
 Allowance at end of period                              $    10,842           $    11,854
                                                         ===========           ===========
</TABLE>


                                       10
<PAGE>

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

(4) LOANS RECEIVABLE, NET - CONTINUED

<TABLE>
<CAPTION>
                                                             Nine months Ended June 30,
                                                             --------------------------
                                                               2004            2005
                                                               ----            ----
                                                                   (Unaudited)
<S>                                                            <C>             <C>
Ratio of allowance to total net loans
 outstanding at the end of the period                          1.38%           1.30%
                                                               ====            ====

Ratio of net charge-offs to average
 total loans outstanding during the period (annualized)         .04%            .12%
                                                               ====            ====
</TABLE>

Non-accrual  loans,  which are  primarily  loans over  ninety  days  delinquent,
totaled  approximately  $4.8 million and $3.8 million at June 30, 2004 and 2005,
respectively. For the nine months ended June 30, 2004 and 2005, interest income,
which  would have been  recorded,  would have been  approximately  $184,000  and
$241,000,  respectively,  had non-accruing loans been current in accordance with
their original terms.

At June 30, 2005 and 2004, impaired loans totaled $3.4 million.  Included in the
allowance  for loan  losses at June 30,  2005 was  $553,000  related to impaired
loans compared to $266,000 at June 30, 2004. The average recorded  investment in
impaired loans for the nine months ended June 30, 2005 was $3.9 million compared
to $4.1  million for the nine months  ended June 30,  2004.  Interest  income of
$133,000 and $232,000 was  recognized on impaired loans for the quarter and nine
months  ended  June 30,  2005.  Interest  income of  $60,000  and  $240,000  was
recognized  on impaired  loans for the  quarter  and nine months  ended June 30,
2004.

(5) DEPOSITS

Deposits consist of the following:

<TABLE>
<CAPTION>
                                    September 30, 2004                 June 30, 2005
                                ---------------------------     ---------------------------
                                                   Weighted                        Weighted
                                                    Average                         Average
                                   Amount            Rate         Amount             Rate
                                   ------            ----         ------             ----
                                                         (Unaudited)
                                                   (Dollars in thousands)
<S>                             <C>                  <C>        <C>                  <C>
Checking accounts               $  233,128           0.22%      $  335,480           0.22%
Money market accounts              224,468           1.37          223,579           1.97
Statement savings accounts          55,205           0.80           74,604           1.22
Certificate accounts               240,578           2.49          373,943           3.03
                                ----------                      ----------
                                $  753,379           1.33%      $1,007,606           1.72%
                                ==========                      ==========
</TABLE>

Included in certificate  accounts  ("CDs") are $125.5 million of brokered CDs at
June 30, 2005.  There were no brokered CDs at  September  20, 2004.  The average
rate and  remaining  term of  brokered  CDs at June 30,  2005 was 3.19% and five
months, respectively.

(6) ADVANCES FROM FEDERAL HOME LOAN BANK

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

<TABLE>
<CAPTION>
                                    September 30, 2004                 June 30, 2005
                                ---------------------------     ---------------------------
                                                   Weighted                        Weighted
                                                    Average                         Average
                                   Amount            Rate         Amount             Rate
                                   ------            ----         ------             ----
                                                         (Unaudited)
                                                   (Dollars in thousands)
<S>                             <C>                  <C>        <C>                  <C>
Maturing within:
1 year                          $   64,500           2.78%      $   14,742           5.13%
2 years                              4,177           2.79            3,294           2.53
3 years                             11,560           2.23            5,951           3.08
4 years                              3,977           3.18           29,130           2.15
5 years                             31,803           2.36           17,650           4.33
After 5 years                      212,490           4.20          212,740           4.21
                                ----------                      ----------
                                $  328,507           3.64%      $  283,507           4.01%
                                ==========                      ==========
</TABLE>


                                       11
<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 June 30, 2005,  the Bank had pledged first  mortgage
loans and  mortgage-backed  securities  with unpaid  balances  of  approximately
$357.3  million  and  $433.1  million,  respectively,  as  collateral  for  FHLB
advances.

At June 30, 2005,  included in the one, two, three,  four,  five, and after five
years  maturities were advances of $200.0 million,  with a weighted average rate
of 3.86%,  subject to call  provisions.  Callable  advances at June 30, 2005 are
summarized as follows:  $75.0 million  callable in fiscal 2005,  with a weighted
average rate of 5.52%;  $28.0 million  callable in fiscal 2006,  with a weighted
average rate of 2.29%;  $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 market interest rates rise.

(7) EARNINGS PER SHARE

Basic  earnings  per share for the three and nine months ended June 30, 2004 and
2005 are computed by dividing net income by the weighted  average  common shares
outstanding  during the respective  periods.  Diluted earnings per share for the
three and nine months  ended June 30, 2004 and 2005 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 June 30,
                                                               (Unaudited)

                                         2004                  2004      2005                  2005
                                         --------------------------      --------------------------
                                         BASIC              DILUTED      BASIC              DILUTED
                                         --------------------------      --------------------------
<S>                                      <C>             <C>             <C>             <C>
Weighted average shares outstanding      17,430,000      17,430,000      17,657,000      17,657,000

Effect of dilutive securities-
  Stock options                                  --         926,000              --         977,000
                                         --------------------------      --------------------------
                                         17,430,000      18,356,000      17,657,000      18,634,000
                                         ==========================      ==========================

<CAPTION>
                                                   For the Nine months Ended June 30,
                                                              (Unaudited)

                                         2004                  2004      2005                  2005
                                         --------------------------      --------------------------
                                         BASIC              DILUTED      BASIC              DILUTED
                                         --------------------------      --------------------------
<S>                                      <C>             <C>             <C>             <C>
Weighted average shares outstanding      17,293,000      17,293,000      17,558,000      17,558,000

Effect of dilutive securities-
  Stock options                                  --         973,000              --         987,000
                                         --------------------------      --------------------------
                                         17,293,000      18,266,000      17,558,000      18,545,000
                                         ==========================      ==========================
</TABLE>

(8) STOCK BASED COMPENSATION

At June 30, 2005,  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.


                                       12
<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 June 30,
                                                           ---------------------------
                                                             2004             2005
                                                             ----             ----
                                                                   (Unaudited)
                                                              (Dollars in thousands)
<S>                                                      <C>               <C>
Net income, as reported                                  $      3,899      $      4,356
Deduct: Total stock-based employee and director
        compensation expense determined under
        fair value based method for all awards,
        net of related tax effects                               (156)             (201)
                                                         ------------      ------------
Pro forma net income                                     $      3,743      $      4,155
                                                         ============      ============

Basic earnings per share:
     As reported                                         $        .22      $        .25
                                                         ============      ============
     Pro forma                                           $        .21      $        .24
                                                         ============      ============

Diluted earnings per share:
     As reported                                         $        .21      $        .23
                                                         ============      ============
     Pro forma                                           $        .20      $        .22
                                                         ============      ============

<CAPTION>
                                                           Nine months Ended June 30,
                                                           --------------------------
                                                             2004             2005
                                                             ----             ----
                                                                   (Unaudited)
                                                              (Dollars in thousands)
<S>                                                      <C>               <C>
Net income, as reported                                  $     10,895      $     12,535
Deduct: Total stock-based employee and director
        compensation expense determined under
        fair value based method for all awards,
        net of related tax effects                               (442)             (577)
                                                         ------------      ------------
Pro forma net income                                     $     10,453      $     11,958
                                                         ============      ============

Basic earnings per share:
     As reported                                         $        .63      $        .71
                                                         ============      ============
     Pro forma                                           $        .60      $        .68
                                                         ============      ============

Diluted earnings per share:
     As reported                                         $        .60      $        .68
                                                         ============      ============
     Pro forma                                           $        .57      $        .64
                                                         ============      ============
</TABLE>

(9) COMMON STOCK DIVIDEND

On July  30,  2004 and  December  15,  2004,  the  Company  declared  10%  stock
dividends,   aggregating   approximately   1,442,000   and   1,594,000   shares,
respectively.  All share and per share data have been retroactively restated for
the stock dividends.


                                       13
<PAGE>

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

(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.  These  standby  letters  of  credit  are  generally   collateralized.
Commitments  under  standby  letters of credit are usually one year or less.  At
June 30, 2005,  the Company has recorded no liability  for the current  carrying
amount of the obligation to perform as a guarantor. The maximum potential amount
of  undiscounted  future  payments  related  to  standby  letters  of  credit at
September 30, 2004 and 2005 was $5.5 million and $5.8 million, respectively.

(11) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITES

The Bank originates  certain fixed rate residential  loans with the intention of
selling  these  loans in the  secondary  market.  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 $6.5
million at June 30, 2005. The fair value of the loan commitments was an asset of
approximately  $50,000 at June 30, 2005.  As of June 30,  2005,  the Company had
sold $8.0 million in forward  commitments to deliver fixed rate  mortgage-backed
securities, which were recorded as a derivative liability of $11,000.


                                       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

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  the  Company's  control  and which may
cause its 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  the   Company's   market   areas   may   increase
            significantly.

      o     Adverse  changes  in the  economy  or  business  conditions,  either
            nationally  or  in  the  Company's  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 the  Company's  provision for losses on loans
            and related expenses.

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

      o     Fluctuations  in interest  rates and market  prices could reduce the
            Company's  net  interest  margin and asset  valuations  and increase
            expenses.

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

      o     The Company's continued growth will depend in part on its ability to
            enter  new  markets  successfully  and  capitalize  on other  growth
            opportunities.

      o     Changes in legislative or regulatory requirements, or actions by the
            Securities and Exchange Commission ("SEC"), the Financial Accounting
            Standards Board ("FASB"), or the Public Company Accounting Oversight
            Board, applicable to the Company and its subsidiaries could increase
            costs,  limit certain  operations  and adversely  affect  results of
            operations.

      o     Changes in tax  requirements,  including tax rate  changes,  new tax
            laws and revised tax law  interpretations may increase the Company's
            tax expense or adversely affect its 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.  The Company
undertakes   no  obligation   to  publicly   update  or  otherwise   revise  any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.


                                       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

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
primary  business  activities  of the Company  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 (the most recent date for which published data is available) 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.

In the  fourth  fiscal  quarter  of 2004,  the Bank  began two  significant  new
initiatives. The first was "The Experience of FANtastic! Customer Service". This
initiative  focuses on  Customer  service  and  convenience.  The Bank is in the
process of  redesigning  its  infrastructure,  software  and products to improve
Customer  service and convenience and Associate  productivity.  In addition,  in
order  to  improve  Customer   service  and  convenience,   the  Bank  added  an
extended-hours  Call Center and introduced "6 Day Branch  Banking" with extended
operating  hours.  The  Call  Center  employs  20 to  25  Associates.  The  Bank
experienced  increased  salary and benefit  expenses in the first nine months of
fiscal 2005 and anticipates these expenses continuing thereafter associated with
the hiring, training and placement of these new Associates.


                                       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

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

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 three
fiscal quarters of 2005, marketing expenses were $1,456,000 compared to $625,000
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 three fiscal quarters of fiscal 2005,  checking
account balances grew  approximately  44%. 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  the  Company's  financial
condition  and results of  operations,  it is important to  understand  the more
critical  accounting policies and the extent to which judgment and estimates are
used 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 risk,  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.

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. 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  that are  unsecured  or are  secured by  residential  property.  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. Standby letters
of credit are generally collateralized and are usually one year or less.


                                       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

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

At June 30, 2005,  the Company  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  September  30, 2004 and June
30,2005 was $5.5 million and $5.8 million, respectively.

A summary of loans receivable with  undisbursed  commitments to extend credit at
September 30, 2004 and June 30, 2005 follows:

<TABLE>
<CAPTION>
                                                                   September 30,       June 30,
                                                                   -------------       --------
                                                                       2004              2005
                                                                       ----              ----
                                                                             (Unaudited)
                                                                        (Dollars In thousands)
<S>                                                                <C>               <C>
Residential mortgage loans in process                              $     21,613      $     27,222
Business and consumer credit card lines                                  14,171            14,249
Consumer home equity lines                                               37,031            39,789
Other consumer lines of credit                                            8,361             7,295
Commercial real estate and construction
     and land development                                                52,978           100,460
Other commercial lines of credit                                          8,071             9,552
                                                                   ------------      ------------
     Total loans receivable with undisbursed commitments           $    142,225      $    198,567
                                                                   ============      ============
</TABLE>

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.  Since 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 $6.5 million at
June  30,  2005.  The  fair  value  of the  loan  commitments  was an  asset  of
approximately  $50,000 at June 30, 2005.  As of June 30,  2005,  the Company had
sold $8.0 million in forward  commitments to deliver fixed rate  mortgage-backed
securities, which were recorded as a derivative liability of $11,000.

DISCUSSION OF FINANCIAL CONDITION CHANGES FROM SEPTEMBER 30, 2004 TO
--------------------------------------------------------------------
JUNE 30, 2005
-------------

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
$467.6  million  for the nine  months  ended June 30,  2004,  compared to $634.0
million for the nine  months  ended June 30,  2005.  Loan  principal  repayments
amounted  to $329.4  million in the first  three  quarters  of 2004  compared to
$453.4 million for the nine months ended June 30, 2005. In addition, the Company
sells certain loans in the secondary market to finance future loan originations.
In the first three  quarters of fiscal 2004,  the Company sold mortgage loans or
securitized  and sold  mortgage  loans  totaling  $54.2 million that compares to
$46.0  million for the first nine months ended June 30, 2005.  In addition,  the
Bank sold $19.5  million of  commercial  loan  participations  in the first nine
months ended June 30, 2005. No commercial loan  participations  were sold in the
nine months ended June 30, 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

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

During the nine month period ended June 30, 2005, the Company  securitized $33.7
million of mortgage loans and concurrently sold these mortgage-backed securities
to outside  third parties and  recognized a net gain on sale of $769,000,  which
included $454,000 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 nine month  period  ended June 30, 2005,  the Company  purchased  $256.9
million in investment and mortgage-backed  securities. For the nine month period
ended June 30, 2004,  the Company  purchased  $212.0  million in investment  and
mortgage-backed  securities.  These purchases during the nine month period ended
June 30, 2005 were primarily  funded by borrowings,  repayments of $66.9 million
within the  securities  portfolio  and sales of  mortgage-backed  securities  of
$119.0 million.

During the nine month  periods  ended June 30, 2005 the Company sold  commercial
loan  participations  totaling $19.5 million.  No commercial loan participations
were sold in the same period in 2004.

Total customer deposits, which exclude certificates of deposits obtained through
brokers,  increased $128.7 million between September 30, 2004 and June 30, 2005.
The Company places  significant  emphasis on growth in money market and checking
accounts.  Money market and checking accounts have increased from  approximately
$457.6  million at September  30, 2004 to $559.1  million at June 30,  2005,  an
increase of $101.5  million or 22.2%.  Core  deposits  (defined as money  market
accounts,  checking accounts and statement savings accounts) have increased from
$512.8  million at September  30, 2004 to $633.7  million at June 30,  2005,  an
increase of 23.6%.

At June 30, 2005,  the Company had $341.9  million of  certificates  of deposits
("CDs")  that were due to mature  within  one year.  Included  in these CDs were
brokered CDs totaling  $125.5  million.  Based on past  experience,  the Company
believes  that the majority of the  non-brokered  certificates  of deposits will
renew with the  Company.  At June 30,  2005,  the  Company  had  commitments  to
originate  $27.2  million  in  residential  mortgage  loans,  $56.6  million  in
undisbursed  business  and  retail  lines of  credit,  $14.2  million  in unused
business and personal  credit card lines,  and $100.5 million in commercial real
estate and construction  and land development  which the Company expects to fund
from  normal  operations.  At June 30,  2005,  the  Company  had  $79.1  million
available in FHLB advances.

Additionally,  at June 30, 2005, the Company had outstanding available lines for
federal funds of $20.0 million.

As a result of $12.5  million in net  income,  less the cash  dividends  paid to
stockholders  of  approximately  $2.5 million,  proceeds of  approximately  $1.1
million from the exercise of stock  options,  and the net decrease in unrealized
gain  on  securities  available  for  sale,  net  of  income  tax  of  $714,000,
stockholders' equity increased from $85.3 million at September 30, 2004 to $95.8
million at June 30, 2005.

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  $108.1 million at June 30,
2005, exceeding the core capital requirement by $63.5 million. At June 30, 2005,
the Bank's  risk-based  capital of  approximately  $118.4  million  exceeded its
current   risk-based  capital   requirement  by  $47.7  million.   (For  further
information see Regulatory Capital Matters).


                                       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

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

The table below summarizes future contractual obligations as of June 30, 2005
(unaudited):

<TABLE>
<CAPTION>
                                                       Payments Due by Period
                            --------------------------------------------------------------------------
                                            1 Year and          2-3            4-5            After 5
                               Total           Less            Years           Years           Years
                            ----------      ----------      ----------      ----------      ----------
<S>                         <C>             <C>             <C>             <C>             <C>
Time deposits               $  373,943      $  341,864      $   28,835      $    2,468      $      776
Short-term borrowings           79,760          79,760              --              --              --
Long-term debt                 284,229              --           9,245          46,780         228,204
Construction contracts         695,000         695,000              --              --              --
Operating leases                   578             140             150              69             219
                            ----------      ----------      ----------      ----------      ----------
Total contractual cash
     obligations            $1,433,510      $1,116,764      $   38,230      $   49,317      $  229,199
                            ==========      ==========      ==========      ==========      ==========
</TABLE>

Purchase  commitments.  The  Company  signed a  non-binding  letter of intent to
purchase land for approximately $2.8 million,  which is expected to close during
the fourth quarter.

Lease  commitments.  The Company has entered into a land lease for a new branch,
expected to close  during the fourth  quarter.  Lease  payments  aggregate  $2.6
million for the initial  term of 30 years with six  five-year  renewal  options.
Lease payments during the renewal periods aggregate $5.9 million.

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

Net income increased from $10.9 million, or $.60 per diluted share, for the nine
months ended June 30, 2004 to $12.5  million,  or $.68 per diluted share for the
nine months ended June 30, 2005. This 15.0% increase in net income resulted from
increased net interest  income of $5.0 million,  or 16.3%,  an increase in other
income  of $2.3  million,  offset  by  increased  provision  for loan  losses of
$275,000  increased  general and  administrative  expenses of $4.4 million,  and
increased income taxes of $1.0 million.

As a result of growth in loans  receivable and  investments and an increased net
interest  margin,  net interest income  increased 16.3%. The net interest margin
increased  from 3.58% for the nine  months  ended June 30, 2004 to 3.68% for the
nine  months  ended  June 30,  2005.  The  increase  in net  interest  income is
primarily  attributable  to an  increase  in  average  earning  assets of $152.9
million,  or 13.3%.  Average loans  receivable  increased $109.8 million for the
nine months ended June 30, 2005 compared to June 30, 2004. In addition,  average
balances of investment  securities  increased  approximately $43.1 million.  The
investment  securities  were  primarily  funded  with  deposits.  The  Company's
deposits  increased from $753.4 million at June 30, 2004 to $1.0 billion at June
30, 2005.

The Company's  provision for loan losses increased  $275,000 for the nine months
ended  June  30,  2005  when  compared  to the  prior  year  primarily  due to a
significant  increase  in the loan  portfolio  as result of a robust real estate
market and the risk factors related to the underlying  portfolio.  The allowance
for loan losses as a percentage  of loans was 1.30% at June 30, 2005 as compared
to 1.38% at June 30, 2004.

Other income increased from $6.9 million for the nine months ended June 30, 2004
to $9.2 million for the nine months ended June 30, 2005. This was a result of an
increase  in fees and  service  charges  on loan and  deposit  accounts  of $1.4
million and increased  Federal Home Loan Bank stock dividends of $172,000 offset
by a decrease in gains on sales of loans held for sale of $346,000.  The Company
also had gains on sales of  securities  available  for sale and mortgage  backed
securities  available  for sale of $119,000  for the nine months  ended June 30,
2005, compared to losses of $707,000 for the nine months ended June 30, 2004. In
addition, the Company had gain on investment security held to maturity called by
issuer of $160,000  for the nine months  ended June 30, 2005 and $0 for the nine
months ended June 30, 2004.

General and  administrative  expenses  increased from $20.1 million for the nine
months  ended June 30, 2004 to $24.5  million for the nine months ended June 30,
2005.  Compensation increased from $12.0 million for the first three quarters of
fiscal  2004 to $13.5  million  in the first  three  quarters  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


                                       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

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

center,  Associates  in new  branches  and normal  salary  increases.  Marketing
expenses were $625,000 for the nine months ended June 30, 2004, compared to $1.5
million for the nine months ended June 30, 2005. In addition,  other expense was
$2.8 million for the nine months  ended June 30, 2004,  compared to $3.9 million
for the nine months ended June 30, 2005.

MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF OPERATIONS  FOR THE THREE MONTHS ENDED
--------------------------------------------------------------------------------
JUNE 30, 2004 AND 2005
----------------------

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

Interest  income for the three months  ended June 30,  2005,  increased to $20.3
million as compared to $16.7  million for the three  months ended June 30, 2004.
The earning  asset yield for the three  months  ended June 30,  2005,  was 6.00%
compared  to a yield of 5.61% for the three  months  ended  June 30,  2004.  The
average yield on loans  receivable for the three months ended June 30, 2005, was
6.64%  compared to 6.05% for three  months ended June 30,  2004.  The  increased
yield on loans is primarily due to the increased yield on commercial  loans with
interest  rates tied to the prime lending rate. The prime rate was 6.25% at June
30, 2005, compared to 4.00% at June 30, 2004. The yield on investments decreased
to 4.77% for the three  months  ended  June 30,  2005,  from 4.79% for the three
months ended June 30, 2004.  Long term interest  rates have remained  relatively
constant  during the last year despite  rising  short term rates.  Consequently,
most of the  cash  flows  received  from  the  investment  portfolio  have  been
reinvested   at   approximately   the  same   interest   rate.   Total   average
interest-earning assets were $1.4 billion for the quarter ended June 30, 2005 as
compared to $1.2  billion for the quarter  ended June 30,  2004,  an increase of
14.2%.  The increase in average  interest-earning  assets is primarily due to an
increase in average loans receivable of approximately  $112.7 million  resulting
primarily from growth in the commercial loan portfolio.

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

Interest expense on interest-bearing  liabilities was $7.8 million for the three
months  ended June 30,  2005,  as compared to $5.9  million for the three months
ended June 30,  2004.  The average  cost of deposits  for the three months ended
June 30, 2005,  was 1.64%  compared to 1.33% for the three months ended June 30,
2004. The cost of  interest-bearing  liabilities  was 2.29% for the three months
ended June 30, 2005  compared to 1.98% for the three months ended June 30, 2004.
The cost of FHLB  advances,  repurchase  and reverse  repurchase  agreements and
other borrowings was 3.96%, 2.76% and 6.24%, respectively,  for the three months
ended June 30, 2005.  For the three months ended June 30, 2004, the cost of FHLB
advances,  reverse  repurchase  agreements and other borrowings was 3.73%, 1.36%
and 4.29%, respectively.  The increased cost of funds on other borrowings is due
to the increased  short-term interest rates. At June 30, 2005, the federal funds
rate  was  3.35%   compared   to  1.38%  at  June  30,   2004.   Total   average
interest-bearing  liabilities  increased  from $1.2  billion at June 30, 2004 to
$1.4  billion  at June  30,  2005.  The  increase  in  average  interest-bearing
liabilities is due to an increase in average  deposits of  approximately  $206.6
million,  increased  average FHLB advances of $1.5 million used to fund loan and
investment   securities  growth  and  increased   average  Customer   repurchase
agreements of $18.0 million.  Included in increased deposits, were brokered CD's
which  increased by $113.9  million in average  balances when  comparing the two
periods.  This  increase was partially  offset by a decrease in average  reverse
repurchase agreements of $51.4 million.


                                       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

MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF OPERATIONS  FOR THE THREE MONTHS ENDED
--------------------------------------------------------------------------------
JUNE 30, 2004 AND 2005 - CONTINUED
----------------------------------

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

Net interest  income was $12.5 million for the three months ended June 30, 2005,
as compared to $10.8  million for the three months ended June 30, 2004.  The net
interest margin was 3.71% for the three months ended June 30, 2005,  compared to
3.64% for the three months ended June 30, 2004.

The following table  summarizes the average balance sheet and the related yields
on  interest-earning  assets and  deposits and  borrowings  for the three months
ended June 30, 2004 and 2005:

<TABLE>
<CAPTION>
                                                                (Unaudited)
                                                          (Dollars in Thousands)
                                                        Three Months Ended June 30,
                                                        ---------------------------
                                                2004                                        2005
                                                ----                                        ----
                              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)                 $  779,309       $   11,783       6.05%      $  892,027      $   14,807      6.64%
  Investment
    Securities, MBS
    Securities and
    Other (3)                  407,674            4,878       4.79%         463,320           5,530      4.77%
                            ----------       ----------                  ----------      ----------
Total earning assets        $1,186,983       $   16,661       5.61%      $1,355,347      $   20,337      6.00%
                            ==========       ----------                  ==========      ----------

Liabilities
  Deposits                     732,994            2,445       1.33%         939,634           3,856      1.64%
  Borrowings                   458,269            3,447       3.01%         426,437           3,975      3.73%
                            ----------       ----------                  ----------      ----------
Total interest-bearing
  Liabilities               $1,191,263            5,892       1.98%      $1,366,071           7,831      2.29%
                            ==========       ----------                  ==========      ----------

Net interest income                          $   10,769                                  $   12,506
                                             ==========                                  ==========
Net interest margin                                           3.64%                                     3.71%
Net yield on earning                                          3.63%                                     3.69%
  Assets
</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  increased  from $200,000 for the three
months ended June 30, 2004, to $550,000 for the three months ended June 30, 2005
primarily  due to growth in loan  balances at June 30, 2005.  The  allowance for
loan losses as a  percentage  of loans was 1.30% at June 30, 2005 as compared to
1.38% at June 30, 2004.  The allowance as a percentage of loans  declined due to
improving  economic  conditions  and the risk factors  related to the underlying
portfolio.  Loans  delinquent 90 days or more were $3.8 million or .41% of total
loans at June 30, 2005,  compared to $4.8 million or .61% of total loans at June
30, 2004. The allowance for loan losses was 314% of loans  delinquent  more than
90 days at June 30, 2005, compared to 226% at June 30, 2004. Net charge-offs for
the three months ended June 30, 2005 were $464,000  compared to $116,000 for the
three months ended June 30, 2004.  Included in the  charge-offs  for the quarter
ended June 30, 2005 were two loans  totaling  $196,000  guaranteed  by the Small
Business  Administration  (SBA).  The  guarantee has been denied by the SBA. The
Bank is appealing this decision.


                                       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

MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF OPERATIONS  FOR THE THREE MONTHS ENDED
--------------------------------------------------------------------------------
JUNE 30, 2004 AND 2005 - CONTINUED
----------------------------------

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

Management  believes  that the current level of the allowance for loan losses at
June 30, 2005 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 at that date.

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

For the three months ended June 30, 2005, other income was $3.1 million compared
to $2.1  million  for the three  months  ended June 30,  2004.  Fees and service
charges from deposit  accounts  increased  $647,000 or 67.1% to $1.6 million for
the three months ended June 30, 2005,  compared to $964,000 for the three months
ended June 30,  2004.  The  majority of this  increase is due to fee income from
increased number of personal checking  accounts.  In the first three quarters of
fiscal 2005,  checking account balances grew  approximately 44%. Gain on sale of
loans was $215,000 for the quarter ended June 30, 2005, compared to $315,000 for
the quarter  ended June 30, 2004.  Losses on sales of  securities  available for
sale were  $127,000 for the quarter  ended June 30, 2005,  compared to losses of
$440,000 for the quarter ended June 30, 2004.  Other income was $806,000 for the
three months  ended June 30, 2005,  as compared to $638,000 for the three months
ended June 30, 2004. The increase was primarily due to increased fee income from
ATM activity and debit card transaction fee income.

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

General and administrative expenses were $6.8 million for the quarter ended June
30, 2004 compared to $8.4 million for the quarter ended June 30, 2005.  Salaries
and  employee  benefits  were $4.0  million for the three  months ended June 30,
2004,  as compared to $4.6 million for the three months ended June 30, 2005,  an
increase  of 15.2%,  primarily  due to an  increase  in the  number  of  banking
Associates in business banking,  Associates in the Company's expanded hours call
center, Associates in new branches, and normal salary increases. 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,
equipment  purchased to improve  Customer  convenience  and  increased  checking
activity,  net occupancy,  furniture and fixtures and data  processing  expenses
increased by  $486,000,  including  increased  depreciation  of  $208,000,  when
comparing the two periods. Marketing expenses were $247,000 for the three months
ended June 30,  2004,  compared to $463,000  for the three months ended June 30,
2005.  This is primarily  attributed to the Bank's "Totally Free Checking With A
Gift" initiative;  introduction of Penny Pavilion,  the Bank's totally free coin
counting  service;  marketing of the Bank's  expanded  banking hours,  including
Saturday banking at all Bank branches; and marketing of the Bank's new branch in
Wilmington,  NC.  The  Bank's  "Totally  Free  Checking  With A Gift"  promotion
involves   significant   direct  mail   advertising  as  well  as  direct  media
advertising.  Other  expenses  were $1.0 million for the quarter  ended June 30,
2004 compared to $1.4 million for the quarter ended June 30, 2005. Other expense
increased due to increased debit card and ATM transaction  expenses of $138,000,
increased costs incurred  related to compliance with  Sarbanes-Oxley  of $75,000
and increased  deposit  account  losses of $86,000.  The increase in net deposit
losses and increased debit card and ATM  transaction  expenses are tied directly
to the increased number of personal checking accounts. The Bank expects to incur
similar  increased  professional  expenses  related  to  the  implementation  of
Sarbanes-Oxley compliance throughout the remainder of the year.

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

Income taxes were $2.0 million for the three months ended June 30, 2004 compared
to $2.3 million for the three months ended June 30, 2005.  The effective  income
tax rate as a percentage of pretax income was 34.11% and 34.37% for the quarters
ended  June 30,  2004 and 2005,  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.


                                       23
<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
--------------------------------------------------------------------------------
JUNE 30, 2004 AND 2005 - CONTINUED
----------------------------------

INCOME TAXES CONTINUED
----------------------

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  non-deductibility 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.

MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF  OPERATIONS  FOR THE NINE MONTHS ENDED
--------------------------------------------------------------------------------
JUNE 30, 2004 AND 2005
----------------------

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

Interest  income for the nine months  ended June 30,  2005,  increased  to $57.2
million as compared to $48.4  million for the nine months  ended June 30,  2004.
The  earning  asset  yield for the nine months  ended June 30,  2005,  was 5.86%
compared  to a yield of 5.61%  for the nine  months  ended  June 30,  2004.  The
average yield on loans  receivable  for the nine months ended June 30, 2005, was
6.38%  compared to 6.12% for the nine months ended June 30, 2004.  The increased
yield on loans is primarily due to the increased yield on commercial  loans with
interest  rates tied to the prime lending rate. The prime rate was 6.25% at June
30, 2005, compared to 4.00% at June 30, 2004. The yield on investments increased
to 4.85% for the nine months ended June 30, 2005, from 4.67% for the nine months
ended June 30, 2004. Total average interest-earning assets were $1.3 billion for
the nine months  ended June 30,  2005 as  compared to $1.1  billion for the nine
months ended June 30, 2004. The increase in average  interest-earning  assets is
primarily due to an increase in average loans receivable of approximately $109.8
million  resulting  primarily  from  growth in the  commercial  loan  portfolio.
Securities  increased $43.1 million,  primarily funded by borrowings,  including
brokered CD's.

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

Interest expense on interest-bearing  liabilities was $21.3 million for the nine
months  ended June 30,  2005,  as compared to $17.5  million for the nine months
ended June 30, 2004. The average cost of deposits for the nine months ended June
30, 2005,  was 1.47%  compared to 1.42% for the nine months ended June 30, 2004.
The cost of  interest-bearing  liabilities  was 2.17% for the nine months  ended
June 30, 2005  compared to 2.03% for the nine months  ended June 30,  2004.  The
cost of FHLB advances,  repurchase and reverse  repurchase  agreements and other
borrowings was 3.76%, 2.31% and 5.66%,  respectively,  for the nine months ended
June 30,  2005.  For the nine  months  ended  June  30,  2004,  the cost of FHLB
advances,  reverse  repurchase  agreements and other borrowings was 3.83%, 1.44%
and 4.29%, respectively.  The increased cost of funds on other borrowings is due
to the increased  short-term interest rates. At June 30, 2005, the federal funds
rate  was  3.35%   compared   to  1.38%  at  June  30,   2004.   Total   average
interest-bearing  liabilities  increased  from $1.1  billion at June 30, 2004 to
$1.3  billion  at June  30,  2005.  The  increase  in  average  interest-bearing
liabilities is due to an increase in average  deposits of  approximately  $136.5
million as a result of the Company's focus on checking growth, increased average
FHLB  advances  of $56.7  million  used to fund loan and  investment  securities
growth and increased  average Customer  repurchase  agreements of $17.0 million.
Included in increased  deposits,  were  brokered  CD's which  increased by $58.2
million in average  balances when  comparing the two periods.  This increase was
partially offset by a decrease in average reverse repurchase agreements of $51.4
million.


                                       24
<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 NINE MONTHS ENDED
--------------------------------------------------------------------------------
JUNE 30, 2004 AND 2005 - CONTINUED
----------------------------------

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

Net interest  income was $35.9  million for the nine months ended June 30, 2005,
as compared to $30.9  million for the nine months ended June 30,  2004.  The net
interest  margin was 3.68% for the nine months ended June 30, 2005,  compared to
3.58% for the nine months ended June 30, 2004.

The following table  summarizes the average balance sheet and the related yields
on interest-earning assets and deposits and borrowings for the nine months ended
June 30, 2004 and 2005:

<TABLE>
<CAPTION>
                                                                        (Unaudited)
                                                                  (Dollars in Thousands)
                                                                Nine months Ended June 30,
                                                                --------------------------
                                                   2004                                          2005
                                                   ----                                          ----
                                  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)                     $  744,723      $   34,182          6.12%      $  854,556      $   40,911          6.38%
  Investment
    Securities, MBS
    Securities and
    Other (3)                      404,572          14,170          4.67%         447,630          16,284          4.85%
                                ----------      ----------                     ----------      ----------
Total earning assets            $1,149,295      $   48,352          5.61%      $1,302,186      $   57,195          5.86%
                                ==========       ----------                    ==========      ---------

Liabilities
  Deposits                         705,096           7,510          1.42%         841,635           9,290          1.47%
  Borrowings                       440,792           9,956          3.01%         463,056          11,988          3.45%
                                ----------      ----------                     ----------      ----------
Total interest-bearing
  Liabilities                   $1,145,888          17,466          2.03%      $1,304,691          21,278          2.17%
                                ==========      ----------                     ==========      ----------

Net interest income                             $   30,886                                     $   35,917
                                                ==========                                     ==========
Net interest margin                                                 3.58%                                          3.68%
Net yield on earning
  Assets                                                            3.58%                                          3.68%
</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 increased $275,000 from $1.3 million for
the nine months ended June 30,  2004,  to $1.5 million for the nine months ended
June 30, 2005  primarily due to a significant  increase in the loan portfolio as
result of a robust  real  estate  market  and the risk  factors  related  to the
underlying portfolio. The allowance for loan losses as a percentage of loans was
1.30% at June 30, 2005 as compared to 1.38% at June 30, 2004.  Loans  delinquent
90 days or more  were $3.8  million  or 0.41% of total  loans at June 30,  2005,
compared to $4.8 million or 0.61% of total loans at June 30, 2004. The allowance
for loan losses was 314% of loans delinquent more than 90 days at June 30, 2005,
compared to 226% at June 30,  2004.  Net  charge-offs  for the nine months ended
June 30, 2005 were $748,000  compared to $240,000 for the nine months ended June
30, 2004.  Included in charge-offs  for the nine months ended June 30, 2005 were
two loans  totaling  $196,000  guaranteed by the Small  Business  Administration
(SBA).  The  guarantee  has been denied by the SBA. The Bank is  appealing  this
decision. Management believes that the level of the allowance for loan losses at
June 30, 2005 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 at that date.


                                       25
<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 NINE MONTHS ENDED
--------------------------------------------------------------------------------
JUNE 30, 2004 AND 2005 - CONTINUED
----------------------------------

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

For the nine months ended June 30, 2005,  other income was $9.2 million compared
to $6.9  million  for the nine  months  ended June 30,  2004.  Fees and  service
charges from deposit accounts  increased $1.4 million or 50% to $4.1 million for
the nine  months  ended June 30,  2005,  compared  to $2.7  million for the nine
months ended June 30, 2004.  The majority of this  increase is due to fee income
from increased number of personal checking accounts. In the first three quarters
of fiscal 2005,  checking  account balances grew  approximately  44%. During the
nine months ended June 30, 2004, the Company  securitized and concurrently  sold
$31.7  million of mortgage  loans  compared to $33.7 million for the nine months
ended June 30,  2005.  Gain on sale of loans was  $769,000  for the nine  months
ended June 30, 2005, compared to $1.1 million for the nine months ended June 30,
2004. Gains on sales of securities available for sale were $119,000 for the nine
months ended June 30,  2005,  compared to losses of $707,000 for the nine months
ended June 30, 2004. In addition,  the Company had gain on  investment  security
held to maturity called by issuer of $160,000 for the nine months ended June 30,
2005 and $0 for the nine  months  ended  June 30,  2004.  Other  income was $2.2
million for the nine months ended June 30, 2005, as compared to $1.9 million for
the nine months ended June 30, 2004. The increase was primarily due to increased
fee income from ATM activity and debit card transaction fee income.

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

General and administrative expenses were $24.5 million for the nine months ended
June 30, 2005 compared to $20.1 million for the nine months ended June 30, 2004.
Salaries and employee benefits were $13.5 million for the nine months ended June
30, 2005,  as compared to $12.0 million for the nine months ended June 30, 2004,
an  increase  of 12.7%,  primarily  due to an  increase in the number of banking
Associates in business banking,  Associates in the Company's expanded hours call
center,  Associates in new branches and normal salary increases. 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,
equipment  purchased to improve  Customer  convenience  and  increased  checking
activity,  net occupancy,  furniture and fixtures and data  processing  expenses
increased $1.0 million,  including depreciation of $399,000,  when comparing the
two periods. Marketing expenses were $625,000 for the nine months ended June 30,
2004,  compared to $1.5 million for the nine months ended June 30, 2005. This is
primarily  attributed  to  the  Bank's  "Totally  Free  Checking  With  A  Gift"
initiative;  introduction  of Penny  Pavilion,  the  Bank's  free coin  counting
service;  marketing of the Bank's  expanded  banking hours,  including  Saturday
banking  at all Bank  branches;  and  marketing  of the  Bank's  new  branch  in
Wilmington,  NC.  The  Bank's  "Totally  Free  Checking  With A Gift"  promotion
involves   significant   direct  mail   advertising  as  well  as  direct  media
advertising. Other expenses were $2.8 million for the nine months ended June 30,
2004  compared to $3.9 million for the nine months  ended June 30,  2005.  Other
expense  increased due to increased debit card and ATM  transaction  expenses of
$301,000, loss on write-off of signage related to the Bank's re-branding efforts
in conjunction with the initiation of "6 Day Branch Banking" of $122,000,  costs
incurred  related to compliance  with  Sarbanes-Oxley  of $198,000 and increased
deposit account losses of $277,000.  The increase in net deposit losses are tied
directly to the increased number of personal checking accounts. The Bank expects
to incur similar increased  professional  expenses related to the implementation
of Sarbanes-Oxley compliance throughout the remainder of the year.

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

Income taxes were $5.5 million for the nine months ended June 30, 2004  compared
to $6.5 million for the nine months ended June 30, 2005.  The  effective  income
tax rate as a  percentage  of pretax  income  was 33.56% and 34.29% for the nine
months ended June 30, 2004 and 2005, 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 nine


                                       26
<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 NINE MONTHS ENDED
--------------------------------------------------------------------------------
JUNE 30, 2004 AND 2005 - CONTINUED
----------------------------------

INCOME TAXES - CONTINUED
------------------------

months  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  non-deductibility 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.

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 June 30, 2005:
 Total Capital:                    $118,441        13.40%        $70,702       8.00%      $88,378       10.00%
   (To Risk Weighted Assets)
 Tier 1 Capital:                   $108,086        12.23%            N/A        N/A       $53,027        6.00%
   (To Risk Weighted Assets)
 Tier 1 Capital:                   $108,086         7.27%        $44,588       3.00%      $74,313        5.00%
   (To Total Assets)
 Tangible Capital:                 $108,086         7.27%        $22,294       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 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


                                       27
<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

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS, CONTINUED
-----------------------------------------------------

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.

In July 2005, the FASB issued final guidance that eliminated paragraphs 10-18 of
EITF-03-1  (paragraphs 19-20 have no material impact on the financial  condition
or results of operations  of the Company) and will, in the near future,  reissue
the  final   pronouncement   as  FSP  FAS115-1   that  will  be  effective   for
other-than-temporary  impairment  analysis  conducted in periods beginning after
September 15, 2005.

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  October  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.

On March 29, 2005 the SEC Staff issued Staff  Accounting  Bulletin No. 107 ("SAB
107"). SAB 107 expresses the views of the SEC staff regarding the interaction of
SFAS 123R and certain SEC rules and  regulations  and  provides  the SEC staff's
view  regarding the valuation of  share-based  payment  arrangements  for public
companies.  The Company is currently evaluating the expected impact that SAB 107
will have on its financial condition or results of operations.

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.

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,  with
adjustments made for off-balance  sheet items over a range of assumed changes in
market  interest  rates.  The Bank's Board of Directors  has adopted an interest
rate risk policy which  establishes  maximum  allowable  decreases in NPV in the
event of a sudden  and  sustained  one  hundred  to three  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
June 30, 2005.


                                       28
<PAGE>

PART I. FINANCIAL INFORMATION
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                                Market
                                   Board                 Board                 Market            Value
                                   Limit                 Limit                 Value           Portfolio
                                Minimum NPV             Maximum              Of Assets          Equity            NPV
Change in interest rates           Ratio            Decline in NPV            06/30/05          06/30/05         Ratio
-------------------------       -----------         ---------------          ----------       ------------     --------
<C>                                <C>                  <C>                  <C>                 <C>             <C>
300 basis point rise               5.00%                400 BPS              $1,494,233          $148,376        9.93%
200 basis point rise               6.00%                300 BPS              $1,513,595          $158,255       10.46%
100 basis point rise               6.00%                250 BPS              $1,536,223          $167,864       10.93%
No change                          6.00%                                     $1,552,815          $175,433       11.30%
100 basis point decline            6.00%                250 BPS              $1,562,035          $174,657       11.18%
200 basis point decline            6.00%                300 BPS              $1,567,161          $166,048       10.60%
300 basis point decline            6.00%                350 BPS                     N/A               N/A          N/A
</TABLE>

The preceding  table  indicates  that at June 30, 2005, in the event of a sudden
and  sustained  increase in prevailing  market  interest  rates,  the Bank's Net
Portfolio Value (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 decrease  minimally.  A value for the 300 basis point decline is not
indicated due to the level of interest rates at June 30, 2005. At June 30, 2005,
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.

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  material  changes  in the  Company's
internal control over financial reporting occurred during the quarter ended June
30, 2005 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  condition  or  results of
operations.

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

      Not Applicable.

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


                                       29
<PAGE>
      Not Applicable.

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

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

      Not Applicable.

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

      Not Applicable.

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 (4)

                  (c)   Bylaws of Coastal Financial Corporation (1)

            10    (a)   Employment Agreement with Michael C. Gerald (6)

                  (b)   Employment Agreement with Jerry L. Rexroad (6)

                  (c)   Employment Agreement with Phillip G. Stalvey (6)

                  (d)   Employment Agreement with Jimmy R. Graham (6)

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

                  (f)   1990 Stock Option Plan (2)

                  (g)   Directors Performance Plan (3)

                  (h)   Coastal Financial Corporation 2000 Stock Option Plan (5)

            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 June 30, 1998 Form 10-Q filed with Securities
      and Exchange Commission on May 15, 1998.

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

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


                                       30
<PAGE>

                                   SIGNATURES

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

                                           COASTAL FINANCIAL CORPORATION


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


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


                                       31