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 Quarter Ended June 30, 2004

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

              For the transition period from          to
                                             --------    ----------

                         Commission File Number: 0-19684

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


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


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

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

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

          YES  [X]     NO [ ]

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

          YES  [X]     NO [ ]

     Indicate  the  number of  shares  outstanding  of each of the  registrant's
classes of common stock, as of June 30, 2004.

Common Stock $.01 Par Value Per Share                        14,414,532 Shares
--------------------------------------------------------------------------------
(Class)                                                         (Outstanding)

     On July 30,  2004,  the Company  declared a 10% stock  dividend.  The stock
dividend will be payable August 27, 2004 to Shareholders of record on August 13,
2004.



<PAGE>
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2004

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

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

       Consolidated Statements of Financial Condition
       as of September 30, 2003 and June 30, 2004                         3

       Consolidated Statements of Operations for the three
       months ended June 30, 2003 and 2004                                4

       Consolidated Statements of Operations for the nine                 5
       months ended June 30, 2003 and 2004

       Consolidated Statements of Stockholders' Equity
       and Comprehensive Income for the nine months ended
       June 30, 2003 and 2004                                             6

       Consolidated Statements of Cash Flows for the nine
       months ended June 30, 2003 and 2004                              7-8

       Notes to Consolidated Financial Statements                      9-14

   2.  Management's Discussion and Analysis of
       Financial Condition and Results of Operations                  15-25

   3.  Quantitative and Qualitative Disclosures About                    25
       Market Risk

   4.  Controls and Procedures                                        25-26


Part II - Other Information
Item
   1.  Legal Proceedings                                                 26

   2.  Changes in Securities, Use of Proceeds and Issuer
       Purchases of Equity Securities                                    26

   3.  Defaults Upon Senior Securities                                   26

   4.  Submission of Matters to a Vote of Securities Holders             26

   5.  Other Information                                                 26

   6.  Exhibits and Reports on Form 8-K                               26-27

Signatures                                                               28

Exhibits

  31-1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)  29

  31-2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)  30

  32-1 Section 1350 Certification (Chief Executive Officer)              31

  32-2 Section 1350 Certification (Chief Financial Officer)              32



                                   2

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

<TABLE>
<CAPTION>
                                                          September 30,     June 30,
                                                              2003            2004
                                                              ----            ----
                                                                   (Unaudited)
                                                                 (In thousands,
                                                                except share data)
<S>                                                       <C>             <C>
ASSETS:
Cash and amounts due from banks                           $    18,605     $    27,836
Short-term interest-bearing deposits                            2,970           2,148
Investment securities available for sale                       15,909          16,933
Mortgage-backed securities available for sale                 383,324         378,647
Loans receivable (net of allowance for
   loan losses of $9,832 at September 30,
   2003 and $10,842 at June 30, 2004)                         682,737         776,292
Loans receivable held for sale                                 19,096           7,791
Real estate acquired through foreclosure, net                   1,627           1,055
Office property and equipment, net                             16,088          17,566
Federal Home Loan Bank (FHLB)stock, at cost                    13,991          14,652
Accrued interest receivable on loans                            2,258           2,641
Accrued interest receivable on securities                       2,074           2,037
Bank-owned life insurance                                      16,165          21,385
Other assets                                                    6,365          10,894
                                                          -----------     -----------
                                                          $ 1,181,209     $ 1,279,877
                                                          ===========     ===========

LIABILITIES AND STOCKHOLDERS' EQUITY:

LIABILITIES:
Deposits                                                  $   697,012     $   763,990
Securities sold under agreements to repurchase                133,602         124,019
Advances from FHLB                                            244,114         284,042
Junior subordinated debt                                           --          15,464
Debt associated with trust preferred securities                15,000              --
Other borrowings                                                   81              --
Drafts outstanding                                              2,644           3,274
Advances by borrowers for property taxes
   and insurance                                                1,795           1,462
Accrued interest payable                                        1,263           1,343
Other liabilities                                              11,991           8,161
                                                          -----------     -----------
   Total liabilities                                        1,107,502       1,201,755
                                                          ===========     ===========

STOCKHOLDERS' EQUITY:
Serial preferred stock, 1,000,000 shares
   authorized and unissued                                         --              --
Common stock, $.01 par value, 25,000,000
   shares authorized; 14,213,428 shares at
   September 30, 2003 and 14,414,532 shares
   at June 30, 2004 issued and outstanding                        142             144
Additional paid-in capital                                     10,222          10,518
Retained earnings, restricted                                  63,030          70,596
Treasury stock, at cost (334,508 shares at
   September 30, 2003 and 148,901 shares at
   June 30, 2004)                                              (3,375)         (1,508)
Accumulated other comprehensive income (loss),
   net of tax                                                   3,688          (1,628)
                                                          -----------     -----------
   Total stockholders' equity                                  73,707          78,122
                                                          -----------     -----------
                                                          $ 1,181,209     $ 1,279,877
                                                          ===========     ===========
</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, 2003 AND 2004

<TABLE>
<CAPTION>
                                                              2003             2004
                                                              ----             ----
                                                                    (Unaudited)
                                                                  (In thousands,
                                                                 except share data)
<S>                                                       <C>              <C>
Interest income:
 Loans receivable                                         $     10,715     $     11,783
 Investment securities                                             502              750
  Mortgage-backed securities                                     3,526            4,107
  Other                                                             47               21
                                                          ------------     ------------
  Total interest income                                         14,790           16,661
                                                          ------------     ------------
Interest expense:
  Deposits                                                       2,938            2,445
  Securities sold under agreements to repurchase                   476              486
  Advances from FHLB                                             2,348            2,800
  Other borrowings                                                  17              161
                                                          ------------     ------------
  Total interest expense                                         5,779            5,892
                                                          ------------     ------------
  Net interest income                                            9,011           10,769
  Provision for loan losses                                        750              200
                                                          ------------     -------------
  Net interest income after provision
    for loan losses                                              8,261           10,569
                                                          ------------     ------------

Other income:
 Fees and service charges on loans and deposit accounts            889              964
 Gain from real estate owned                                       111               96
 Gain on sales of loans held for sale                              875              315
 Gain (loss) on sales of investment securities
    available for sale and mortgage-backed
    securities available for sale                                  146             (440)
  Income from sales of non-depository products                     264              416
  FHLB stock dividends                                             110              132
 Other income                                                      550              638
                                                          ------------     ------------
  Total other income                                             2,945            2,121
                                                          ------------     ------------
General and administrative expenses:
  Salaries and employee benefits                                 3,307            4,003
  Net occupancy, furniture and fixtures
    and data processing expense                                  1,490            1,482
  FDIC insurance premium                                            26               26
  FHLB prepayment penalties                                        750               --
  Other expenses                                                 1,278            1,262
                                                          ------------     ------------
  Total general and administrative expense                       6,851            6,773
                                                          ------------     ------------
Income before income taxes                                       4,355            5,917
Income taxes                                                     1,575            2,018
                                                          ------------     ------------

Net income                                                $      2,780     $      3,899
                                                          ============     ============
Net income per common share
   Basic                                                  $        .18     $        .25
                                                          ============     ============
   Diluted                                                $        .17     $        .23
                                                          ============     ============
Weighted average common shares outstanding
   Basic                                                    15,582,000       15,846,000
                                                          ============     ============
   Diluted                                                  16,197,000       16,687,000
                                                          ============     ============
Dividends per share                                       $       .045     $       .045
                                                          ============     ============
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       4

<PAGE>
PART I.  FINANCIAL INFORMATION
Item 1.  COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 2003 AND 2004


<TABLE>
<CAPTION>
                                                        2003            2004
                                                        ----            ----
                                                            (Unaudited)
                                                           (In thousands,
                                                          except share data)
<S>                                                 <C>             <C>
Interest income:
 Loans receivable                                   $     31,083    $     34,182
 Investment securities                                     1,517           2,062
 Mortgage-backed securities                               11,563          12,048
 Other                                                       110              60
                                                    ------------    ------------
 Total interest income                                    44,273          48,352
                                                    ------------    ------------

Interest expense:
  Deposits                                                 9,260           7,510
  Securities sold under agreements to repurchase           1,245           1,662
  Advances from FHLB                                       6,652           7,811
  Other borrowings                                            54             483
                                                    ------------    ------------
  Total interest expense                                  17,211          17,466
                                                    ------------    ------------
  Net interest income                                     27,062          30,886
  Provision for loan losses                                2,055           1,250
                                                    ------------    ------------
  Net interest income after provision
    for loan losses                                       25,007          29,636
                                                    ------------    ------------
Other income:
 Fees and service charges on loans and deposit accounts    2,582           2,746
 Gain from real estate owned                                  29               5
 Gain on sales of loans held for sale                      2,255           1,115
 Gain (loss) on sales of investment securities
    available for sale and mortgage-backed
    securities available for sale                            662            (707)
  Income from sales of non-depository products               925           1,441
  FHLB stock dividends                                       350             362
 Other income                                              1,525           1,917
                                                    ------------    ------------
  Total other income                                       8,328           6,879
                                                    ------------    ------------
General and administrative expenses:
  Salaries and employee benefits                           9,941          12,006
  Net occupancy, furniture and fixtures
    and data processing expense                            4,425           4,547
  FDIC insurance premium                                      78              79
  FHLB prepayment penalties                                2,428              77
  Other expenses                                           3,526           3,409
                                                    ------------    ------------
  Total general and administrative expense                20,398          20,118
                                                    ------------    ------------
Income before income taxes                                12,937          16,397
Income taxes                                               4,652           5,502
                                                    ------------    ------------
Net income                                          $      8,285    $     10,895
                                                    ============    ============
Net income per common share
   Basic                                            $        .53    $        .69
                                                    ============    ============
   Diluted                                          $        .51    $        .66
                                                    ============    ============

Weighted average common shares outstanding
   Basic                                              15,537,000      15,721,000
                                                    ============    ============
   Diluted                                            16,222,000      16,606,000
                                                    ============    ============

Dividends per share                                 $        .12    $       .135
                                                    ============    ============
</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, 2003 AND 2004


<TABLE>
<CAPTION>

                                                                           Accumulated
                                                                             Other
                                        Additional                           Compre-      Total
                               Common   Paid-In     Retained    Treasury     hensive   Stockholders'
                               Stock    Capital     Earnings    Stock      Income(Loss)   Equity
                              -------   --------    --------    --------   -----------  --------
                                                   (Unaudited)
                                                 (In thousands)
<S>                            <C>       <C>        <C>         <C>          <C>        <C>
Balance at September
  30, 2002                    $   116   $  9,934    $ 54,954    $ (4,376)    $ 5,758    $ 66,386
Net income                         --        --       8,285           --          --       8,285
Other comprehensive
 income:
 Unrealized losses arising
 during period, net of
 tax benefit of $378               --         --          --          --        (618)         --
 Less: reclassification
 adjustment for gains
 included in net income,
 net of taxes of $252              --         --          --          --        (410)         --
                                                                            --------
Other comprehensive loss           --         --          --          --      (1,028)     (1,028)
                                                                            --------    --------
Comprehensive income               --         --          --          --          --       7,257
                                                                                        --------
Treasury stock repurchases         --         --          --        (342)         --        (342)
Exercise of stock
  options                           1         94        (338)      1,024          --         781
Cash dividends                     --         --      (1,873)         --          --      (1,873)
Balance at June               -------   --------    --------    --------    --------    --------
  30, 2003                    $   117   $ 10,028    $ 61,028    $ (3,694)   $  4,730    $ 72,209
                              =======   ========    ========    ========    ========    ========


Balance at September
  30, 2003                    $   142   $ 10,222    $ 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 $3,527             --         --          --          --      (5,754)         --
 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                    $   144   $ 10,518    $ 70,596    $ (1,508)   $ (1,628)   $ 78,122
                              =======   ========    ========    ========    ========    ========

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                     6

<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2003 AND 2004

<TABLE>
<CAPTION>
                                                                 2003               2004
                                                                 ----               ----
                                                                       (Unaudited)
                                                                      (In thousands)
<S>                                                            <C>               <C>
Cash flows from operating activities:
 Net income                                                    $   8,285         $  10,895
 Adjustments to reconcile net income to net
   cash provided by (used in) operating activities:
 Depreciation                                                      1,794             1,611
 Provision for loan losses                                         2,055             1,250
(Gain) loss on sale of investment securities
   available for sale and mortgage-backed
   securities available for sale                                    (662)              707
Gain on sale of real estate acquired through foreclosure            (153)               --
 FHLB prepayment penalties                                         2,428                77
 Origination of loans receivable held for sale                   (96,000)          (42,896)
 Proceeds from sales of loans receivable held for sale            96,103            22,465
 Impairment loss (recovery) from write-down of originated
   mortgage servicing rights, net                                    262               (81)
 Increase in:
   Cash value of life insurance                                     (439)             (720)
   Accrued interest receivable                                      (263)             (346)
   Other assets                                                     (774)           (3,984)
 Increase (decrease) in:
   Accrued interest payable                                         (144)               80
   Other liabilities                                                 (49)             (572)
                                                               ---------         ---------

     Net cash provided by (used in) operating activities          12,443           (11,514)
                                                               ---------         ---------

Cash flows from investing activities:
 Issuer exercise of call of investment
   securities available for sale                                   2,000             2,000
 Purchases of investment securities available for sale            (9,729)           (5,371)
 Origination of loans receivable                                (374,638)         (424,686)
 Principal collected on loans receivable                         254,950           329,366
 Purchases of mortgage-backed securities
   available for sale                                           (265,879)         (206,612)
 Proceeds from sales of investment
   securities available for sale                                      --             1,893
 Proceeds from sales of mortgage-backed
   securities available for sale                                  86,083           143,190
 Principal collected on mortgage-backed
   securities, net                                               147,689            91,008
 Proceeds from sale of real estate
   acquired through foreclosure, net                               1,391             1,087
 Purchases of office properties and equipment                     (3,644)           (3,147)
 Proceeds from sales of office properties
     and equipment                                                    --                58
 (Purchases) sales of FHLB stock, net                                 59              (661)
 Purchase of bank-owned life insurance                           (15,500)           (4,500)
                                                               ---------         ---------
      Net cash used in investing activities                     (177,218)          (76,375)
                                                               ---------         ---------

</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, 2003 AND 2004 (CONTINUED)

<TABLE>
<CAPTION>

                                                                 2003               2004
                                                                 ----               ----
                                                                      (Unaudited)
                                                                     (In thousands)
<S>                                                           <C>                <C>
Cash flows from financing activities:
 Increase (decrease) in deposits, net                         $  75,841         $   66,978
 Increase (decrease) in securities sold under
   agreement to repurchase, net                                  77,051             (9,583)
 Proceeds from FHLB advances                                    486,861            533,176
 Repayment of FHLB advances                                    (467,539)          (493,248)
 Prepayment penalties on FHLB advances                           (2,428)               (77)
 Proceeds (repayments) of other borrowings                        2,006                (81)
 Decrease in advance payments by borrowers
   for property taxes and insurance, net                             16               (333)
 Increase in drafts outstanding, net                              1,220                630
 Repurchase of treasury stock, at cost                             (342)                --
 Dividends to stockholders                                       (1,873)            (2,153)
 Exercise of stock options                                          781                989
                                                              ---------         ----------

     Net cash provided by financing activities                  171,594             96,298
                                                              ---------         ----------

     Net increase in cash and cash equivalents                    6,819              8,409
Cash and cash equivalents at beginning
   of the period                                                 25,802             21,575
                                                              ---------         ----------
Cash and cash equivalents at end
   of the period                                              $  32,621         $   29,984
                                                              =========         ==========

Supplemental information:
   Interest paid                                              $  17,355         $   17,386
                                                              =========         ==========

   Income taxes paid                                          $   3,697         $    5,638
                                                              =========         ==========

Supplemental schedule of non-cash investing
   and financing transactions:

 Transfer of mortgage loans to real estate
   acquired through foreclosure                               $   1,927         $      515
                                                              =========         ==========

 Securitization of mortgage loans into
   mortgage-backed securities                                 $  60,952         $   31,736
                                                              =========         ==========

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

Change in unrealized loss in investment securities
   and mortgage-backed securities available
   for sale, net of tax                                       $  (1,028)        $   (5,316)
                                                              =========         ==========

</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 and nine month periods ended June 30, 2004 are not necessarily  indicative
of the results which 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, 2003,
included in the  Company's  2003 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.

The Company  determines  whether it has a controlling  financial  interest in an
entity by first  evaluating  whether the entity is a voting interest entity or a
variable interest entity under accounting  principles  generally accepted in the
United  States of America.  Voting  interest  entities are entities in which the
total equity  investment  at risk is sufficient to enable each entity to finance
itself  independently  and provides the equity  holders with the  obligation  to
absorb  losses,  the right to  receive  residual  returns  and the right to make
decisions  about  the  entity's  activities.  The  Company  consolidates  voting
interest  entities  in which it has all,  or at least a majority  of, the voting
interest.  As defined in  applicable  accounting  standards,  variable  interest
entities ("VIEs") are entities that lack one or more of the characteristics of a
voting interest entity described above. A controlling  financial  interest in an
entity is present when an enterprise has a variable  interest,  a combination of
variable interests, that will absorb a majority of the entity's expected losses,
receive a majority of the  entity's  expected  residual  returns,  or both.  The
enterprise  with  a  controlling  financial  interest,   known  as  the  primary
beneficiary, consolidates the VIE.

Prior to January 1, 2004, the Company consolidated its wholly-owned  subsidiary,
Coastal  Financial  Capital Trust I ("Trust").  In December  2003, the Financial
Accounting  Standards  Board issued a revised version of  Interpretation  No. 46
("FIN 46")  "Consolidation  of Variable  Interest  Entities." The revised FIN 46
clarifies  some of the  provisions of the original  interpretation  and adds new
scope exceptions.  As a result of the changes,  the Company  deconsolidated  the
Trust,  increasing  other assets by  $464,000,  increasing  junior  subordinated
debt-trust  preferred  securities by $15.5 million and reducing debt  associated
with trust preferred securities by $15.0 million.

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

                                     9

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


(2) LOANS RECEIVABLE, NET

Loans receivable, net consists of the following:

<TABLE>
<CAPTION>
                                                                 September 30,     June 30,
                                                                     2003            2004
                                                                 -------------     --------
                                                                          (Unaudited)
                                                                         (In thousands)
<S>                                                                <C>           <C>
First mortgage loans:
 Single family to 4 family units                                   $ 290,395     $ 322,832
 Land and land development                                            62,221        95,938
 Residential lots                                                     20,327        28,990
 Other, primarily commercial real estate                             179,283       187,883
 Residential construction loans                                       56,950        78,838
 Commercial construction loans                                        24,943         7,584

Consumer and commercial loans:
 Installment consumer loans                                           16,581        17,856
 Mobile home loans                                                     4,607         5,068
 Savings account loans                                                 2,179         2,138
 Equity lines of credit                                               26,640        30,069
 Commercial and other loans                                           24,457        31,922
                                                                   ---------     ---------
                                                                     708,583       809,118
Less:
 Allowance for loan losses                                             9,832        10,842
 Deferred loan costs, net                                               (556)         (702)
 Undisbursed portion of loans in process                              16,570        22,686
                                                                   ---------     ---------

                                                                   $ 682,737     $ 776,292
                                                                   =========     =========
</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,
                                                                  --------------------------
                                                                     2003            2004
                                                                     ----            ----
                                                                         (Unaudited)
                                                                    (Dollars in thousands)
<S>                                                                <C>           <C>

Allowance at beginning of period                                   $ 7,883        $  9,832
Provision for loan losses                                            2,055           1,250
                                                                   -------        --------
Recoveries:
 Residential loans                                                      --              --
 Commercial loans                                                       13             149
 Consumer loans                                                         26              41
                                                                   -------        --------
   Total recoveries                                                     39             190
                                                                   -------        --------

Charge-offs:
 Residential loans                                                      39              --
 Commercial loans                                                      177             109
 Consumer loans                                                        332             321
                                                                   -------        --------
   Total charge-offs                                                   548             430
                                                                   -------        --------
   Net charge-offs                                                     509             240
                                                                   -------        --------
 Allowance at end of period                                        $ 9,429        $ 10,842
                                                                   =======        ========

Ratio of allowance to total net loans
 outstanding at the end of the period                                 1.40%           1.38%
                                                                   =======        ========

Ratio of net charge-offs to average
 total loans outstanding during the period (annualized)                .11%            .04%
                                                                   =======        ========
</TABLE>

                                       10


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

Non-accrual  loans,  which are  primarily  loans over  ninety  days  delinquent,
totaled  approximately  $5.9 million and $4.8 million at June 30, 2003 and 2004,
respectively. For the nine months ended June 30, 2003 and 2004, interest income,
which  would have been  recorded,  would have been  approximately  $461,000  and
$184,000,  respectively,  had non-accruing loans been current in accordance with
their original terms.

At June 30, 2004,  impaired loans totaled $3.4 million.  There were $5.0 million
in impaired loans at June 30, 2003. Included in the allowance for loan losses at
June 30, 2004 was  $266,000  related to impaired  loans  compared to $376,000 at
June 30, 2003.  The average  recorded  investment in impaired loans for the nine
months  ended June 30, 2004 was $4.1  million  compared to $3.8  million for the
nine months  ended June 30,  2003.  Interest  income of $60,000 and $240,000 was
recognized  on impaired  loans for the  quarter  and nine months  ended June 30,
2004,  respectively.  Interest  income of $28,000 and $60,000 was  recognized on
impaired   loans  for  the  quarter  and  nine  months   ended  June  30,  2003,
respectively.

(3)  DEPOSITS

Deposits consist of the following:
<TABLE>
<CAPTION>

                                      September 30, 2003         June 30, 2004
                                      ------------------        ---------------
                                                Weighted               Weighted
                                                Average                Average
                                      Amount     Rate        Amount      Rate
                                      ------     ----        ------      ----
                                                    (Unaudited)
                                               (Dollars in thousands)
<S>                                 <C>           <C>       <C>           <C>

Transaction accounts                $ 390,439     0.84%     $ 463,558     0.80%
Statement savings accounts             46,236     0.80         55,275     0.79
Certificate accounts                  260,337     2.67        245,157     2.47
                                    ---------               ---------
                                    $ 697,012     1.52%     $ 763,990     1.33%
                                    =========               =========
</TABLE>

(4)  ADVANCES FROM FEDERAL HOME LOAN BANK

Advances from Federal Home Loan Bank ("FHLB") consist of the following:
<TABLE>
<CAPTION>

                               September 30, 2003         June 30, 2004
                               ------------------      --------------------
                                         Weighted                  Weighted
                                          Average                   Average
                               Amount      Rate         Amount       Rate
                               ------      ----         ------       ----

Maturing within:                             (Unaudited)
                                       (Dollars in thousands)
<S>                          <C>           <C>         <C>           <C>
1 year                       $  34,435     1.32%       $   9,535     1.82%
2 years                         13,500     5.17           14,741     5.13
3 years                          5,686     2.81            8,294     1.63
4 years                          5,132     3.00            4,951     3.07
5 years                          4,633     3.28           29,130     2.15
After 5 years                  180,728     4.35          217,391     4.19
                             ---------                 ---------
                             $ 244,114     3.89%       $ 284,042     3.86%
                             =========                 =========
</TABLE>

At September  30, 2003 and June 30, 2004,  the Bank had pledged  first  mortgage
loans and  mortgage-backed  securities  with unpaid  balances  of  approximately
$275.8  million  and  $330.6  million,  respectively,  as  collateral  for  FHLB
advances.  At June 30, 2004,  included in the two,  three,  four, five and after
five years  maturities  were $218.0  million,  with a weighted  average  rate of
3.91%, of advances  subject to call  provisions.  Callable  advances at June 30,
2004 are summarized as follows:  $57.0 million  callable in fiscal 2004,  with a
weighted  average rate of 5.32%;  $36.0 million  callable in fiscal 2005, with a
weighted  average rate of 5.30%;  $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 interest  rates rise.  If exercised,  the Company may
have to replace called advances with borrowings at a higher interest rate.

                                11

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

(5)  EARNINGS PER SHARE

Basic  earnings  per share for the three and nine months ended June 30, 2003 and
2004, are computed by dividing net income by the weighted  average common shares
outstanding  during the respective  periods.  Diluted earnings per share for the
three and nine months ended June 30, 2003 and 2004, are computed by dividing net
earnings  by  the  weighted  average  dilutive  shares  outstanding  during  the
respective periods.

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

 <TABLE>
 <CAPTION>
                                                             For the Quarter Ended June 30,
                                                                      (Unaudited)

                                             2003                  2003       2004                   2004
                                             ------------------------------------------------------------
                                             BASIC               DILUTED      BASIC               DILUTED
                                             ------------------------------------------------------------
<S>                                          <C>              <C>             <C>              <C>
Weighted average shares outstanding          15,582,000       15,582,000      15,846,000       15,846,000
Effect of dilutive securities-
 Stock options                                       --          615,000              --          841,000
                                             ------------------------------------------------------------
                                             15,582,000       16,197,000      15,846,000       16,687,000
                                             ============================================================


</TABLE>

<TABLE>
<CAPTION>

                                                             For the Nine Months Ended June 30,
                                                                      (Unaudited)

                                             2003                   2003      2004                   2004
                                             ------------------------------------------------------------
                                             BASIC               DILUTED      BASIC               DILUTED
                                             ------------------------------------------------------------
<S>                                          <C>              <C>             <C>              <C>
Weighted average shares outstanding          15,537,000       15,537,000      15,721,000       15,721,000
Effect of dilutive securities-
 Stock options                                       --          685,000              --          885,000
                                             ------------------------------------------------------------
                                             15,537,000       16,222,000      15,721,000       16,606,000
                                             ============================================================

</TABLE>


(6)   STOCK-BASED COMPENSATION

At June 30, 2004,  the Company had a stock  option plan that  provides for stock
options to be granted primarily to directors, officers and other key Associates.
The  plan is more  fully  described  in Note  17 of the  Notes  to  Consolidated
Financial Statements included in the Company's 10-K for the year ended September
30, 2003. The Company  applies the intrinsic value method of APB Opinion No. 25,
"Accounting  for Stock  Issued to  Employees"  (APB  Opinion No. 25) and related
interpretations  in accounting for its plan.  Accordingly,  no compensation cost
has been  recognized  for its fixed stock  option  plans as all options  granted
under  those plans had an  exercise  price  equal to or greater  than the market
value of the underlying stock at the date of grant.  Had  compensation  cost for
the Company's  stock-based  compensation  plans been determined  consistent with
SFAS Statement No. 123, "Accounting for Stock-Based Compensation", the Company's
net income  and  earnings  per share  would  have been  reduced to the  proforma
amounts indicated below for the quarters and nine months ended June 30.


                                 12

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

<TABLE>
<CAPTION>

                                                       Three Months Ended June 30,
                                                       ----------------------------
                                                            2003           2004
                                                            ----           ----
                                                               (Unaudited)
                                                          (Dollars in thousands)
<S>                                                       <C>            <C>
Net income, as reported                                   $ 2,780        $ 3,899
Deduct: Total stock-based employee and director
        compensation expense determined under
        fair value based method for all awards,
        net of related tax effects                           (126)          (156)
                                                          -------        -------
Pro forma net income                                      $ 2,654        $ 3,743
                                                          =======        =======

Basic earnings per share:
   As reported                                            $   .18        $   .25
                                                          =======        =======
   Pro forma                                              $   .17        $   .24
                                                          =======        =======

Diluted earnings per share:
   As reported                                            $   .17        $   .23
                                                          =======        =======
   Pro forma                                              $   .16        $   .22
                                                          =======        =======

</TABLE>

<TABLE>
<CAPTION>


                                                         Nine Months Ended June 30,
                                                         --------------------------
                                                            2003          2004
                                                            ----          ----
                                                                (Unaudited)
                                                           (Dollars in thousands)
<S>                                                       <C>            <C>
Net income, as reported                                   $ 8,285        $ 10,895
Deduct: Total stock-based employee and director
        compensation expense determined under
        fair value based method for all awards,
        net of related tax effects                           (378)           (442)
                                                          -------        --------
Pro forma net income                                      $ 7,907        $ 10,453
                                                          =======        ========

Basic earnings per share:
   As reported                                            $   .53        $    .69
                                                          =======        ========
   Pro forma                                              $   .51        $    .66
                                                          =======        ========

Diluted earnings per share:
   As reported                                            $   .51        $    .66
                                                          =======        ========
   Pro forma                                              $   .49        $    .63
                                                          =======        ========


</TABLE>

(7)    COMMON STOCK DIVIDEND

On May 27, 2003,  August 28, 2003 and February 18, 2004, the Company  declared a
10% stock dividend, aggregating approximately 1,065,000 shares, 1,174,000 shares
and 1,308,000 shares respectively.

On July 30, 2004, the Company declared a 10% stock dividend.  The stock dividend
will be payable August 27, 2004 to Shareholders of record as of August 13, 2004.

All average  share and per share data have been  retroactively  restated for the
stock dividends.  Actual  outstanding  shares at June 30, 2004 and September 30,
2003 in the accompanying balance sheet have not been retroactively restated.



                                       13

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

(8)    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
and the  letters  of credit  are  generally  collateralized.  Commitments  under
standby  letters of credit are usually one year or less.  At June 30, 2004,  the
Company  has  recorded  no  liability  for the  current  carrying  amount of the
obligation  to  perform  as a  guarantor,  as such  amounts  are not  considered
material.  The maximum potential amount of undiscounted  future payments related
to standby letters of credit at June 30, 2004 was $4.4 million.

(9)   DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITES

The Bank originates  certain fixed rate residential  loans with the intention of
selling these loans. Between the time that the Bank enters into an interest rate
lock or a commitment to originate a fixed rate residential loan with a potential
borrower  and the time the  closed  loan is sold,  the  Company  is  subject  to
variability  in the market  prices  related to these  commitments.  The  Company
believes that it is prudent to limit the  variability of expected  proceeds from
the sales through forward sales of "to be issued" mortgage-backed securities and
loans  ("forward  sales  commitments").  The commitment to originate  fixed rate
residential  loans and forward sales  commitments  are  freestanding  derivative
instruments.   When  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 $7.5 million at June 30, 2004. The
fair value of the loan commitments was an asset of approximately $76,000 at June
30,  2004.  As of June 30, 2004,  the Company had sold $12.0  million in forward
commitments  to  deliver  fixed  rate  mortgage-backed  securities,  which  were
recorded as a derivative liability of $83,000.

(10) JUNIOR SUBORDINATED DEBT

The Company  determines  whether it has a controlling  financial  interest in an
entity by first  evaluating  whether the entity is a voting interest entity or a
variable interest entity under accounting  principles  generally accepted in the
United  States of America.  Voting  interest  entities are entities in which the
total equity  investment  at risk is sufficient to enable each entity to finance
itself  independently  and provides the equity  holders with the  obligation  to
absorb  losses,  the right to  receive  residual  returns  and the right to make
decisions  about  the  entity's  activities.  The  Company  consolidates  voting
interest  entities  in which it has all,  or at least a majority  of, the voting
interest.  As defined in  applicable  accounting  standards,  variable  interest
entities ("VIEs") are entities that lack one or more of the characteristics of a
voting interest entity described above. A controlling  financial  interest in an
entity is present when an enterprise has a variable  interest,  a combination of
variable interests, that will absorb a majority of the entity's expected losses,
receive a majority of the  entity's  expected  residual  returns,  or both.  The
enterprise  with  a  controlling  financial  interest,   known  as  the  primary
beneficiary, consolidates the VIE.

Prior to January 1, 2004, the Company consolidated its wholly-owned  subsidiary,
Coastal  Financial  Capital Trust I ("Trust").  In December  2003, the Financial
Accounting  Standards  Board issued a revised version of  Interpretation  No. 46
("FIN 46")  "Consolidation  of Variable  Interest  Entities." The revised FIN 46
clarifies  some of the  provisions of the original  interpretation  and adds new
scope exceptions.  As a result of the changes,  the Company  deconsolidated  the
Trust,  increasing  other assets by  $464,000,  increasing  junior  subordinated
debt-trust  preferred  securities by $15.5 million and reducing debt  associated
with trust preferred securities by $15.0 million.

                                    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.  Such
forward-looking  statements  are about  matters that are  inherently  subject to
risks and  uncertainties.  Factors that could influence the matters discussed in
certain  forward-looking  statements  include  the timing and amount of revenues
that may be  recognized  by the  Company,  continuation  of current  revenue and
expense trends (including  trends affecting  charge-offs and provisions for loan
losses),  unforeseen  changes in the  Company's  markets,  legal and  regulatory
changes, and general changes in the economy  (particularly in the markets served
by the  Company).  Because of the risks and  uncertainties  inherent  in forward
looking  statements,  readers are cautioned not to place undue reliance on them,
whether  included  in this  report  or made  elsewhere  from time to time by the
Company  or on its  behalf.  Except  as may be  required  by  applicable  law or
regulation,  the Company  assumes no  obligation  to update any forward  looking
statements.

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  services.  The Company's primary business
activities are conducted by the Bank. The Company and Bank's principal executive
offices are located in Myrtle Beach, South Carolina.

Coastal  Federal  Bank is a full  service  financial  services  company  with 19
branches  located  in four  counties  throughout  the  coastal  regions of South
Carolina and North Carolina.  The Bank has twelve offices in Horry County, South
Carolina;  one office in  Georgetown  County,  South  Carolina;  four offices in
Brunswick County,  North Carolina;  and two 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, 2003 with 16.4% of deposits as reported by  Sheshunoff  Market Share Report.
The Bank also has the third highest market share of deposits as of June 30, 2003
in  Brunswick  County,  North  Carolina  with 8.4% of  deposits  as  reported by
Sheshunoff Market Share 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 to meet its Customer's needs.

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;  certificates of deposit; 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 four ATMs at off-site  locations  and an ATM at
each branch. The Bank also offers a wide range of financial products through its
division,  Coastal Investor  Services,  including stocks,  bonds,  mutual funds,
annuities, insurance, and retirement products.


                                 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

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

The Company  considers its policy  regarding the allowance for loan losses to be
its most critical  accounting  policy,  because it requires many of management's
most  subjective and complex  judgments.  The Company has developed  appropriate
policies and  procedures  for  assessing  the adequacy of the allowance for loan
losses,  recognizing  that this requires a number of  assumptions  and estimates
with respect to its loan portfolio. The Company's assessments may be impacted in
future  periods by  changes in  economic  conditions,  the impact of  regulatory
examinations  and the discovery of information  with respect to borrowers  which
were not known by  management  at the time of the  issuance of the  consolidated
financial statements.

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

In the  normal  course of  operations,  the  Company  engages  in a  variety  of
financial  transactions that, in accordance with generally  accepted  accounting
principles, are recorded in amounts that differ from the notional amounts. These
transactions involve, to varying degrees, elements of credit, interest rate, and
liquidity risk. Such  transactions are used by the Company for general corporate
purposes or to satisfy customer needs.  Corporate purpose  transactions are used
to help manage customers' requests for funding.

The Bank's  off-balance sheet  arrangements,  which principally  include lending
commitments and derivatives, are described below.

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 which are unsecured or are secured by residential  property.  At June 30,
2004,  unfunded business and personal lines of credit commitments  totaled $54.4
million.  Unused  business and personal  credit card lines,  which totaled $13.7
million at June 30, 2004, are generally for short-term  borrowings.  The Company
also had commitments to originate $17.1 million in residential mortgage loans.

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
and these standby  letters of credit are generally  collateralized.  Commitments
under standby  letters of credit are usually one year or less. At June 30, 2004,
the Company has recorded no  liability  for the current  carrying  amount of the
obligation  to  perform  as a  guarantor,  as such  amounts  are not  considered
material.  The maximum potential amount of undiscounted  future payments related
to standby letters of credit at June 30, 2004 was $4.4 million.


                                      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

Derivatives  and Hedging  Activities.  The Bank  originates  certain  fixed rate
residential  loans with the intention of selling  these loans.  Between the time
that the Bank enters into an interest  rate lock or a commitment  to originate a
fixed rate  residential  loan with a potential  borrower and the time the closed
loan is sold, the Company is subject to variability in the market prices related
to these  commitments.  The  Company  believes  that it is  prudent to limit the
variability of expected  proceeds from the sales through forward sales of "to be
issued" mortgage-backed securities and loans ("forward sales commitments").

The  commitment  to originate  fixed rate  residential  loans and forward  sales
commitments are freestanding  derivative  instruments.  When such instruments do
not qualify for hedge  accounting  treatment,  their fair value  adjustments are
recorded  through  the  income  statement  in net  gains on sale of  loans.  The
commitments  to originate  fixed rate  conforming  loans totaled $7.5 million at
June  30,  2004.  The  fair  value  of the  loan  commitments  was an  asset  of
approximately  $76,000 at June 30, 2004.  As of June 30,  2004,  the Company had
sold $12.0 million in forward commitments to deliver fixed rate mortgage- backed
securities, which were recorded as a derivative liability of $83,000.

DISCUSSION  OF  FINANCIAL  CONDITION  CHANGES  FROM  SEPTEMBER  30, 2003 TO JUNE
--------------------------------------------------------------------------------
30,2004
-------

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

Historically,  the Company has  maintained  its liquidity at levels  believed by
management  to be  adequate  to meet  the  requirements  of  normal  operations,
potential  deposit  out-flows  and strong  loan  demand,  and still  provide 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 securities.

The Company  originated  loans  receivable of $470.6 million for the nine months
ended June 30, 2003,  compared to $467.6  million for the nine months ended June
30, 2004. Loan principal repayments amounted to $255.0 million in the first nine
months of 2003  compared to $329.4  million  for the nine months  ended June 30,
2004. In addition,  the Company  sells certain loans in the secondary  market to
finance future loan  originations.  In the first nine months of fiscal 2003, the
Company  sold  loans or  securitized  and sold  loans  totaling  $157.1  million
compared to $54.2  million in the nine months  ended June 30,  2004.  Generally,
these loans have consisted only of mortgage  loans,  which have been  originated
within the prior twelve months.

During the nine month period ended June 30, 2004, the Company  securitized $31.7
million of mortgage loans and concurrently sold these mortgage-backed securities
to outside  third parties and  recognized a net gain on sale of $789,000,  which
included $417,000 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, 2003,  the Company  purchased  $275.6
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, 2004 were funded  primarily by repayments  of $91.0 million  within the
securities portfolio and sales of mortgage-backed securities of $143.2 million.

The Company  experienced  an increase of $67.0  million in deposits for the nine
month  period  ended June 30,  2004.  The  Company  is  focused on growing  core
deposits.  For the nine month period ended June 30, 2004,  transaction  accounts
increased $73.1 million,  statement savings accounts increased $9.0 million, and
certificate accounts decreased $15.2 million.

At June 30, 2004 the Company had $206.2 million of certificates of deposits that
were due to mature within one year.


                                       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

The Company  believes that the majority of these  certificates  of deposits will
renew with the  Company.  At June 30,  2004,  the  Company  had  commitments  to
originate  $17.1  million  in  residential  mortgage  loans,  $54.4  million  in
undisbursed  business  and retail  lines of credit  and $13.7  million in unused
business and personal credit card lines,  which the Company expects to fund from
normal operations.  At June 30, 2004, the Company had $43.1 million available in
FHLB  advances.  Additionally,  at June 30,  2004,  the Company had  outstanding
available lines for federal funds of $20.0 million.

The  Company  funded the  majority of its loan  growth  with  increases  in FHLB
advances and growth in deposits. During the nine months ended June 30, 2004, the
Company borrowed $71.5 million of new advances with a term greater than one year
from the FHLB with a weighted average rate of 2.72%.

As a result of $10.9  million in net  income,  less the cash  dividends  paid to
stockholders of approximately $2.2 million,  proceeds of approximately  $989,000
from the exercise of stock options,  and the net decrease in unrealized  gain on
securities available for sale, net of income tax, of $5.3 million, stockholders'
equity  increased  from $73.7  million at September 30, 2003 to $78.1 million at
June 30, 2004.

The Company's  securities  available for sale had an unrealized gain, net of tax
of $3.7 million at September 30, 2003 compared to an unrealized loss, net of tax
of $1.6  million at June 30,  2004.  The  decrease  in the  market  value of the
securities  available  for sale was the result of  increased  intermediate  term
interest  rates.  The  Company's  securities  are  comprised of  mortgage-backed
securities or municipal  bonds that are generally  rated AAA or have a guarantee
from Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage
Association ("FNMA") or the Government National Mortgage  Association  ("GNMA").
None of the decline in market value was due to a change in the investment  grade
of the Company's  securities.  The Company believes it has only temporary losses
on securities available for sale.

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  $94.2 million at June 30,
2004, exceeding the core capital requirement by $55.7 million. At June 30, 2004,
the Bank's  risk-based  capital of  approximately  $103.4  million  exceeded its
current   risk-based  capital   requirement  by  $41.6  million.   (For  further
information see Regulatory Capital Matters).

The table below summarizes future contractual obligations as of June 30, 2004:

<TABLE>
<CAPTION>
                                          Payments Due by Period
                           ------------------------------------------------------
                                      Less than      1-3        4-5     After 5
                           Total      1 Year        Years      Years    Years
                           ---------  ---------   ---------  --------  ----------
<S>                       <C>         <C>         <C>        <C>       <C>
Time deposits              $ 245,157  $ 206,180   $  34,493  $  3,789   $     695
Short-term borrowings        123,554    123,554          --        --          --
Long-term debt               299,971         --      33,035    34,081     232,855
Operating leases                 625        188         194        45         198
                           ---------  ---------   ---------  --------   ---------
Total contractual cash
   obligations             $ 669,307  $ 329,922   $  67,722  $ 37,915   $ 233,748
                           =========  =========   =========  ========   =========
</TABLE>

Purchase commitments. The Company has entered into various contracts to purchase
equipment and software  products to improve  productivity and Customer  service.
The price of the  equipment  and software is  approximately  $1.7  million.  The
annual  maintenance  fees are  approximately  $150,000.  The Company  expects to
complete the purchases in the fourth fiscal quarter of 2004 and the first fiscal
quarter of 2005.

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

Net income increased from $8.3 million,  or $.51 per diluted share, for the nine
months ended June 30, 2003 to $10.9  million,  or $.66 per diluted share for the
nine months ended June 30, 2004. This 31.5% increase in net income resulted from
increased net interest  income of $3.8 million,  or 14.1%,  reduced  general and
administrative  expenses of  $280,000,  decreased  provision  for loan losses of
$805,000 and was somewhat  offset by decreased  other income of $1.4 million and
increased tax expense at $850,000.

Despite  the  decrease  in the net  interest  margin  as a result  of  continued
declining  interest rates, from 3.76% for the nine months ended June 30, 2003 to
3.58% for the nine months ended June 30, 2004,  net  interest  income  increased
14.1%.  The increase in net  interest  income is  primarily  attributable  to an
increase in average  earning assets of $193.9  million,  or 20.3%.  For the nine
months ended June 30, 2004, average loans receivable increased to $744.7 million
an increase of 22.3%,  when compared to $609.1 million for the nine months ended
June 30, 2003. In addition,  average balances of investment securities increased
approximately  $64.0 million.  The investment  securities were primarily  funded
with longer-term  advances.  The Company's advances with a maturity greater than
four years  increased  from $184.2 million at June 30, 2003 to $246.5 million at
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

Although  loans  receivable  increased  $93.6 million for the nine months ended,
June 30, 2004,  the  provision  for loan losses  decreased by $805,000.  This is
primarily  attributed to an improved credit risk profile associated with problem
loans at June 30, 2004. During the nine months ended June 30, 2004, the Bank had
several large loans that were criticized or classified by the Bank,  aggregating
$8.2 million that were paid off.

Total other  income  decreased  from $8.3 million for the nine months ended June
30,  2003 to $6.9  million  for the nine months  ended June 30,  2004.  This was
primarily  a result of  decreased  gains on sales of loans held for sale of $1.1
million.  The Company  experienced a significant  reduction in residential  loan
refinancings in the first nine months of fiscal 2004 compared to fiscal 2003 due
to interest  rates,  which increased  slightly  beginning in September 2003. The
Company also had  increased  net loss on  securities  available for sale of $1.4
million in the first nine months of 2004 when comparing to the first nine months
of 2003.  This was offset by increased  income from the sales of non- depository
products of $516,000 and other income of $392,000.  The increase in other income
was  primarily  due to  increased  income  from bank  owned  life  insurance  of
$281,000.

Total general and  administrative  expenses decreased from $20.4 million for the
nine months ended June 30, 2003 to $20.1  million for the nine months ended June
30, 2004.  Salaries and employee  benefits  increased $2.1 million or 20.8% when
comparing  the two  periods.  This was offset  primarily  by a decrease  of $2.4
million in FHLB prepayment penalties.

MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF OPERATIONS  FOR THE THREE MONTHS ENDED
--------------------------------------------------------------------------------
JUNE 30, 2003 AND 2004
----------------------

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

Despite a  reduction  in the  average  yield,  the  Company's  growth in average
interest  earning  assets of 18.8%  resulted  in  interest  income for the three
months ended June 30, 2004, increasing to $16.7 million, or 12.7% as compared to
$14.8 million for the three months ended June 30, 2003.  The earning asset yield
for the three months ended June 30, 2004, was 5.61% compared to a yield of 5.92%
for the three months ended June 30, 2003. As a result of  significant  declining
interest  rates over much of the last two years,  the Bank's yield on assets and
cost of funds has declined.  Interest rates have recently begun to increase.  At
June 30,  2002,  2003 and 2004,  the  one-year  treasury  rate of  interest  was
approximately 2.10%, 1.02% and 2.16%,  respectively.  At June 30, 2002, 2003 and
2004,  the prime rate of  interest  was  approximately  4.75%,  4.00% and 4.00%,
respectively. On July 1, 2004, the prime rate was increased to 4.25%.

The average yield on loans  receivable for the three months ended June 30, 2004,
was 6.05%  compared to 6.61% for three months ended June 30, 2003. The Company's
yield on  loans  has  continued  to  decline  as  loans  in the  portfolio  have
refinanced at lower rates. The yield on investments  decreased slightly to 4.79%
for the three months ended June 30, 2004,  from 4.83% for the three months ended
June 30,  2003.  The yield on  investments  has declined due to payoff of higher
yielding mortgage-backed securities (MBS) resulting from significant prepayments
during fiscal 2003.  These higher yielding MBS were replaced with lower yielding
MBS.  Total  average  interest-earning  assets were $1.2 billion for the quarter
ended June 30, 2004 as compared to $999.1 million for the quarter ended June 30,
2003.  The increase in average  interest-earning  assets is primarily  due to an
increase  in average  loans  receivable  of  approximately  $130.5  million  and
investment securities of approximately $71.9 million.

                                       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

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

Interest expense on interest-bearing  liabilities was $5.9 million for the three
months  ended June 30,  2004,  as compared to $5.8  million for the three months
ended June 30,  2003.  The average  cost of deposits  for the three months ended
June 30, 2004,  was 1.33%  compared to 1.73% for the three months ended June 30,
2003.  This is  primarily  due to lower  market  rates for  fiscal  2004 and the
composition  of deposits when  comparing  the two periods.  Deposits at June 30,
2004 were $764.0 million with transaction  accounts comprising 60.7% compared to
$713.9 million with transaction  accounts comprising 54.6% at June 30, 2003. The
cost of interest- bearing  liabilities was 1.98% for the three months ended June
30, 2004,  as compared to 2.31% for the three  months  ended June 30, 2003.  The
cost of FHLB advances,  other borrowings and reverse  repurchase  agreements was
3.73%, 4.29% and 1.38%, respectively,  for the three months ended June 30, 2004.
For the three  months  ended June 30,  2003,  the cost of FHLB  advances,  other
borrowings  and  reverse  repurchase  agreements  was  4.46%,  2.48% and  1.84%,
respectively.  The decrease for FHLB advances and reverse repurchase  agreements
is primarily due to lower interest rates in fiscal 2004 compared to fiscal 2003.
The increase in other borrowings is due to the junior subordinated debt of $15.0
million at a variable rate tied to the 90-day LIBOR plus 305 basis points. Total
average  interest-bearing  liabilities increased from $999.3 million at June 30,
2003 to $1.2 billion at June 30, 2004. The increase in average  interest-bearing
liabilities  is due to an increase in average  deposits of  approximately  $52.7
million. This was accompanied by an increase in reverse repurchase agreements of
$33.2  million,  FHLB  advances  of $89.3  million  and $15.0  million of junior
subordinated debt related to trust preferred securities.

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

Net interest  income was $10.8 million for the three months ended June 30, 2004,
as compared to $9.0 million for the three  months ended June 30, 2003.  With the
reduction  in  interest  rates over the last two years,  the Bank  continued  to
experience  a decrease in its net  interest  margin  through  December 31, 2003.
However,  as rates stabilized over the last nine months, the Bank's net interest
margin  has  generally  stabilized,  and  actually  increased  in the  last  two
quarters.  The net interest  margin for the quarters ended March 31, 2003,  June
30, 2003,  September  30, 2003,  December 31, 2003 and March 31, 2004 was 3.87%,
3.61%, 3.65%, 3.48% and 3.58% respectively.  In the quarter ended June 30, 2004,
the net interest margin actually continued to increase slightly to 3.63%.

Throughout  the quarter ended June 30, 2004,  intermediate  interest  rates have
increased  approximately 100 basis points. The Bank believes that over time this
should slow the refinancing of loans at lower rates.  Based upon the most recent
information  available,  management believes that its net interest margin should
remain   stable  and  could   increase   slightly  if   short-term   rates  rise
commensurately with long-term rates.  Projection of the impact of interest rates
on the  Bank's  net  interest  margin  is  often  imprecise  due to the fact the
short-term and long-term interest rates often move very differently.

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

The Company's  provision for loan losses  decreased  from $750,000 for the three
months ended June 30, 2003, compared to $200,000 for the three months ended June
30, 2004. This is due to the nature and the risk profile of the loans delinquent
90 days or more at June 30, 2004 as compared to June 30, 2003. The allowance for
loan losses as a  percentage  of loans was 1.38% at June 30, 2004 as compared to
1.40% at June 30, 2003.  Loans  delinquent  90 days or more were $4.8 million or
..61% of total loans at June 30,  2004,  compared to $5.9 million or .88% at June
30, 2003. The allowance for loan losses was 226% of loans  delinquent  more than
90 days at June 30, 2004, compared to 160% at June 30, 2003. Net charge-offs for
the three  months  ended  June 30,  2004 and 2003 were  $116,000  and  $210,000,
respectively.  Management  believes that current level of the allowance for loan
losses is  adequate  considering  the  composition  of the loan  portfolio,  the
portfolio's  loss  experience,  delinquency  trends,  current regional and local
economic conditions and other factors.

                                      20

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

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

For the three months ended June 30, 2004, other income was $2.1 million compared
to $2.9  million  for the three  months  ended June 30,  2003.  Fees and service
charges from deposit  accounts were $964,000 for the three months ended June 30,
2004,  compared  to  $889,000  for the three  months  ended June 30,  2003.  The
increase  in  fees  and  service  charges  is  primarily  due to the  growth  in
transaction  accounts.  During the three months ended June 30, 2004, the Company
securitized loans into  mortgage-backed  securities  ("MBS") of $8.7 million and
then sold the MBS and sold  loans  held for sale of $13.3  million,  aggregating
$22.0  million.  During  the three  months  ended  June 30,  2003,  the  Company
securitized loans into  mortgage-backed  securities ("MBS") of $18.8 million and
then sold the MBS and sold  loans  held for sale of $13.5  million,  aggregating
$32.3  million.  Originations  of loans held for sale have  declined as interest
rates  began  to  increase  in  September  2003.  This  increase  in  rates  has
significantly curtailed mortgage refinancing. Based upon current interest rates,
the Company expects mortgage  refinancing to continue  significantly  below last
years levels.  Gain on sale of loans was $315,000 for the quarter ended June 30,
2004, compared to $875,000 for the quarter ended June 30, 2003. Loss on sales of
securities  was $440,000 for the quarter ended June 30, 2004,  compared to gains
of  $146,000  for the  quarter  ended  June  30,  2003.  Income  from  sales  of
non-depository products increased $152,000 when comparing the two periods.

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

General and administrative expenses were $6.9 million for the quarter ended June
30, 2003, compared to $6.8 million for the quarter ended June 30, 2004. Salaries
and  employee  benefits  were $3.3  million for the three  months ended June 30,
2003,  as compared to $4.0 million for the three months ended June 30, 2004,  an
increase  of 21.0%.  This is  primarily  due to the  addition  of new  branches,
additional  business banking Associates and increased expense related commission
from  the  sale of  non-depository  products.  The  Company  has  added  several
Associates  in a Banking  Group that is focused on growing small to medium sized
business banking relationships.  The Company employed 352 Associates at June 30,
2004,  compared to 301  Associates at June 30, 2003.  For the quarter ended June
30, 2003, there were $750,000 of prepayment  penalties on FHLB advances included
in general and  administrative  expenses.  For the quarter  ended June 30, 2004,
there were no  prepayment  penalties.  Other  expenses were $1.3 million for the
quarters  ended June 30,  2003 and 2004.  Other  expenses  included  $155,000 of
mortgage service rights  impairment for the three months ended June 30, 2003 and
$14,000 of mortgage  service rights recovery for the three months ended June 30,
2004.

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

Income taxes were $1.6 million for the three months ended June 30, 2003 compared
to $2.0 million for the three months ended June 30, 2004.  The effective  income
tax rate as a percentage  of pretax  income was 34.1% and 36.2% for the quarters
ended  June 30,  2004 and 2003,  respectively.  The  effective  income  tax rate
primarily  declined  in  connection  with an  increase  in income  generated  by
bank-owned life insurance and municipal  securities that are exempt from federal
and certain  state taxes.  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 local, state or federal taxing  authorities.  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.

                                      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 NINE MONTHS ENDED
----------------------------------------------------------------------------
JUNE 30, 2003 AND 2004
----------------------

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

Despite a  reduction  in the  average  yield,  the  Company's  growth in average
interest  earning assets of 20.3% resulted in an increase in interest income for
the nine months ended June 30, 2004, of $4.1 million to $48.4  million,  or 9.2%
as  compared  to $44.3  million for the nine  months  ended June 30,  2003.  The
earning asset yield for the nine months ended June 30, 2004,  was 5.61% compared
to a yield of 6.18% for the nine  months  ended  June 30,  2003.  As a result of
significant declining interest rates over much of the last two years, the Bank's
yield on  assets  and cost of funds  has  declined.  Interest  rates  have  very
recently  begun to  increase.  At June 30,  2002,  2003 and 2004,  the  one-year
treasury   rate  of  interest  was   approximately   2.10%,   1.02%  and  2.16%,
respectively.  At June 30, 2002,  2003 and 2004,  the prime rate of interest was
approximately 4.75%, 4.00% and 4.00%,  respectively.  On July 1, 2004, the prime
rate was increased to 4.25%.  The average yield on loans receivable for the nine
months  ended June 30, 2004,  was 6.12%  compared to 6.80% for nine months ended
June 30, 2003. The yield on  investments  decreased to 4.68% for the nine months
ended June 30, 2004,  from 5.16% for the nine months  ended June 30,  2003.  The
yield  on   investments   has  declined   due  to  payoff  of  higher   yielding
mortgage-backed  securities (MBS) resulting from significant  prepayments during
fiscal 2003.  These higher  yielding MBS were replaced with lower  yielding MBS.
Total  average  interest-earning  assets  were $1.1  billion for the nine months
ended June 30, 2004 as compared to $955.4 million for the nine months ended June
30, 2003. The increase in average interest-earning assets is primarily due to an
increase  in average  loans  receivable  of  approximately  $135.6  million  and
investment securities of approximately $64.0 million.

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

Interest expense on interest-bearing  liabilities was $17.5 million for the nine
months  ended June 30,  2004,  as compared to $17.2  million for the nine months
ended June 30, 2003. The average cost of deposits for the nine months ended June
30, 2004,  was 1.42%  compared to 1.88% for the nine months ended June 30, 2003.
The cost of  interest-bearing  liabilities  was 2.03% for the nine months  ended
June 30, 2004, as compared to 2.42% for the nine months ended June 30, 2003. The
cost of FHLB advances,  other borrowings and reverse  repurchase  agreements was
3.83%, 4.29% and 1.47%,  respectively,  for the nine months ended June 30, 2004.
For the nine  months  ended  June 30,  2003,  the cost of FHLB  advances,  other
borrowings  and  reverse  repurchase  agreements  was  4.41%,  3.14% and  1.85%,
respectively.  Total average interest-bearing  liabilities increased from $950.2
million at June 30,  2003 to $1.1  billion at June 30,  2004.  The  increase  in
average  interest-bearing  liabilities is due to an increase in average deposits
of approximately  $49.5 million.  This was accompanied by an increase in reverse
repurchase agreements of $58.5 million and FHLB advances of $70.8 million.

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

Net interest  income was $30.9  million for the nine months ended June 30, 2004,
as compared to $27.1  million for the nine months ended June 30, 2003.  With the
reduction  in  interest  rates over the last two years,  the Bank  continued  to
experience  a decrease in its net  interest  margin  through  December 31, 2003.
However,  as rates stabilized over the last nine months, the Bank's net interest
margin  declined at a much slower pace and  actually  increased  slightly in the
most recent  quarter.  The net interest  margin for the quarters ended March 31,
2003, June 30, 2003,  September 30, 2003,  December 31, 2003, March 31, 2004 and
June 30, 2004 was 3.87%, 3.61%, 3.65%, 3.48%, 3.58% and 3.63% respectively.  For
the nine months ended June 30, 2004, the net interest margin was 3.58%.

Throughout  the quarter ended June 30, 2004,  intermediate  interest  rates have
increased  approximately  100 basis points.  Management  believes that over time
this should slow the  refinancing  of loans at lower rates.  Based upon the most
recent information  available,  management believes that its net interest margin
should  remain  stable and could  increase  slightly  if  short-term  rates rise
commensurately with long-term rates.  Projection of the impact of interest rates
on the  Bank's  net  interest  margin  is often  imprecise  due to the fact that
short-term and long-term interest rates often move very differently.

                                      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

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

The Company's provision for loan losses decreased from $2.1 million for the nine
months ended June 30,  2003,  compared to $1.3 million for the nine months ended
June 30,  2004.  This is due to the  nature  and the risk  profile  of the loans
delinquent  90 days or more at June 30, 2004 as compared to June 30,  2003.  The
allowance for loan losses as a percentage of loans was 1.38% at June 30, 2004 as
compared to 1.40% at June 30, 2003.  Loans  delinquent 90 days or more were $4.8
million or .61% of total loans at June 30,  2004,  compared  to $5.9  million or
..88% at June  30,  2003.  The  allowance  for  loan  losses  was  226% of  loans
delinquent  more  than 90 days at June 30,  2004,  compared  to 160% at June 30,
2003.  Net charge-  offs for the nine  months  ended June 30, 2004 and 2003 were
$240,000 and $509,000, respectively.  Management believes that the current level
of the allowance for loan losses is adequate  considering the composition of the
loan portfolio,  the portfolio's loss experience,  delinquency  trends,  current
regional and local economic conditions and other factors. Subsequent to June 30,
2004, a non-accrual  loan secured by commercial  property was paid in full.  The
original  amount of the loan was $1.7  million and the  balance was  $522,000 at
June 30,  2004.  As a result  of this,  the Bank  will  recognize  approximately
$320,000 of interest income its fourth fiscal quarter.


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

For the nine months ended June 30, 2004,  other income was $6.9 million compared
to $8.3  million  for the nine  months  ended  June  30,  2003.  As a result  of
increased  transaction  account  balances of $389.0  million at June 30, 2003 to
$463.6 million at June 30, 2004, fees and service charges from deposit  accounts
were $2.7  million for the nine  months  ended June 30,  2004,  compared to $2.6
million for the nine months ended June 30, 2003.  Gain on sale of loans was $1.1
million for the nine months  ended June 30,  2004,  compared to $2.3 million for
the nine months ended June 30, 2003.  Loss on sales of  securities  was $707,000
for the nine months ended June 30,  2004,  compared to gains of $662,000 for the
nine months  ended June 30,  2003.  Other  income was $3.7  million for the nine
months  ended June 30,  2004,  as compared  to $2.8  million for the nine months
ended June 30,  2003.  This  increase is  primarily  due to  increased  sales of
non-depository products and services.

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

General and administrative expenses were $20.4 million for the nine months ended
June 30, 2003 compared to $20.1 million for the nine months ended June 30, 2004.
Salaries and employee  benefits were $9.9 million for the nine months ended June
30, 2003,  as compared to $12.0 million for the nine months ended June 30, 2004,
an increase of 20.8%.  This is primarily  due to the  addition of new  branches,
additional  business banking Associates and increased expense related commission
from the sale of non-depository products. The Company employed 352 Associates at
June 30, 2004,  compared to 301 Associates at June 30, 2003. Also as a result of
new branches, net occupancy, furniture and fixtures and data processing expenses
increased  $122,000 when comparing the two periods.  General and  administrative
expenses also include prepayment  penalties on FHLB advances of $2.4 million and
$77,000 for the nine months ended June 30, 2003 and 2004, respectively.  For the
nine months  ended June 30,  2004,  the  Company  prepaid  $4.6  million of FHLB
advances  with  a  weighted   average  rate  of  3.21%.   Other   expenses  were
approximately  $3.5  million for the nine month  period  ended June 30, 2003 and
$3.4  million for the nine month  period  ended June 30,  2004.  Other  expenses
included  $262,000 of mortgage  service  rights  impairment  for the nine months
ended June 30, 2003 and  $106,000 of mortgage  service  rights  recovery for the
nine months ended June 30, 2004.

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

Income taxes were $4.7 million for the nine months ended June 30, 2003, compared
to $5.5 million for the nine months ended June 30, 2004.  The  effective  income
tax rate as a  percentage  of  pretax  income  was  33.6% and 36.0% for the nine
months ended June 30, 2004 and 2003, respectively. The effective income tax rate
primarily  declined  in  connection  with an  increase  in income  generated  by
bank-owned life insurance and municipal  securities that are exempt from federal
and certain state taxes.

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 local,
state or federal taxing authorities. The

                                      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

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

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, 2004:
 Total Capital:                  $103,410         13.39%       $61,777            8.00%          $77,222       10.00%
  (To Risk Weighted Assets)
Tier 1 Capital:                  $ 94,189         12.20%          N/A              N/A           $46,333        6.00%
 (To Risk Weighted Assets)
Tier 1 Capital:                  $ 94,189          7.35%       $38,452            3.00%          $64,005        5.00%
  (To Total Assets)
Tangible Capital:                $ 94,189          7.35%       $19,202            1.50%              N/A          N/A
  (To Total Assets)
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------

Effective January 1, 2004, the Company adopted FASB  Interpretation No. 46 ("FIN
46"),   "Consolidation   of  Variable   Interest   Entities,"   which  addresses
consolidation by business  enterprises of variable interest entities.  Under FIN
46, an  enterprise  that  holds  significant  variable  interest  in a  variable
interest  entity but is not the primary  beneficiary is required to disclose the
nature,  purpose,  size and  activities  of the variable  interest  entity,  its
exposure to loss as a result of the variable interest holder's  involvement with
the entity,  and the nature of its involvement with the entity and date when the
involvement  began.  The primary  beneficiary of a variable  interest  entity is
required to disclose the nature,  purpose,  size and  activities of the variable
interest entity, the carrying amount and  classification of consolidated  assets
that are collateral for the variable interest entity's obligations, and any lack
of recourse by creditors  (or  beneficial  interest  holders) of a  consolidated
variable  interest entity to the general credit of the primary  beneficiary.  In
accordance  with these  rules,  the  Company  deconsolidated  Coastal  Financial
Capital  Trust I at January 1, 2004,  which had been formed to raise  capital by
issuing preferred securities to an institutional  investor.  The deconsolidation
of this wholly-owned subsidiary,  increased other assets by $464,000,  increased
junior  subordinated  debt-trust  preferred  securities  by $15.5  million,  and
reduced debt associated with trust  preferred  securities by $15.0 million.  The
full and  unconditional  guarantee by the Company for the  preferred  securities
remains in effect.

The Federal  Reserve  presently  considers  the trust  preferred  securities  to
qualify  as  Tier 1  Capital.  This  may  change  in  the  future  based  on the
application and  interpretation  by the Federal Reserve Board of FIN 46R. As FIN
46R was recently issued and contains  provisions that the accounting  profession
and banking  regulators  continue to analyze,  the  Company's  assessment of the
impact of FIN 46R on its trust preferred securities is ongoing. However, at this
time and based on  management's  current  interpretation,  the Company  does not
believe that the  implementation  of FIN 46R will have a material  impact on the
Company's financial condition.

                                      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

FASB  Statement  No. 150,  Accounting  for Certain  Financial  Instruments  with
Characteristics  of both  Liabilities  and Equity,  was issued in May 2003.  The
Statement  establishes  standards  for the  classification  and  measurement  of
certain  financial  instruments  with  characteristics  of both  liabilities and
equity.   The  Statement  also  includes  required   disclosures  for  financial
instruments  within its scope. For the Company,  the Statement was effective for
instruments  entered into or modified  after May 31, 2003 and otherwise  will be
effective as of January 1, 2004,  except for  mandatorily  redeemable  financial
instruments.  For certain  mandatorily  redeemable  financial  instruments,  the
Statement  will be effective  for the Company on January 1, 2005.  The effective
date has been  deferred  indefinitely  for certain  other  types of  mandatorily
redeemable  financial  instruments.  The  Company  currently  does  not have any
financial instruments that are within the scope of this Statement.

On March 9, 2004,  the  Securities  and Exchange  Commission  staff issued Staff
Accounting  Bulletin No. 105,  "Application  of  Accounting  Principles  to Loan
Commitments"  ("SAB 105").  SAB 105 provides  recognition  guidance for entities
that issue loan  commitments that are required to be accounted for as derivative
instruments.  SAB 105 indicates  that the expected  future cash flows related to
the  associated  servicing  of the  loan  and any  other  internally-  developed
intangible assets should not be considered when recognizing a loan commitment at
inception or through its life.  SAB 105 also discusses  disclosure  requirements
for loan  commitments  and is effective  for loan  commitments  accounted for as
derivatives and entered into subsequent to March 31, 2004. The Company currently
does not include the  associated  servicing  of the loan when  recognizing  loan
commitments at inception and throughout its life. The Company adopted SAB 105 on
April 1, 2004 with no material impact.

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

At June 30, 2004, no material  changes have occurred in market risk  disclosures
included  in the  Company's  Annual  Report to  Stockholders  for the year ended
September 30, 2003,  filed as an exhibit to the Company's  Annual Report on Form
10-K.

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

The Company's  management,  including the Company's  principal executive officer
and  principal  financial  officer,  have  evaluated  the  effectiveness  of the
Company's  "disclosure controls and procedures," as such term is defined in Rule
13a-15(e)  under the Securities  Exchange Act of 1934, as amended (the "Exchange
Act").  Based  upon  their  evaluation,  the  principal  executive  officer  and
principal  financial officer concluded that, as of the end of the period covered
by this report, the Company's  disclosure controls and procedures were effective
for the purpose of ensuring that the information required to be disclosed in the
reports  that the  Company  files or  submits  under the  Exchange  Act with the
Securities  and  Exchange  Commission  (the "SEC") (1) is  recorded,  processed,
summarized and reported within the time periods specified in the SEC's rules and
forms,  and (2) is accumulated  and  communicated  to the Company's  management,
including  its  principal  executive  and  principal   financial  officers,   as
appropriate  to  allow  timely  decisions  regarding  required  disclosure.   In
addition, based on that evaluation,  no change in the Company's internal control
over financial  reporting  occurred  during the quarter ended June 30, 2004 that
has  materially  affected,  or is reasonably  likely to materially  affect,  the
Company's internal control over financial reporting.

                                      25

<PAGE>
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  these  matters,  the
Company  believes  none of the  lawsuits  would  have a  material  impact on the
Company's financial status.

Item 2. Changes In Securities, Use of Proceeds and Issuer Purchases of Equity
-----------------------------------------------------------------------------
Securities
----------

     Not Applicable.

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

     Not Applicable.

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

     Not Applicable.

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

     Not Applicable.

Item 6.  Exhibits and Reports on Form 8-K
-----------------------------------------

   (a)  Exhibits

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

             (b)   Certificate of Amendment to Certificate of
                   Incorporation of Coastal Financial Corporation (6)

             (c)   Bylaws of Coastal Financial Corporation (1)

          10 (a)   Employment Agreement with Michael C. Gerald (9)

             (b)   Employment Agreement with Jerry L. Rexroad (9)

             (c)   Employment Agreement with Phillip G. Stalvey (9)


                                      26


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


             (d)   Employment Agreement with Jimmy R. Graham (9)

             (e)   Employment Agreement with Steven J. Sherry (9)

             (f)   1990 Stock Option Plan (2)

             (g)   Directors Performance Plan (3)

             (h)   Loan Agreement with Bankers Bank (5)

             (i)   Coastal Financial Corporation 2000 Stock Option Plan (8)

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

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

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

           32-(b)  Section 1350 Certification (Chief Financial Officer)

   (b)  Report on Form 8-K

          The  Company  furnished  a Form 8-K on April 29,  2004 to  report  the
          Company's  second  quarter  earnings.  A copy of the  Company's  press
          release dated April 28, 2004 was attached as an exhibit.

-----------

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

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

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

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

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

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

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

          Incorporated  by reference to the definitive  proxy  statement for the
(8)       2000 Annual Meeting of Stockholders filed December 22, 1999.

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


                                      27

<PAGE>

                                  SIGNATURES


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

                                         COASTAL FINANCIAL CORPORATION

     August 12, 2004                      /s/ Michael C. Gerald
     ---------------                     ----------------------
     Date                                Michael C. Gerald
                                         President and Chief Executive Officer

     August 12, 2004                      /s/ Jerry L. Rexroad
     ---------------                     ---------------------
     Date                                Jerry L. Rexroad
                                         Executive Vice President and
                                         Chief Financial Officer


                                       28

<PAGE>